QBI and the determinants

Technical topics regarding tax preparation.
#41
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That's how I read it also
 

#42
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Mark Luscombe, principal federal tax analyst at Wolters Kluwer Tax & Accounting, said in an email that he discussed the proposed regulations with “some senior IRS personnel” at a recent tax conference. They indicated that they “have not yet decided how far to extend trade or business treatment to real estate rental activity. It was not their intent in the proposed regulations to treat all real estate rental activity as a qualifying trade or business.”
From https://www.sfchronicle.com/business/ne ... 181697.php
 

#43
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Whoa! Since when do IRS personnel get to make that decision?? That's a legislative item, not a bureaucratic one.
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missingdonut wrote:even if the error is not attributable to the §199A deduction.

That’s correct. The example I gave is a subset of what falls under this new penalty rule. I more or less made that comment, about the accuracy related penalty, in response to some of the comments where it sure sounded like the QBI deduction would be claimed without much thought.
 

#45
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Jeff - thanks for the clarification.

JR - I agree, but here is the thing: if the IRS issues regulations taking a position, and we prepare the return taking a different position, then we have to disclose, creating a huge audit risk. So for practical purposes, the IRS does get to make the decision unless someone decides to take them on.
 

#46
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Jeff, thanks for your clarification. I was worried that I had missed something in the last few months.

JR1 wrote:Whoa! Since when do IRS personnel get to make that decision?? That's a legislative item, not a bureaucratic one.


Most regulations written by IRS personnel, explicitly given the power to make decisions because Congress says that the "Secretary" may promulgate rules for dealing with the law.

It's kind of like a dog that goes to the bathroom on your living room carpet -- legislators write basic tax law and tell the IRS to figure out how to clean it up.
 

#47
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Oh, I understand the roles. But this is much deeper than promulgating regs. This has to do with intent.
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#48
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How is promulgating regs, in accordance with the intent of Congress, not the role of the IRS?
 

#49
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How is promulgating regs, in accordance with the intent of Congress, not the role of the IRS?


I think JR1 might be saying that, as to “Is the operation a trade or business?” issue, it would be out of bounds for the IRS to create Regulations. Numerous statutes, including 199A, use the “trade or business” phrase and I see no reason why the IRS would all of sudden take it upon themselves, or interpret a Congressional reg-writing directive within a statute, to define “trade or business.”

The trade/business concept is not a new concept introduced by Sec 199A. As such, Treasury does not need to write Regulations on that point “necessary to carry out the purposes of this section.”

I don’t think it’s the Treasury’s duty to write Regulations in the definitional area of “trade or business.” And I don’t think the Treasury sees it as its duty either. In fact, they likely view it as an out-of-bounds area wherein they lack the authority. It also wouldn’t make sense to me if they tried to write Regulations on this specific point, but couched it with a, “For the purposes of Section 199A, the phrase ‘trade or business’ should be taken to mean…” That wouldn’t make sense to me because there is no indication that Congress intended the phrase “trade or business” to mean one thing for general tax purposes (i.e. other provisions of the Code, including Sec 162) and something different for Section 199A purposes. As such, if the IRS tried to write Regulations on this point, yet couched it as per the above, people would complain that the definition they drafted “for purposes of Sec 199A only” really isn’t for Sec 199A only because Congress did not indicate the definition should be any different than what we already have through case law in general.

Given the above, I don’t expect to see anything out of the Treasury as to the “trade or business” issue, despite complaints and comments by commenters. The -1 Regulation states:

Trade or business means a section 162 trade or business other than the trade or business of performing services as an employee.

…and I don’t think that will change when the Regulations are finalized. Maybe there will be a carve out for RE Pros, but maybe not.
 

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Jeff-Ohio wrote:I think JR1 might be saying that, as to “Is the operation a trade or business?” issue, it would be out of bounds for the IRS to create Regulations. Numerous statutes, including 199A, use the “trade or business” phrase and I see no reason why the IRS would all of sudden take it upon themselves, or interpret a Congressional reg-writing directive within a statute, to define “trade or business.”

The trade/business concept is not a new concept introduced by Sec 199A. As such, Treasury does not need to write Regulations on that point “necessary to carry out the purposes of this section.”


§1202 isn't a new concept introduced by §199A either but they sure wrote some interesting regs related to that this year!

The trade/business issue is an issue that has gone without clarification for a long time, for better or for worse, but as the 1099 penalties have increased and the stakes raised now with §199A, it seems logical that the straw can finally break the camel's back.
 

#51
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As IRC Section 199A(C)(1) states:

“The term ‘qualified business income means, for any taxable year, the net amount of qualified items of income, gain, deduction, and loss with respect to any qualified trade or business of the taxpayer.”

Proposed regulation 1.99A-1(b)(13) provided this:

“Trade or business means a section 162 trade or business other than the trade or business of performing services as an employee."

From the Committee Reports to the Revenue Act of 1980 (startup expenses)."Further in the case of rental activities, there must be a significant furnishing of services incident to the rentals to constitute an active business (within the meaning of Code sec. 162) rather than an investment."

I would draw attention to the words significant furnishing of services. Should all future NNN leases include a significant furnishing of services such as the lessor will change the air filters and test the fire alarms on a quarterly basis? Does that meet the letter of the law? I think there's a strong argument.

My current opinion is: if the landlord does anything of significance related to the rental properties then QBID is allowed. If the landlord only collects a check, then no QBID.
Last edited by basisschedule on 15-Nov-2018 8:09am, edited 1 time in total.
 

#52
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Good find! But that doesn't tell us congressional intent. At all. Merely IRS intent!! I would interpret that to mean something similar to Sch. C v E rental: hotels, etc. Significant furnishing of services cannot mean bookkeeping, sending 1099's, taking rent to the bank, etc. Significant. But again, this is IRS' thoughts, not necessarily Congress'.
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#53
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Wouldn't Chevron deference apply in this situation? Since the statutory language is ambiguous, and the regulation supplies a reasonable interpretation, courts will treat the regulatory interpretation as definitive.

Disregard; basisschedule didn't put a closing quote after "employee." I thought the stuff about the committee report was also part of the regulation.
Last edited by MSchmahl on 13-Nov-2018 7:08pm, edited 2 times in total.
 

#54
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From the Committee Reports to the Revenue Act of 1980 (startup expenses).

If you’re using that as your benchmark for 199A, you ought to follow through with the examples in that Committee Report…
 

#55
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I don't recall seeing contrary examples in the Committee Report. Would that be a separate document?
 

#56
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I don't recall seeing contrary examples in the Committee Report.


I’m not sure what that means. And I’m also not sure about your thought process in Post #51. As you state, the standard for 199A is, simply, “trade or business.” In Post #51, you dove into Section 195, which involves a higher standard, as it involves an “active” trade or business. In the committee report that you cited, examples are given as to the types of real estate rentals that would qualify as an “active” trade or business for 195 purposes. Those examples were: operation of an apartment complex, an office building, or a shopping center. I’m hard-pressed to believe these are the only types of real estate rentals that would qualify for the 199A deduction. So, I’m not sure that your dive into Sec 195 is appropriate. And I’m also not sure about the examples you use as constituting the furnishing of services. I think the things you describe would more or less factor in to the level of activity engaged in by the landlord in making the trade/business determination (i.e. regular, continuous, substantial).
 

#57
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If the IRS doesn't come out with some clarifications, they are going to have a mess. I found 2015 data that reported there were 4.5 mil tax returns with less than $200K AGI and rental income that averaged $10.3 K. Assuming the is is one of my old MFJ taxpayers (I am an AARP volunteer) with $100K AGI , std deductions and rental of $10k ... QBI deduction would save them about $240. There is no way the IRS can audit each of the returns without some mechanical way to generate the CP2000.
 

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