Section 199A QBI deduction and crop shares

Hello, all! Landlord has crop share arrangement with farmer where landlord shares in input costs (50%), then crops are divided with farmer 50%/50%. Form 4835 is used. Landlord speaks with farmer every week over the phone, places crop insurance, pays taxes, sells his 50% share of the grain, etc. All of this activity does not add up to 250 hours (I know it's a safe harbor, but it's our best clue as to what the IRS thinks is required to rise to a business). Notice 2019-07 says a couple confusing things. First, it says that rental activity can include "daily operation." Second, it says that the activity does not need to be performed by the landlord, but can be done by an "employee, agent or contractor." Do all of the farmer's hours spent farming count toward the 250 hours? I would think not, as they are not specifically for the 'rental' activity, but the wording in the notice has me wondering. If the farmer's hours are included, then exceeding 250 hours is a forgone conclusion. Without those hours included, taking the QBI deduction is a risk, given the guidance. Thanks for any thoughts!

From Form 4835 instructions:

Do not use Form 4835 if you were a:

• Landowner (or sub-lessor) and materially participated in
the operation or management of the farm—instead use
Schedule F (Form 1040) to report farm income and
expenses

Is the participation material enough to warrant Schedule F instead of Form 4835 to Schedule E? If the landlord farmed in the past, as I commonly see in these situations, check 1.469-5T test (a)5 for one possible way to attain material participation.

I'm skeptical on whether or not you'd be able to apply Notice 2019-07 safe harbor to this activity. Sharing in the input costs 50-50 and the harvest 50-50 resembles something more along the lines of a business joint venture than rental real estate.

Can you qualify as a trade or business under case law?

check 1.469-5T test (a)5 for one possible way to attain material participation.

Pretty sure material participation and Sec 469 is unrelated to trade or business and Sec 199A...

Crop share is considered rental income when the landlord does not participate or provide the equipment. The question I have with this is if you start pushing for QBI, then do you run the risk of moving Form 4835 to a Schedule F activity and therefore are subject to SE tax. This would be a bad a result (unless you want to pay SE tax). I posed the question here but it did not lead to any further discussion.

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1402(a)(1)

There shall be excluded rentals from real estate and from personal property leased with the real estate (including such rentals paid in crop shares, and including payments under section 1233(a)(2) of the Food Security Act of 1985 (16 U.S.C. 3833(a)(2)) to individuals receiving benefits under section 202 or 223 of the Social Security Act) together with the deductions attributable thereto, unless such rentals are received in the course of a trade or business as a real estate dealer; except that the preceding provisions of this paragraph shall not apply to any income derived by the owner or tenant of land if (A) such income is derived under an arrangement, between the owner or tenant and another individual, which provides that such other individual shall produce agricultural or horticultural commodities (including livestock, bees, poultry, and fur-bearing animals and wildlife) on such land, and that there shall be material participation by the owner or tenant (as determined without regard to any activities of an agent of such owner or tenant) in the production or the management of the production of such agricultural or horticultural commodities, and (B) there is material participation by the owner or tenant (as determined without regard to any activities of an agent of such owner or tenant) with respect to any such agricultural or horticultural commodity;

Thanks for your responses, everyone.

Webster:
The landlord did not farm in the past, is an absentee landlord, and does not materially participate. 4835 seems the correct avenue for this crop share arrangement.

DAJCPA:
We definitely don't want SE tax to come into play. Without material participation, we should be safe. However, I agree that we don't want to present enough participation to get the Section 199A deduction if it means that we might open the door too wide and allow SE tax in.

I'm still hung up on the "daily operations" and the potential "contractor" status of the farmer. If the farmer is considered a contractor (with regards to Notice 2019-07), then 250 hour safe harbor is easy to meet. If, however, the farmer's hours are simply the farmer acting in the capacity of a tenant, and not on behalf of the landlord, then those hours would not be eligible. I think this is a key area.

From a broader perspective, there certainly is a desire for profit, and there is regular and continuous activity, but it would not be "considerable" enough (based on the Notice 2019-07 standard) to take the QBI deduction, unless the farmer's hours are included.

We have had this discussion in our office and have not come to a sound conclusion, but I think this is similar to a triple net lease situation where the tenant takes care of everything and just sends a check for the rent (though the cropshare landlord may pay some of the expenses). The tenant is not the landlords agent or contractor, I don't think. He did not hire him and does not pay him directly. He just lets him use his land to farm and the tenant pays the landlord a share of the crops as rent. Nonetheless, the cropshare situation is a difficult one to figure out since it has characteristics of both a rental and a T o B regardless of the participation by the landlord. We went conservative on this until we find out more. We did not want the IRS to say well you are treating it as a trade or business so it should go on Sch F and be subject to SE tax. So we are not recommending our clients take the QBI deduction on cropshare unless it is on Sch F until we have more guidance. That is just what we are doing for the time being. I don't know the REAL answer here.

I am (and have been) inclined to do the same. That makes sense to me.

Thanks for everyone's time!

If the active farmer would qualify for QBI on his/her Schedule F, then I don't understand why the portion being reported on Form 4835 would not qualify.

That's an interesting thought, and one that has me wondering, but I don't think that the farmer's treatment has to mirror the landlord's treatment. A farmer has a farming business, and it makes sense that the income would be QBI. As for the landlord, it may or may not be QBI, depending on whether it's cash rent or crop share, and in the case of crop share, what the landlord's level of involvement is.

I'm reviewing the 2018 tax return of a prospect for onboarding later in the year. 2018 return was prepared by a separate firm in town.

They are treating the client's crop sharing arrangement income (reported on form 4835) as QBI.

To determine if the income is QBI don't we look to section 162, and to determine if the income is subject to SE taxes don't we look at section 1402 and thus material participation (Sec 469) for a crop sharing arrangement? It seems it's easy to connect the dots that a costcrop sharing arrangement could qualify for QBI but also be passive and not subject to SE taxes.

I agree with you, ManVsTax.

If the landlord received a set amount per acre, I would say that the rental activity is separate from the farming activitiy (and then whether it is a §199A T/B is based on the landlord's factors).

However the landlord in a crop share agreement has a relationship with the farm somewhat like a Tenant-In-Common relationship or a partnership interest. The landlord supplies the capital while the farmer supplies the labor in this fake partnership, so the landlord's business is not separate from the farmer's business leading to my conclusion in post #9.

We have had this discussion in our office and have not come to a sound conclusion, but I think this is similar to a triple net lease situation where the tenant takes care of everything and just sends a check for the rent (though the cropshare landlord may pay some of the expenses). The tenant is not the landlords agent or contractor, I don't think. He did not hire him and does not pay him directly. He just lets him use his land to farm and the tenant pays the landlord a share of the crops as rent. Nonetheless, the cropshare situation is a difficult one to figure out since it has characteristics of both a rental and a T o B regardless of the participation by the landlord. We went conservative on this until we find out more. We did not want the IRS to say well you are treating it as a trade or business so it should go on Sch F and be subject to SE tax. So we are not recommending our clients take the QBI deduction on cropshare unless it is on Sch F until we have more guidance. That is just what we are doing for the time being. I don't know the REAL answer here.

DAJCPA, I know this is an old post, but are you still treating the income from crop share as not QBI? I'm not aware of any new guidance unless I missed it. I'm still dealing with this issue for one client. We were conservative last year as well on this issue since our client was not active with the crop share. But the the dollar amount in 2019 is a much bigger number so I want to revisit the issue.