Are You Maximizing Your QBI Deduction?
If you’ve invested in real property, you’re probably using every opportunity you can to offset the income with expenses, so you don’t eat up the property’s cash flow with taxes. But are you doing everything you can to minimize your liability? If you’re not taking advantage of the QBI (Qualified Business Income) deduction, not only are you missing out on an opportunity, but your tax bill is higher than it should be.
As an investor in rental property, you’re probably already aware of the usual, allowable deductions available to you such as:
- Telephone and Internet
- Repairs and Maintenance
You might also be taking advantage of special depreciation options discussed in a recent article entitled “Strategies to Minimize Tax Liability for Business Owners” including:
- Section 179
- Bonus Depreciation
- Cost Segregation
What the Tax Cut and Jobs Act (TCJA) Means to You
You can maximize your QBI deduction on property held for lease or rental by taking advantage of the 20% pass-through deduction available through section 199A, which was introduced as the TCJAof 2017? Section 199A allows owners of certain pass-through businesses to deduct part of their qualified business income from a qualified trade or business.
What this could mean to you is a deduction of up to 20% of qualified business income if your rental property is held by a qualified trade or business, and you meet certain thresholds. On September 24, 2019, Revenue Procedure 2019-38 added:
“…a safe harbor allowing certain interests in rental real estate, including interests in mixed-use property, to be treated as a trade or business for purposes of the qualified business income deduction under section 199A of the Internal Revenue Code (section 199A deduction).”
Of course, you do have to meet certain requirements in order to qualify:
- The property owner must be an individual, partnership, sole proprietor, or S-Corp
- Taxpayer must own a qualified business, in this case, a rental real estate enterprise
As such, the deduction isn’t available to:
- Income earned as an employee providing services
- On properties with triple-net leases
Not unlike many deductions, there are also income thresholds which as of 2021 were:
- $329,800 for Married couples filing jointly
- $164,900 for all others
and for 2022 will be:
- $340,100 for Married couples filing jointly
- $170,050 for all others
How the QBI Deduction Works
Calculation of the deduction involves 2 components:
- QBI – 20% of QBI from a domestic business meeting the ownership criteria discussed above, subject to the following limitations:
- 50% of W-2 wages paid to employees of the business.
- Or 25% of wages paid to employees of the business plus 2.5% of unadjusted basis immediately after acquisition (UBIA) of qualified property held for trade or business
Like much of the IRS code, section 199A can be quite convoluted. There are limitations and qualifications which can be difficult to navigate successfully. Having someone like HKMP, with extensive knowledge and experience with the IRS tax code, can ensure you meet all necessary criteria, your deduction is calculated correctly, and you don’t miss out on every opportunity for potential tax savings.
Protect Your QBI Deduction. Cover All the Bases.
Qualifying for the safe harbor isn’t just about meeting requirements for a qualifying business or understanding the thresholds which limit the deduction. There are specific record-keeping requirements which must be met as well:
- Maintain separate books and records reflecting income and expenses for each property
- Owners of multiple properties can satisfy this requirement by preparing separate income and expense statements for each property before consolidating.
- Investment enterprises in existence less than 4 years must have at least 250 hours of service performed by the taxpayer or others for:
- Landlord-related duties such as
- Repairs and maintenance
- Rent collection
- Application review
- Time spent with tenants
- Ensure a record of all services performed includes:
- Dates of service
- Who performed the service
In addition, you must attach a statement to your tax return for every year you rely on the safe harbor.
Enlisting HKMP’s help can ensure you comply with all the safe harbor requirements, maximize your deduction, and avoid jeopardizing the deduction now, or in the future.