In the 2017 Tax Cut and Jobs Act, Congress added Section 199A to the Code which provided a deduction to taxpayers operating pass-through businesses of up to twenty percent (20%) of the taxpayer’s qualified business income. Thus, businesses operated through a sole proprietorship, partnership, or a S corporation may qualify for this deduction. Moreover, a twenty percent (20%) deduction for aggregate and qualified real estate investment trust (REIT) dividends and qualified publicly traded partnership income is also available if certain conditions are satisfied.
Key to obtaining the Section 199A deduction, inter alia, is the definition of a qualified trade or business, which is defined by Section 199A(d) as any trade or business other than the trade or business of performing services as an employee or a specified service trade or business (SSTB). Treasury Regulation §1.199A-a(b)(14) defines trade or business essentially as a trade or business as that term has been interpreted under Section 162 of the Code other than the trade or business of performing services as an employee. Trade or business classification for real estate operations have always been a troubling issue. For example, if a taxpayer owns his own home but also owns residential rental property, will such taxpayer be deemed to be operating a trade or business for purposes of Section 162 of the Code? In essence, whether the taxpayer’s activities constitute a trade or business is a facts and circumstances test which can be met if the facts demonstrate that the taxpayer has a continuous and regular involvement in the activities under question with an intent to make a profit from the endeavor. See Higgins v. Commissioner, 312 U.S. 212, 217-18 (1941); Groetziner v. Commissioner, 109 S. Ct. 980, 986-87 (1987). Because of this nebulous facts and circumstances test, it is often difficult to determine if the taxpayer satisfies this test in the case of rental real estate. Fortunately, the IRS has provided taxpayers with safe harbor guidelines which will provide some comfort to taxpayers if the tests set forth in the safe harbor revenue procedure are satisfied. The safe harbor provision containing the tests is set forth in Revenue Procedure 2019-38, 2019-42 IRB; IR 2019-158.
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*This post was originally published on October 8, 2019
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