Treasury, IRS Announce Final Regulations on Qualified Business Income Deduction, Including Rental Real Estate Safe Harbor

Treasury, IRS Announce Final Regulations on Qualified Business Income Deduction, Including Rental Real Estate Safe Harbor

The Treasury Department and the Internal Revenue Service issued final regulations and three related pieces of guidance, implementing the new qualified business income deduction (section 199A deduction).

The QBI deduction, created by the 2017 Tax Cuts and Jobs Act, allows many owners of sole proprietorships, partnerships, S corporations, trusts or estates to deduct up to 20% of their qualified business income. Eligible taxpayers can also deduct up to 20% of their qualified real estate investment trust (REIT) dividends and publicly traded partnership income.

Eligible taxpayers will be able to claim the QBI deduction for the first time on their 2018 Form 1040.

The guidance includes:

  • A set of regulations that finalizes proposed regulations issued last summer
  • A new set of proposed regulations that provide guidance on several aspects of the QBI deduction, including qualified REIT dividends received by regulated investment companies
  • A revenue procedure providing guidance on determining W-2 wages for QBI deduction purposes
  • A notice on a proposed revenue procedure providing a safe harbor for certain real estate enterprises that may be treated as a trade or business for purposes of the QBI deduction

The proposed revenue procedure, included in Notice 2019-07, allows individuals and entities who own rental real estate directly or through a disregarded entity to treat a rental real estate enterprise as a trade or business for purposes of the QBI deduction if certain requirements are met. Taxpayers can rely on this safe harbor until a final revenue procedure is issued.

The QBI deduction is generally available to eligible taxpayers with 2018 taxable income at or below $315,000 for joint returns and $157,500 for other filers. Those with incomes above these levels are still eligible for the deduction but are subject to limitations, such as the type of trade or business, the amount of W-2 wages paid in the trade or business and the unadjusted basis immediately after acquisition of qualified property. These limitations are fully described in the final regulations.

The QBI deduction is not available for wage income or for business income earned by a C corporation.

For details and frequently asked questions about this deduction, as well as information on other TCJA provisions, visit IRS.gov/taxreform.

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