IRS Releases Final Regulations on 20% Business Income Deduction
January 28, 2019
On January 18, 2019 the Treasury Department and Internal Revenue Service (IRS) published final regulations[i] implementing the qualified business income (QBI) deduction as established by the Tax Cuts and Jobs Act (“the Act”). Importantly for REALTORS®, the QBI deduction under the final regulations allows real estate agents and brokers to deduct up to 20 percent of income if they are independent contractors or owners of a sole proprietorship, partnership, or other type of “pass-through” entity.
The Act established a new section in the Internal Revenue Code (“the Code”)[ii], which provides that independent contractors and individuals whose businesses are organized as pass-through entities may deduct up to 20 percent of their net business income before they calculate their tax burdens. The deduction cannot be used for wages or income gained through a C corporation. The regulations also clarified that, while some types of businesses are ineligible for the deduction, real estate brokers are indeed eligible.[iii] Certain limitations would apply to taking the deduction for income over the regulations’ income thresholds if a filer was engaged in a different trade or business.[iv]
Along with the final regulations, Treasury and the IRS also published a “Proposed Revenue Procedure” governing whether rental income may be deducted as a part of QBI.[v] The procedure allows individuals and entities who own rental real estate to take the 20% QBI deduction for income from the rental enterprise, as long as books and records are maintained, 250 or more hours of rental services are performed with respect to the rental enterprise, and that time reports or logs are maintained regarding the services performed. The notice states that taxpayers may rely on the proposed procedure until a final version is issued.
The National Association of REALTORS® (NAR) has published several helpful videos explaining changes to the Code in the Tax Cuts and Jobs Act that affect the real estate industry, which can be found here. For further information, NAR’s landing page on tax reform can be found here.
[i] 26 C.F.R. § 1.199A
[ii] 26 U.S.C. § 199A.
[iii] See 26 C.F.R. §1.199A-5(b)(2)(X) (clarifying that the QBI deduction applies to real estate agents and brokers making over $157,000 as single filers and $315,00 as joint filers, as they are not engaged in a restricted “Specified Service Trade or Business”).
[iv] The regulations also clarify that if a filer’s income is above the $157,500/315,00 amount and he or she exchanged property for another to defer taxes under 26 U.S.C. § 1031 (also known as a “like-kind” exchange), a partial deduction may still be claimed.
[v] I.R.S. Notice 2019-07.