Code Section 199A Safe Harbor

The Internal Revenue Service has issued additional guidance regarding the qualified business income deduction under Code Section 199A in the form of a notice.  Notice 2019-07 contains a proposed revenue procedure that provides for a safe harbor, solely for purposes of Code Section 199A, under which certain rental real estate enterprises will be treated as a trade or business.  This proposed safe harbor is helpful because, until its issuance, it was not clear whether rental real estate activities would qualify as a trade or business for the pass-through deduction that became effective January 1, 2018. 

The safe harbor requirements are as follows: 

  1. Separate books and records are maintained to reflect income and expenses for each rental real estate enterprise;
  2. 250 or more hours of rental services (as described in the notice) are performed per year with respect to the rental enterprise (different rules to apply for taxable years beginning after December 31, 2022); and
  3. For taxable years beginning on or after January 1, 2019, contemporaneous records are maintained regarding hours of all services performed, description of all services, dates on which services were performed, and who performed the services.

Real estate rented or leased under triple net leases and real estate used by the taxpayer as a residence during the year is not eligible for the safe harbor.  If the rental real estate activity does not meet the proposed safe harbor requirements, it does not necessarily preclude a rental real estate enterprise from establishing that it is in fact a trade or business for purposes of Code Section 199A, but operating under safe harbor guidelines can be helpful to business owners who want to ensure a deduction.  Although only a proposed revenue procedure, the safe harbor may be used until such time as the revenue procedure is published in final form.

Business owners who may qualify for the Code Section 199A deduction should closely examine all rental real estate activities to determine whether the safe harbor requirements are met or if changes can be made going forward to satisfy the requirements.  For more information on this and other U.S. federal income tax issues, please contact Drew Griesser at 513-639-3909, Margaret Kubicki at 513-579-6913 or Mark Sims at 513-579-6966.

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