Why does my Farm Rental Income Qualify for QBID in TurboTax?

[rwilsond]

I am puzzled as to how TurboTax came to the conclusion that my income from my farm rental qualifies for the "Qualified Business Income Deduction" (QBID).

Here is the situation: I live in California, and inherited some farmland a few years ago in the midwest. Accordingly, I receive a share of the income from the crops, and I pay for a portion of the fertilizer, and all the property taxes. Although I visit the farm annually, and communicate with the farmer a few times per year, and occasionally advise him when he asks what kind of crops I want, etc., I do NOT "Materially Participate" (e.g., I do not run the operations, or spend more than a few hours at the farm each year). Also, the farm is not an LLC or any other type of corporation. I simply receive payments, and report this income (and expenses) on IRS Form 4835.

Recently, I read some articles about QBI, and concluded that it is not easy to find a simple answer to this question. TurboTax somehow concludes that this income qualifies for the QBID when I use it to file my IRS Form 1040. Nevertheless, I would like to ask the TurboTax community:

Based on the information provided above, does this income qualify for a QBID? Why or why not?

[MonikaK1]

It depends on all of the relevant facts and circumstances. You may wish to revisit the TurboTax interview for your farm rental activity to confirm that you answered all of the questions as intended.

Rental real estate is treated as a trade or business for purposes of the Qualified Business Income Deduction under section 199A if it meets any of the following three tests:

1. The rental real estate rises to the level of a section 162 trade or business.
    
2. The rental real estate is a rental real estate enterprise meeting the requirements of the safe harbor provided in Revenue Procedure 2019-38 (and the direct owner of the property chooses to rely on the safe harbor). 
    
3. The rental or licensing of property is to a commonly controlled trade or business operated by an individual or a passthrough entity as described in Treas. Reg. section 1.199A-1(b)(14). This is often referred to as a self-rental.

A link to a PDF version of the Revenue Procedure, a summary of its provisions, and many more questions and answers are available at this IRS webpage.

The "safe harbor" provision, if it is relied upon, has four requirements, all of which must be met.

Please see this TurboTax help article regarding rentals and the QBID and this one regarding the QBI in general. Here is another Community discussion on this topic.

[Rick19744]

Some comments on your question:

• You are correct in that you will not find a "simple" answer.  This is the case for many tax issues, as many issues rely on specific facts and circumstances.  That's just the way tax law works.
• It is possible for "rentals" to qualify for the QBID even without material participation.
• Simply renting out land for cash without any other involvement will not qualify as QBI.
• However, you appear to be doing more than just collecting cash for rent.  Based on your facts you pay for a portion of the fertilizer, property taxes (so this isn't a triple net lease), and you share in the income generated from the crops.
• So while we don't have all the facts involved, I believe there may be a position that this qualifies as QBI as you have some involvement.

[rwilsond]

Thank you Rick19744 for your reply - I agree with all you said.

Btw - As you may (or may not) agree, trying to get a clear answer to seemingly simple questions by reading related articles from various sources, results in opening one can of worms after another (one reference/source begets another, and so on  ... and they sometimes circle back to the starting point).

For my question, it seems to ultimately boil down to finding an answer to the question: Does such an arrangement qualify as a "Trade or Business" with consideration of Internal Revenue Code Section 162? Unfortunately, it appears that Section 162 provides no clear definition of Trade or Business (at least when it regards non-employees).

But another question for you, please. You said "So, while we don't have all the facts involved...". Can you give me an example of a fact or two that wasn't provided in my original post, that would be relevant to answering my original question?  (FYI - this is not a high-income situation that might disqualify the farm income from the QBID).

[RobertB4444]

I generally think that if you're on the fence about the QBI then you probably shouldn't take it.  But the questions I'd ask is how many hours a year do you put into the farm?  If it's 250 or more then you have QBI.  You said you do make some decisions for the farm.  Do you feel like your decisions provide the lions share of direction for the farm?  If so then you have QBI. 

Otherwise, don't take it.

@rwilsond 

[rwilsond]

RobertB444,

Thank you for your reply. However, I am a bit taken aback by your statement that if I am 'on the fence', then I probable should not claim the QBID.  In the situation I described in my original post, I believe (as far as I can tell) I provided sufficient information, enough at least to generally answer the question with a YES/NO (with some possible caveats).

And the situation I described is very common (for a cropland owner to simply rent land to a farmer for a share of the crops, with very little involvement). Since this situation is so common, it is surprising to me that getting an answer to the simple question is so hard, especially given that 2023 marks the 6th year since the QBID has been around. Nobody in this common situation should need to be 'on the fence' regarding this, by now; especially considering that the QBID can have a fairly substantial cumulative impact on their finances over the years.

As for how many hours I put into the farm, it depends on what that means, specifically (e.g., Would all my time researching this farm-related issue count?). However, I do know it is far less than the "250 hours" you mention. I believe you mention the "250 hours" because of the so-called "safe harbor" rule that makes it easier for a land owner's situation to qualify as a "trade or business" for the purposes of  IRC Section 199A, if they do indeed contribute this amount of time toward the operation. As it seems to me (and I am certainly no tax professional), although working a minimum of 250 hours might qualify one's farm rental income for the QBID, it is clearly not the only way to qualify for the QBID for farm income - and I have no interest in pursuing the Safe Harbor direction.

As for the "lions share of direction for the farm, I would not dare want to make that claim (e.g., I do not decide on which day to plant, fertilize, harvest, where to take the harvested crops, which equipment to use, and so on - and if I tried to do so, I may not ever be seen again after my next rural visit with the mid-west farmer).

It just seems to me that the discussions and answers and I am seeing regarding this (not just here on this forum, but including in articles written by tax professionals on this topic and in the IRC) should lead to clear answers - especially given that the described farm situation is a common one and this QBID has been around for a while now.

[RobertB4444]

The answer is no.  You do not qualify for QBI.

@rwilsond 

[rwilsond]

Based on what, Robert?

[AmyC]

Your passive income would not qualify as a business for the QBI deduction from what I read here. If you are getting it, you need to revisit your answers or I am missing information. The 199a seems like a possibility for you as the owner.

The IRS has Qualified Business Income Deduction which includes the  sec 162 and 199a explanations. The QBI is a short term credit leaving with 2025.

[Rick19744]

The 250 hour test is a safe harbor geared toward rental real estate.

I don't believe that this is pertinent to your facts and circumstances;  see below.

I also believe you need to make sure you addressed all TT questions correctly.

This forum is not the place to have a texting discussion of various facts and circumstance.

For some reason I can't attach a link to an article.

Google farm rental qbi and look for an article title Agricultural Law and Taxation Blog.

Also keep in mind that tax professionals can have differing opinions; as do our court systems where highly knowledgable judges can be reversed in an upper level court.

Based on your facts, you do more than just collect rent, and you do not have a triple net lease.

However, you do indicate that you only spend a few hours each year.  This may not achieve the bar to qualify for a trade of business.

You may need to tighten up your lease agreement and increase your involvement to qualify.

[rwilsond]

Rick,

As I mentioned it does seem obvious that the 250-hour "safe harbor" is not a viable option for folks like me who keep in touch with the farmer regarding basics, but let him do his job without interference.

As for how questions were asked and answered in TurboTax, I now see where within TT I should have stopped, read more, and given more thought and investigation into this matter before proceeding in the QBID direction I chose. This topic may simply be beyond the ability of the TT software to adequately address - so I am simply looking beyond TT for answers, including this forum.

Yes, thank you for the references. I have already studied some long reads by Roger McKeowen on this topic, including: "The Qualified Business Income (QBI) Deduction - What a Mess?" and "What is a Trade or Business" For Purposes of I.R.C. Sec. 199A". These are possibly some of the best treatises on this topic (they can be found by copying and pasting the quoted article names into Google or similar). I see you may have gotten the lease agreement advice from the latter of the two referenced articles (btw - I do have such a lease).

(Quite frankly, I am not sure why you threw in there the comment about this not being a texting discussion. I am far from being a tax professional, so I put a scenario together that fairly represents my case as well as many thousands of other taxpayers, and seem to have so far succeeded at soliciting thoughts regarding this complicated matter from people far better qualified than myself.)

[rwilsond]

Thank you for the reply Amy.

Was there any particular definition or guidance you found that led you to conclude that the income from the arrangement I described is 'passive' in the context of QBI? If so, what, please?

Regarding your reference to "Qualified Business Income Deduction which includes the sec 162", are you able to make any determination as to whether the arrangement I described is a "trade or business" per IRC Section 162 (for non-employees)? If so, what, please?

[AmyC]

I am in agreement with @Rick19744  from what you have stated here.  QBI stands for qualified business income. Yours sounds like some rental income that you barely notice rather than a business you are trying to grow.

We can only advise, you will do what you want. Here is the article mentioned by Rick.

[Rick19744]

This is the article I was referencing:

https://lawprofessors.typepad.com/agriculturallaw/2020/02/what-is-a-trade-or-business-for-purposes-o...

[rwilsond · Accepted solution]

I wrote to the author (Roger McEowen), of some key articles that were referenced and suggested by some of those replying to my QBI-related questions, and he replied. He has also graciously given me permission to quote his reply on this forum. Here is what I emailed to him (in Italics):

Although I found your writings very informative, I would like your opinion regarding my very common situation below, please:

• I inherited about 150 acres of cropland in the Midwest a few years ago.
• Accordingly, I rent this land to a farmer and receive a 1/3rd share of the proceeds from the crops. 
• I pay for my portion of the fertilizer, and all property taxes.
• Although I visit with the farmer annually for a few hours, speak with him over the phone occasionally, and sometimes advise him regarding what kind of crops to plant, etc., I do not "Materially Participate" or attempt to run the farm operations.
• The farmer and I have an annual lease that details our responsibilities (e.g., I am not an employee of the farm or farmer, nor do I have employees).
• Neither the farm, nor the arrangement, is an LLC or any other type of corporation.
• I report this income (and expenses) on IRS Form 4835.

Based on this common arrangement, as described, would my share of farm income qualify for the QBID?

Mr. McEowen replied with:  "I think that is likely QBI based on your facts as stated."

Although, I have probably exhausted this topic for all it is worth in this forum, I still welcome any additional replies - especially any that can provide details and a 'basis' for thoughts, findings, conclusions, etc.