QBI eligibility for foreign rentals if taking safe harbor?

[asdfg1234]

First, TurboTax asks: “Let’s see if you’re eligible for the QBI safe harbor?”
This screen focuses on the safe harbor requirements—250 hours of rental services, separate books and records, not using the property as a residence, etc. But there’s no mention of whether the activity must be U.S.-based.

If in this screen you answer:

1. No, I don’t (or can’t) — TurboTax moves to the next screen: “Is This Qualified Business Income?”. Here, a popup link “More info about what’s considered a qualified business” does mention that the activity must be U.S.-based, implying that foreign rentals don’t qualify.

2. Yes, for X or Yes, for an enterprise — TurboTax moves to “Confirming property type and description.” But at this point there’s no mention at all about the U.S.-based requirement.

So it looks like:

• If you go down the “No” path, TurboTax explicitly tells you foreign rentals don’t qualify.

• If you go down the “Yes” path, TurboTax never asks or warns about foreign rental ineligibility ever.

This raises the question: Does TurboTax’s safe harbor workflow inadvertently make it look like foreign rentals qualify for QBI if you answer “Yes” to the safe harbor test? Or is this simply a UI/wording problem in how TurboTax presents the questions?

[guywong · Accepted solution]

A prerequisite for IRC 199A is that the source of income must be derived from the United States domestically.

26 U.S. Code § 199A - Qualified business income | U.S. Code | US Law | LII / Legal Information Insti...

(3)Qualified items of income, gain, deduction, and loss

For purposes of this subsection—

(A) In general 

The term “qualified items of income, gain, deduction, and loss” means items of income, gain, deduction, and loss to the extent such items are—

(i) effectively connected with the conduct of a trade or business within the United States (within the meaning of section 864(c), determined by substituting “qualified trade or business (within the meaning of section 199A)” for “nonresident alien individual or a foreign corporation” or for “a [1] foreign corporation” each place it appears), and

(ii) included or allowed in determining taxable income for the taxable year.

[asdfg1234]

Thank you. I believe your answer supports my point that the TurboTax EasyStep interview for determining QBI deduction eligibility under QBI Safe Harbor rules on rental properties is flawed. Specifically, landlords who meet the 250-hour requirement (along with the other criteria listed under the QBI safe harbor rules) are never alerted during the interview that foreign rental properties don’t qualify.