Tax Year Prior to 2020: Unable to efile due to QBI Deduction Worksheet Schedule B

[wasatchred]

TT - agree with previous comments.  If you can't fix this, you've lost a customer in the future.  Unacceptable to have to Mail return.  Re-ran Taxes in TaxAct, they can e-file.  Why can't you? 

[DougM]

I waited for TT to fix this problem last year, but this year I'm seriously thinking about jumping ship and trying TaxAct. Honestly, the only impediment to me doing that is that I've entered most things in TT for this year and I can't be bothered going over it again.

For 100 bucks, and the cost of an evening, maybe I will give it a go. It is very annoying that the same problem is back again this year.  Does anyone know if TT/Intuit has a satisfaction/refund policy?

Doug

[HoriTT]

I was able to resolve this issue after reading the post by DanielV01 about Section 162. There is some discussion of Section 162 in this link: https://www.journalofaccountancy.com/issues/2019/aug/qbi-deduction-for-rental-real-estate.html

According to that link there are three avenues to get the QBI deduction:

"The final QBI regulations offer three avenues for a rental real estate activity to be considered a trade or business eligible to generate QBI: (1) the rental activity qualifies as a Sec. 162 trade or business; (2) it rents to specific related parties; or (3) it satisfies the requirements of a proposed safe harbor."

I think the confusion is caused by misleading questions in TT about safe harbor. It provides three options:

a- Elect to use safe harbor for the property on its own...

b- Elect to combine the property with other properties as part of a "real estate enterprise"...

c- None of these apply.

When reviewing these options it sounds like aggregating the properties requires to select option b which requires the safe harbor statement. But actually option c can be selected and the properties can still be aggregated. QBI can still be claimed per Section 162 (if the aggregation of your properties qualify). That is what I did and e-filing became available.

[DM26]

Nice job DanielV01, it looks like your post improperly influenced at least one taxpayer.

If anyone is relying on Section 162 to take the QBI deduction without electing the Safe Harbor I suggest researching further into this section or consult with a truly knowledgeable tax consultant.

Look further even within the referenced article which states: Case law provides that a Sec. 162 trade or business entails a profit motive and requires considerable, regular, and continuous activity.

Regulations offer ambiguous rules to determine whether a rental real estate activity qualifies as a trade or business for QBI purposes.

Keep in mind that Rental Income is automatically deemed Passive Income and has been historically.  Most rental property owners do other income producing activities (Regular job, etc.) and most manage their rental properties in addition to their main job.  Unless you are in a real estate profession, can prove such activity is your main activity and that you do it continuously you will have a very difficult time trying to prove that your rental income is not passive.  Trying to prove a Section 162 trade or business is done on a case by case basis.  Burden of proof always falls on the taxpayer.  If you are relying on this section make sure you are prepared to provide evidence that you spend most of your time related to rental activities.  I own (11) rental properties and yet I would have a difficult time proving that.  For most of my rental properties my hands-on involvement is sporadic and a number months could pass where I don’t do any maintenance or work aside from depositing the rent and paying a bill or two which are setup on autopay anyway. 

Now why would anyone take the risk with Section 162 if the IRS has already provided them with a remedy (SAFE HARBOR)?

[apuaar00]

I totally agree with you. You should select the Safe harbor election for QBID for rental properties. With the error in the software how are you filing the state? Did you paper file?

[HoriTT]

Every taxpayer's case is different and you cannot generalize by saying that everyone claiming QBI for rental income should select safe harbor. I appreciate that DanielV01 brought up the Sect. 162 alternative as an option. Having said that, I totally agree that TT should fix this problem such that people can e-file with safe harbor election. I cannot imagine why IRS would accept e-signatures for the whole tax return but not the safe harbor statement.

Regarding a previous comment: "If you are relying on this section make sure you are prepared to provide evidence that you spend most of your time related to rental activities.", I could not find any evidence that this is a requirement for Sect. 162. The requirement is that the taxpayer must engage in the activity on a regular and continuous basis.

Furthermore for taxpayers using a property management company, there is also some debate about that.  The cases involving these debates concluded that "the taxpayer is engaged in a trade or business if the activities performed by the agent would, if conducted by the taxpayer, constitute a trade or business." (https://keitercpa.com/blog/rental-real-estate-rising-to-the-level-of-a-trade-or-business-for-purpose...)

According to the conclusion in the previous paragraph I think I can rely on Sect 162 and also the safe harbor. I have been using the same property management company for all my five rentals,  all of which have positive net earnings, for the last ten years. I agree that the safe harbor method would have been less risky if I could e-file with safe harbor election. But having to paper file and mail the tax forms introduces risks on its own due to handling of the forms, errors during data entry or mail delays etc., and increases the chances of an audit.

[DM26]

HoriTT,

I can only suggest that you conduct a thorough research and also be mindful as to the source.  While each taxpayers situation is different the tax code is not.

If you are relying on Section 162 possibly you are a realtor or other real estate professional to support your continuous activity. And yes, anytime you make an income tax decision based on a particular section of the tax code you should be prepared to provide evidence.  This evidence obviously is not furnished along with your tax return however if you become subject to an audit you’ll need to provide this.  This would include keeping logs and other records to support your claim.  Are you suggesting that taxpayers should only retroactively prepare such evidence upon an audit?

Also, if you’re using a management company surely this will reduce your involvement.

Regardless as to differing opinions there should be no reason as to why TurboTax cannot be updated as it has been in past years.  Taxpayers should not be put in this situation where they have to decide on risking their QBI deduction just so they can e-file.

[HoriTT]

Please show me any evidence (a link or a section of the tax code will do) that a taxpayer claiming section 162 has to be a  a realtor or other real estate professional. I could not find any.

My property management company is a realtor and real estate management company. According the case history "the taxpayer is engaged in a trade or business if the activities performed by the agent would, if conducted by the taxpayer, constitute a trade or business." . 

The property management company uses a software called Appfolio where all the required evidence is accessible anytime. So no I am not planning to retroactively prepare such evidence. I already have it.

[DM26]

It is not required that you need to be a realtor or a real estate professional to relying on section 162 however if you are in this line of work then you can easily defend that such activity is your trade or business.  The problems arise when you don’t work in the field then you are subject to prove “regular and continuous conduct of the activity”. The IRS has been vague on the language as to what will or will not qualify as a trade or business and to qualify each relies on the facts and circumstances on a case by case basis.  So basically there is no assurance that a taxpayer’s activity will qualify as a trade or business and they are left vulnerable.  Again, keep in mind that the IRS already classifies rental income as passive income.  The definition of passive income is earnings created without having to be actively involved.

Section 162 is not fully clear and ambiguous as it pertains to rental activity which is why they created the safe harbor.  The safe harbor was created to avoid the ambiguity in that it sets various conditions and requirements, and if met, allows the taxpayer to declare that rental activity is their trade or business.  The safe harbor however must be elected with attached statement.

I am not here to educate or defend my past postings.  I am a CPA and when I see incorrect information posted I feel compelled to intervene.  I am, however, finding this to be a waste of my time.

[DM26]

I’m going to throw one piece of information into the section 162 issue which may provide a better understanding.

Certain types of passive income including interest income, dividend, capital gains and rental income luckily only have income taxes assessed. This is because this income is deemed not earned like that from a regular trade or business.

Sole Proprietorships (filed on schedule C) include both income taxes PLUS self-employment taxes on the net income.  Even though many sole proprietorships (whether it’s selling on eBay, sub-contract work, etc.) often do not employ anyone yet the IRS still determines that these are businesses or trades and that the net income earned is subject to employment taxes, just like that of w-2 employees of a company.  For those not aware Employers match the employment taxes that their employee pays.  Employment taxes (Social Security & Medicare taxes combined) are 7.65%. When you are self-employed you pay this twice for a total of 15.3%  since you are considered both the employee and the employer.  92.35% of self-employment income is subject to these employment taxes so the net rate is about 14.3% of net income.  This is a large % of additional taxes which I’m glad I don’t have to pay on my rental income.

Keep in mind that Real estate professionals claim business income which is also subject to employment taxes. 

Now if one were to claim the QBI deduction without safe harbor but rely on section 162 they would argue that they have a legitimate business which entitles them to the deduction.  But understand that the IRS previously determined that your rental income is passive income due to lack of active involvement and because of that did not require the 15.3% employment taxes. So basically you would be arguing that your rental activity is business activity to claim the QBI deduction but not business activity to avoid self-employments taxes.

[HoriTT]

I generated pdf files of the tax returns (for filing) with and without safe harbor election and compared them page by page. There are two differences:

1. The safe harbor statement does not exist for one of them as expected.

2.  In the tax return with the safe harbor statement the 8995-A form does not have part 1c (check if aggregation) box checked. As a result there is no Form 8995-A schedule B (Aggregation of Business Operations) in this tax return.

I don't know whether item 2 is a bug in TT or whether it is intentional since the list of properties also appears in the safe harbor statement (in a slightly different format than in 8995-A schedule B). While entering data, I clearly elected to aggregate all properties for both tax returns. 

Since  it doesn't look like TT will fix the e-filing issue anytime soon, I am considering the following options, if the presence of the 8995-A schedule B form in the return is not a problem when electing safe harbor (why should it be a problem since the aggregation is intentional)

a. E-file without the safe harbor election but mail the safe harbor statement to IRS separately through registered mail. IRS does not see the steps the user goes through to get to the final tax return. They just see the result. The only thing missing during e-filing will be the safe harbor statement which IRS will receive through regular mail. The e-file will include a 8995-A schedule B form that lists the properties in the aggregation.

b. Same as option a but without mailing the safe harbor form to IRS. Instead just sign and date the safe harbor statement and keep it for the record in case of an audit.

c. Same as option b but get the safe harbor statement signature notarized for future use in case of an audit.

Thoughts?

[apuaar00]

That is a great suggestion. Where do you mail the safe harbor statement?

[tagteam]

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@DM26 wrote:

But understand that the IRS previously determined that your rental income is passive income due to lack of active involvement and because of that did not require the 15.3% employment taxes.....

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The IRS had nothing to do with that; Section 1402 of the Code specifically excludes rentals from real estate as earnings from self-employment unless the rental income is received in the course of business as a real estate dealer.

See https://www.law.cornell.edu/uscode/text/26/1402

[DM26]

That is exactly my point. What exactly are you trying to indicate???

The code excludes rental income from self-employment taxes because they do not consider this type of income to be EARNED but instead a form of PASSIVE income due to the lack of active involvement.

In order to rely on section 162 however you are indicating you do have an active involvement (like in the course of business). You can’t have it both ways!  Unless of course you elect the safe harbor which does not require “regular and continuous conduct of the activity” as does with section 162 but instead only 250 hours for the year.

[tagteam]

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@DM26 wrote:

.....You can’t have it both ways!  Unless of course you elect the safe harbor which does not require “regular and continuous conduct of the activity” as does with section 162 but instead only 250 hours for the year.

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The above quoted passage, particularly the last sentence, was what I thought was missing from your previous post. Regardless, I now realize that we are in complete agreement on this issue.