I agree with jdddddd in that some people on this forum don’t seem to fully understand the various forms and filing requirements.
Form 8995 is the “Qualified Business Income Deduction Simplified Computation”. This form is used to claim the QBI deduction for various types of qualified businesses.
Form SCHEDULE B (Form 8995-A) is the “Aggregation of Business Operations”. This form is used in addition if a taxpayer wants to combine businesses that provide services that are the same and share significant business elements. For example, for someone that owns multiple separate entity rental properties they can aggregate business operations on this form.
Form Section 199A is the “Rental Real Estate Enterprise Statement”. This form is used to affirm that all requirement for the Safe Harbor have been met per Revenue Procedure 2019-38. THIS IS THE FORM (SAFE HARBOR ELECTION) THAT NEEDS TO BE SIGNED BY THE TAXPAYER AND THEN ATTACHED TO THE RETURN. THIS IS ALSO THE FORM THAT TURBOTAX NEEDS TO ALLOW ATTACHMENT FOR E-FILING PURPOSES!!
For those who may not understand the importance of this Safe Harbor statement as it applies to RENTAL INCOME activity please read the following:
In order to take the QBI deduction you must have Qualified Business Income. Rental Activity is specifically labeled a NOT being a Qualified Business Activity for most purposes unless you are a Real Estate Professional such as a realtor and meet the minimum required hours. The safe Harbor is what provides an exception to this.
The 20% Qualified Business Income (QBI) deduction under Section 199A is only eligible for “QUALIFIED” business. The IRS lists business types that are qualified automatically. RENTAL PROPERTY ACTIVITY is generally NOT a QUALIFIED BUSINESS ACTIVITY especially since historically it has been considered PASSIVE income by the IRS. The exception which does not apply to most taxpayers is if you are a Real Estate professional (realtor, etc.) who spends at least 750 hours in the business. The IRS, however, has allowed an exception for non-Real Estate professionals with their rental property businesses. These exceptions fall under SAFE Harbors (IRS notice 2019-07 and Revenue Procedure 2019-38). IRS notice 2019-07 applies to a single property while Revenue Procedure 2019-38 applies to multiple properties if the taxpayer elects to combine all their rental properties in an Enterprise.
When a taxpayer elects to apply the Safe Harbor to their rental(s) this makes their rental business qualify for the QBI deduction. Since income from investments is usually NOT eligible is it important to elect the Safe Harbor. IMPORTANT: In order to elect the Safe Harbor the taxpayer needs to INCLUDE A SIGNED STATEMENT to this effect and include it in their tax return.
In order to elect the Safe Harbor the signed statement must include that all the following (plus some additional) are true on the statement:
- Separate books and records are maintained to reflect income and expenses for each rental real estate enterprise.
- For rental real estate enterprises that have been in existence less than four years, 250 or more hours of rental services are performed per year. For other rental real estate enterprises, 250 or more hours of rental services are performed in at least three of the past five years.
- The taxpayer maintains contemporaneous records, including time reports, logs, or similar documents, regarding the following: hours of all services performed; description of all services performed; dates on which such services were performed; and who performed the services.
If a taxpayer has several rental properties they must satisfy the 250 hour rule for EACH property unless they aggregate their properties into an Enterprise. By aggregating they are combining all their rentals into one business enterprise so they don’t have to satisfy the 250 hours of service for each property but instead 250 hours combined for all their properties. In order to aggregate all rental activities together the taxpayer needs to include Schedule B (Form 8995-A) Aggregation of Business Operations and name each business and/or enterprise that are to be combined on the form.
For those who may decided to just not include the Safe Harbor statement on their tax return are making a poor decision in my opinion. Again, investment income generally is NOT eligible for the 20% QBI deduction and if the taxpayer does not elect to take the exception (Safe Harbor) that the IRS has provided then, if audited, the 20% deduction will likely be reversed leading to an additional liability with interest and penalty.
Obviously electing the Safe Harbor is the best decision.
