DanielV01
I’m having a difficult time trying to understand your post. First let me say that I am a CPA. Although I have not practiced in the public sector for a number of years I am quite versed at interpreting tax code.
Based on your response I can only assume you have a very limited knowledge of taxation even though your title states “Employee Tax Expert”.
As a so called “Employee Tax Expert” why would you make such a post as you could potentially influence actions on some taxpayers??? You state that you recommend NOT electing the safe harbor and provide some illogical reasons for it. Perhaps you need a bit of education on this subject.
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. How can you possibly make the reckless recommendation to NOT elect the Safe Harbor?
Last month I provided a long post to clarify things which I have copied and pasted below. Perhaps you need to review the post to gain some clarity!!
Also, you provided another ignorant statement: “It has been a very challenging year, with a multitude of last-minute law changes that have forced very layered programming adjustments.” On 12/22/17 the Tax Cuts and Jobs Act of 2017 was signed effective as of 1/1/18. This act introduced significant changes (unlike tax year 2020). The QBI deduction was also introduced within this act. Programming challenges were significant with 2018 tax return software however not nearly as much since. What’s worse is that this efiling issue has been resolved with past year software so the concept is not new.
Please read my prior post below and educate yourself prior to issuing any further guidance.
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. 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 have decided to just not include the Safe Harbor statement on their tax return, just to be able to efile, 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) the IRS has provided than 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.
Numerous posts have asked whether Intuit will update the software to allow efiling with the Safe Harbor. Many of us are on hold with filing our tax returns since this question remains unanswered. I will certainly elect the Safe Harbor with aggregation especially since I own several rental properties. If I am forced to file on paper I will do so however as I stated in an earlier post this poses issues. One being that paper filing causes delay but more importantly subjects me to an additional audit risk since the possibility of data input error exists.
