Does your rental real estate business qualify as a business in order to take advantage of the new qualified business income deduction?

By Melinda Kloster

For years beginning after December 31, 2017, a new potential deduction was created that allows eligible taxpayers to deduct up to 20 percent of their qualified business income as a qualified business income (QBI) deduction. For certain high income taxpayers your deduction could be further limited based on your business’ wages and unadjusted basis in qualified property.

Early on, there was a lot of speculation amongst tax professionals as to whether or not a rental property would qualify as a business in order to be able to take advantage of this new QBI deduction. It seemed that with the inclusion of unadjusted basis of qualified property in determining the QBI deduction, that Congress intended for at least some real estate businesses to qualify for the deduction since it allowed taxpayers who rely on revenue-producing assets to benefit. These types of taxpayers are typically in the real estate business.

Then the question became what facts and circumstances would qualify a real estate activity to rise to the level of a trade or business so that its owners could receive the benefit of the QBI deduction.

To answer the many questions and comments they were receiving, the IRS came out with a revenue procedure that provides a safe harbor under which a rental real estate business for eligible taxpayers will automatically be treated as a trade or business. The revenure procedure was finalized in September 2019 and applies only for purposes of QBI deduction.

In order to qualify under this safe harbor, all of the following requirements must be met by the taxpayer:

  • Separate books and records must be maintained for each rental real estate enterprise.
  • In general, 250 or more hours of rental services were performed in at least three of the past five years. Rental services include advertising to rent or lease the real estate, negotiating and executing leases, verifying tenant applications, collection of rent, daily operation, maintenance and repair of the property, managing the real estate, and supervision of employees and independent contractors. Rental services do not include time spent for financial or investment management services, arranging financing, finding property to purchase, reviewing financial statements or operating reports, travel time to and from the real estate property or time spent related to the construction of long-term capital improvements.
  • The taxpayer must maintain contemporaneous records, including time reports, logs, or similar documents regarding hours of all services performed; description of all services performed and dates on which such services were performed; and who performed the services. These services do not have to be performed by the taxpayer. They could be performed by a management company or other employees or contractors.

Certain rental real estate activities are specifically excluded from being able to qualify for the deduction under this safe harbor:

  • Real estate used by the taxpayer as a residence
  • Real estate rented under a triple net lease
  • Real estate rented to a commonly controlled trade or business (self-rental)
  • Real estate treated as a specified service trade or business

For example, Hayden and Ella each own a 50% interest in a partnership that owns and operates two apartment buildings. Hayden determines that he performs 25 hours per year of rental services, and Ella determines that she performs 30 hours per year of rental services for each property. In addition, they determine that the property management company performs another 100 hours of rental services on each property. Therefore, each property has 155 hours of rental services. Their bookkeeper maintains a separate set of books for each property, and Ella maintains records of the hours each of them spent on each property. Based on these facts, this rental enterprise would be treated as a business for purposes of the QBI deduction under the safe harbor rules because the total hours performed were 310, which exceeds the 250-hour safe harbor requirement.

Keep in mind, these safe harbors are provided such that if your real estate enterprise meets these safe harbor rules, it will be treated as a single trade or business for purposes of the QBI deduction calculation. However, it is also important to note that if it does not meet all of these safe harbor rules, it does not preclude you from otherwise establishing that an interest in the rental real estate enterprise is a trade or business for purposes of the QBI deduction. Other facts and circumstances may still allow your rental real estate enterprise to rise to the level of a trade or business for the QBI purposes

As usual, there are exceptions to each rule listed above, as well as many different sets of facts and circumstances that could qualify your rental property for the QBI deduction. If you need help determining if your rental enterprise qualifies for the QBI deduction and/ or how to structure the activity such that it would qualify, please contact us so that you do not miss out on this potential deduction.

Tax Advantages of S Corporations

by Eric Felton

When starting a business, determining the entity type that is right for you is one of the most important decisions an owner will have to make. LLCs or partnerships have been a popular choice of entity types for quite some time, but depending on your circumstances, an S corporation may be a better option.

A popular reason not to consider an S corporation is the requirement that all profits not paid as salary must be distributed exactly in accordance with ownership percentages. An LLC taxed as a partnership offers much more flexibility in allocating profits and distributions. However, S corporations also have substantial advantages, as we discuss below.

Pass-Through Taxation

In a traditional corporation, all net income earned by the corporation, after the payment of all salaries and bonus payments, is taxed at the corporate level at a rate of 21% . This same income is taxed again at the individual level when the shareholder receives distributions in the form of dividends. Depending on the individual’s Adjusted Gross Income, the tax on these dividends can be as high as 23.8% , plus state taxes. However, in an S corporation, all income is passed through to the shareholders and taxed at the individual level rather than being subject to the double taxation mentioned above. The income reported on the individual level is taxed once as ordinary income at rates of 10 to 37% depending on the individual’s taxable income.

Self-employment Tax Savings

Another advantage of an S corporation is the potential for self-employment tax savings. As a member of an LLC, your share of income from the partnership is subject to self-employment taxes (employer and employee portion of FICA tax). As an S corporation shareholder, you only pay FICA tax on your wages and the remaining profits from the company are not subject to self-employment tax. Depending on the income of your business, this could lead to substantial savings. The IRS requires S corporation shareholders to take reasonable compensation in wages to avoid abuse. To illustrate the potential tax savings of this strategy, here is an example:

Ashley forms a single-member LLC for her IT support business and elects to be taxed as an S corporation. For the tax year, the S corporation had net income of $250,000. Since the corporation must pay Ashley reasonable compensation for working within the business, she determines reasonable compensation to be $100,000. After paying these wages, the net income of the business is reduced to $150,000. Ashley and the business will pay FICA taxes on her wages of $100,000, totaling $15,300. The $150,000 of net income will pass through to Ashley and will not be subject to self-employment taxes. If Ashley had not elected S corporation status, the full $250,000 would be subject to self-employment taxes. 

Qualified Business Income Tax Deductions

With the implementation of the Tax Cuts and Jobs Act (TCJA), there came another tax advantage for certain S corporations. TCJA brought us a new deduction of up to 20% of the taxpayers’ Qualified Business Income (QBI) from pass-through entities. For high-income taxpayers, this deduction requires the business to either pay wages or have large amounts of tangible assets.

As an LLC member, you can’t pay yourself a salary. Many LLC members receive guaranteed payments, but these are not considered QBI. Depending on your business, many LLC’s will not generate enough wages to allow a 20% QBI deduction on your personal return.

S corporation shareholders, can take a salary that creates wages for purposes of calculating the QBI deduction. This is an area where we have worked with a number of our clients in analyzing the potential tax savings of converting from an LLC to an S corporation.

How to make an S Election

Electing to be treated as an S corporation requires the filing of Form 2553. This form needs to be filed no later than 75 days after the beginning of the tax year in which you wish to make the election. For example, if you would like to be taxed as an S corporation for the 2020 tax year, you need to file Form 2553 before March 15, 2020.

As with any IRS related issue, there are many additional considerations that would need to be discussed before switching an entity type. We would be happy to talk to you about these issues at any time.

Less UBIT and More Transparency: Repeal of Non-Profit Transit Tax and Taxpayer First Act

By Keith Jennings

Two pieces of legislation passed in mid and late 2019 have major tax implications for nonprofit organizations.

Repeal of Tax on Nonprofit Transportation Benefits

On December 20, 2019, the federal government gave all nonprofits an early holiday present by repealing the burdensome unrelated business income tax (UBIT) on qualified transportation benefits provided to employees. The repeal was part of a Revenue Provision in H.R. 1865 and any amounts previously paid after December 31, 2017 for qualified transportation fringe benefits, including expenses for parking facilities and mass transit benefits, are no longer subject to UBIT. Thus making any tax liability incurred for these benefits in 2018 as if it never happened!

The IRS has finalized the guidelines on how to request a refund – the 2018 Form 990-T must be amended with the words “Amended Return – Section 512(a)(7) Repeal” across the top of the return. Here is the IRS link with more information –

Taxpayer First Act Mandates Electronic Filing for all Tax-Exempt Organization Returns

On July 1, 2019, the President signed into law a piece of bipartisan legislation to help usher the filing of exempt organization tax returns into the 21st century with the Taxpayer First Act (H.R. 3151). This law contains two major provisions related to tax-exempt organizations, each of which is discussed in further detail below:

Mandatory Electronic Filing

Prior to the Taxpayer First Act, only tax-exempt organizations with year-end assets of $10 million or more filing at least 250 returns (including Form W-2s and 1099s) during a calendar year had to file their Form 990s electronically. Even with this requirement, most organizations voluntarily chose to file their Form 990 series returns electronically due to how much quicker and easier it is than mailing a paper return to the IRS. The only tax-exempt organization return type that was prohibited from being electronically filed was the Form 990-T for unrelated business income (UBI), even though payments for any unrelated business income tax due are generally required to be submitted through the Electronic Federal Tax Payments System (EFTPS).

Effective for taxable years beginning after July 1, 2019, all tax-exempt organization returns, including the Form 990-T, are required to be electronically filed. Smaller organizations with annual gross receipts of less than $200,000 and total year-end assets of less than $500,000, are afforded a delay in the requirement, until taxable years beginning after July 1, 2021.

Organizations are not the only ones who benefit from this electronic filing requirement, donors and the general public do as well. With all returns being electronically filed, the IRS is able to provide more information to donors through the “Tax Exempt Organization Search” function of their website ( Previously, the public would only be able to view PDF versions of Form 990 returns through websites like ProPublica and GuideStar, or by downloading a large cumbersome data file from the IRS. In recent months, the IRS has begun to not only upload PDF versions of Form 990 returns to their website, but also upload tax-exempt determination letters for recently approved tax-exempt organizations. This is a major step toward improving transparency and increasing the public’s access to this information, which will only continue into the future.

Notice of Revocation

Another benefit to tax-exempt organizations from the Taxpayer First Act is that the IRS must notify exempt organizations in advance prior to revoking their tax exempt status for failure to file return information. Prior to this Act, organizations were notified of an automatic revocation after three consecutive years of noncompliance, such as a failure to file, related to tax filings. Effective for the second year of required returns to be filed after December 31, 2019, the IRS is essentially required to provide organizations with a one year warning prior to any revocations. If the IRS has no record of having received a return from the organization for two consecutive years, the IRS must inform the organization that the organization’s tax exempt status will be revoked if they fail to file a return for the third consecutive year. This will hopefully minimize the number of organizations that have their tax-exempt status revoked and the burdensome filings to restore the status.

Snyder Cohn is proud to announce that Billy Litz, CPA, became a Principal at the Firm!

Billy has been a valued member of Snyder Cohn since he joined the firm in 2006. He works closely with real estate investors, commercial and residential developers as well as entrepreneurial businesses and their owners. Billy helps his clients with comprehensive tax planning, financial statement and tax return preparation, and property acquisition due diligence analysis.

Billy is a graduate of the University of Maryland and a veteran of the US Air Force. He is a certified public accountant licensed in Maryland and is a member of both the American Institute of Certified Public Accountants and the Greater Washington Society of Certified Public Accountants. Billy is also a Leadership Montgomery – Emerging Leaders class of 2016 graduate. To learn more about Billy and his expertise, click here.

End of Year Tax Law Changes for Individuals and their Retirement Plans

by Greg Yoder

The appropriations act that went into law at the end of 2019 included a number of significant tax measures. Most notable of these was the SECURE act, which — in addition to showing how far Congress will go for an acronym — made important changes to retirement plan provisions. Let’s look at a few of them:

  • The age for beginning required minimum distributions (RMDs) has been raised to 72. In the past, taxpayers had to take their first distribution from most retirement plans in the year they reached 70 1/2 (even if they were still working). Now, if you reach age 70 1/2 after December 31, 2019, you can wait until the year you turn 72 to begin taking RMDs. The rule that allows you to defer the first distribution until April 1 of the year following the year you reach the minimum distribution age has not changed (but keep in mind that people who wait until the following year to take the first distribution will have to take two distributions in that year). Note that someone who turned 70 1/2 in 2018 or 2019 isn’t helped by this law. Life isn’t fair, and neither are taxes.
  • There is no longer a maximum age for making contributions to a traditional IRA. Under old law, traditional IRA contributions were only allowed up until the year a taxpayer turned 70 1/2. Now, there’s no upper age limit. However, other restrictions still apply, so, for example, a taxpayer still needs earned income in order to make a traditional IRA contribution.
  • There have been changes to post-death RMD rules for inherited IRAs and other retirement plans. Under the old tax law, when and how quickly RMDs had to be taken by the heir(s) of a retirement plan holder depended on a number of factors, including the age of the holder at death. Now, most beneficiaries will be required to receive the entire account balance of the plan within ten years of the date of death. As with many retirement plan provisions, there are a number of exceptions.
  • While the minimum distribution age for IRAs has increased to 72, the qualified charitable distribution age remains 70 1/2. IRA owners who have reached 70 1/2 may transfer up to $100K each year to qualified charities. The transfer can reduce or eliminate the RMD and is not included in the owner’s taxable income.

There were plenty of other changes affecting retirement plans, and plenty of other changes to other areas of the tax law. For example:a number of provisions that were slated to expire were extended. These “extenders” include

  • A number of energy-related incentives
  • The 7.5% of AGI floor for medical expense deductions (the floor had been 10% of AGI and was scheduled to return to 10% for 2019)
  • An above-the-line deduction for qualified tuition and some related expenses, and
  • A special exemption for income from forgiveness of debt related to a principal residence.

As with most tax legislation, there were a number of other provisions that are highly technical and apply to limited numbers of taxpayers, and there are exceptions to pretty much everything. The above is a tiny sample of the provisions of the recent act. If you’re interested in any of its provisions and how they affect your tax situation, please get in touch with us.