On April 9, Annette Nellen, the chair of the AICPA Tax Executive Committee, sent a letter to Treasury and to the IRS Chief Counsel’s Office asking for additional guidance on the Sec. 199A deduction for qualified business income (QBI) beyond the corrected final regulations (T.D. 9847) and Notice 2019-07, which contains a proposed revenue procedure that provides a trade or business safe harbor for rental real estate.
The first request contained in the letter is for clarification on a number of issues regarding the real estate trade or business safe harbor. Specifically, the AICPA recommends that the final revenue procedure:
- Allow taxpayers to aggregate commercial and residential rental real estate activities to reflect business realities that both types may exist in the same piece of property;
- Allow taxpayers that enter into triple net lease arrangements to qualify under the revenue procedure, in situations where the activities of the taxpayer surrounding the triple net lease would otherwise satisfy the requirements outlined in the revenue procedure;
- Clarify the taxpayer’s use of real property as a residence in which the taxpayer rents a portion and resides in a portion of the real property;
- Clarify that the time spent by a professional real estate management company would count toward the 250-hour requirement;
- Reduce the 250-hour requirement;
- Reduce the requirements for contemporaneous documentation for independent contractors and a taxpayer’s agents; and
- Clarify the reporting requirement, specify what a taxpayer needs to include in the reporting statement, and remove the requirement for a signature.
The next issue involves the deemed trade or business requirement for commonly owned entities. The AICPA notes that, under the regulations, the deemed trade or business requirement is not met or available if the real estate is leased to a commonly owned C corporation. The AICPA believes that the tax filing classification of the tenant operating business should not matter in respect to the deemed treatment as one managed trade or business. Therefore, the IRS should amend Regs. Sec. 1.199A-1(b)(14) to include rentals to a commonly owned C corporation as a deemed trade or business for the rental activity. However, aggregation under Regs. Sec. 1.199A-4(b)(1)(i) should continue to deny aggregation with a commonly owned C corporation.
The AICPA next took up the issue of the allocation of expenses to multiple businesses. It believes that the method in the regulations is flawed. Thus, it is recommending that Regs. Sec. 1.199A-3(b)(1)(vi) be amended so that taxpayers allocate the various deductions, which are not direct deductions of the trade or business, proportionally to the businesses based upon relative positive QBI — not gross receipts.
Another proposed change to the final regulations involves the unadjusted basis of property immediately after acquisition (UBIA). The final regulations allow a limited adjustment for excess Sec. 743(b) adjustments, but not for similar adjustments under Sec. 734(b). The AICPA recommends that an excess Sec. 734(b) adjustment should generate UBIA in the same manner as an excess Sec. 743(b) adjustment
Finally, the AICPA recommends that the IRS clarify the meaning of QBI. The AICPA notes in the letter that taxpayers and tax preparers struggle with determining which items constitute QBI and, to provide needed clarity on items commonly reported by taxpayers that own relevant passthrough entities, the regulations need additional examples. To this end, the letter contains a list of seven new examples that the AICPA believes should be added to the regulations.
— Sally P. Schreiber, J.D., (Sally.Schreiber@aicpa-cima.com) is a Tax Adviser senior editor.