Application of the Qualified Business Income Deduction for Rental Activities
By John M. Robinson, CPA
The Tax Cuts and Jobs Act, signed into law on December 22, 2017, includes a new provision that allows owners of sole proprietorships, S corporations, and partnerships a deduction of up to 20% of Qualified Business Income earned in a qualified trade or business. There are several types of business activities that are specifically listed in the law as being ineligible for this deduction. However, the law does not specifically address whether income from rental activities will qualify for the deduction.
In general, current thinking is that income from rental property may qualify for the Qualified Business Income deduction. However, there is discussion that “triple net leases” (where the tenant or lessee pays all property taxes, insurance, and maintenance on the leased property) may not qualify for the Qualified Business Income deduction. The reason for this is that a triple net lease requires so little involvement on the owner’s part that it does not rise to the level of a trade or business.
We are still awaiting specific guidance on whether income from rental activities, including from triple net leases, qualifies for the Qualified Business Income deduction, and, if there are limits, whether there will be any provision that allows grouping when the lessor also has an interest in the lessee’s operating business.
If it is determined that a taxpayer might benefit from the Qualified Business Income deduction related to income from rental activities, the following are some key pieces of information, based on the assumption that the activities in question qualify for the deduction.
If the taxpayer’s personal taxable income is less than $315,000 married filing joint or $157,500 if not married filing joint, the taxpayer will be eligible for the full 20% deduction on this income.
If the taxpayer’s personal taxable income is over $315,000 married filing joint or $157,500 if not married filing joint, the taxpayer will still be eligible for the deduction, but the deduction will be limited to the greater of 1) 50% of W-2 wages paid by the activity, or 2) 25% of W-2 wages paid by the activity + 2.5% of the original cost of depreciable property held by the activity where the property has not reached the end of its depreciable life for tax purposes (raw land would not qualify, and fully depreciated assets placed in service more than 10 years ago would also not qualify).
So, if these rental activities generate $100,000 of taxable income per year after expenses, the maximum deduction based on income would be $20,000. If the taxpayer’s income is over the threshold amounts and there are no W-2 wages paid from the rental activity, we would next look at the depreciable basis of property. If the activity has property that is depreciable and has not reached the end of its depreciable life with an original cost of $750,000, we would take 2.5% of that, for a maximum of $18,750. So, in this case, the taxpayer would be eligible for a Qualified Business Income deduction of $18,750 related to this activity.
As mentioned previously, it is important to note that we are still waiting for guidance on whether rental activities will benefit from this new provision. Please stay tuned for additional updates as more guidance begins to be available in this area.
John M. Robinson Tax Principal, CPA
John is a tax principal and has worked at BRC since 2001. He is responsible for providing tax compliance and consulting services to a wide variety of clients. His primary industry experience includes individuals, manufacturing, retail and wholesale, and not-for-profit organizations. Education Appalachian State University – Bachelor of Science in Business Administration, Concentration in Accounting […]