A Surprise or Two in New Tax Regulations

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The Internal Revenue Service (IRS) continues to issue final regulations relating to the tax reform package that was passed at the end of 2017. In mid-January, the IRS issued some final regulations for section 199A, which pertains to some in our industry.  

AmericanHort members enjoy the benefits of our partnership with K-Coe Isom, a leading national agricultural tax firm, with offices in eight states across the country. Our advocacy team leans on K-Coe to provide clarity on complex tax issues, and these recent regulations for 199A definitely fit the bill. Bryce Gibbs, a principal at K-Coe Isom in Chico, CA, provided some insight on these latest regulations in recent correspondence with our advocacy team.

What was the biggest change to section 199A as a result of these regulations?

“IRS changed the rule around common control for rental income qualifying as QBI for sole purposes of 199A. Rent received from a C-corporation of which you have common control no longer automatically qualifies under their special rule. The rent must be received from a trade or business conducted by an individual or RPE (i.e. Pass-through entity). This will affect many farming operations and other multiple entity structures that will have a c-corporation pay rent to an individual as a part of a plan to manage taxable income and to keep real estate separated from operating business.”

Any other changes in the recently-issued regulations that are worth mentioning?

“The other change that caught our attention is a new “safe harbor” for rental real estate to qualify as trade or business for sole purposes of 199A. Note this is just a safe harbor and does not automatically disqualify if not met but gives some good indication of IRS position on the topic. Under the proposed safe harbor, a rental real estate enterprise may be treated as a trade or business for purposes of section 199A if at least 250 hours of services are performed each taxable year with respect to the enterprise.”

With tax season is in full swing, AmericanHort will continue to provide updates on the latest regulations through counsel by K-Coe Isom. Be on the lookout for additional programming around this topic. 

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