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Real Estate 199A Aggregation and 469 Grouping Rules: Real Estate Professionals and Safe Harbor ElectionTHURSDAY, OCTOBER 17, 2019, 1:00-2:50 pm Eastern
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FOR LIVE PROGRAM ONLY
October 17, 2019
Real Estate 199A Aggregation and 469 Grouping Rules: Real Estate Professionals and Safe Harbor Election
Brian T. Lovett, CPA, JD, Partner
WithumSmith+Brown
blovett@withum.com
Guinevere M. Moore, Partner
Johnson Moore
guinevere.moore@jmtaxlitigation.com
Kira Wheat, Senior Tax Manager
DHJJ
kwheat@dhjj.com
Notice
ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY
THE SPEAKERS’ FIRMS TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY
OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT
MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR
RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN.
You (and your employees, representatives, or agents) may disclose to any and all persons,
without limitation, the tax treatment or tax structure, or both, of any transaction
described in the associated materials we provide to you, including, but not limited to,
any tax opinions, memoranda, or other tax analyses contained in those materials.
The information contained herein is of a general nature and based on authorities that are
subject to change. Applicability of the information to specific situations should be
determined through consultation with your tax adviser.
Agenda
5
• Final Section 199A regulations• Notice 2019-07• Aggregation under Section 199A• Grouping under Section 469• Deductible expenses• Depreciation• Tax planning for real estate owners after
TCJA
Final Section 199A Regulations
6
• Section 199A enacted in TCJA• Effective for tax years beginning after 2017
and before 2026• Non- C corp businesses get deduction of
up to 20% of qualified business income from qualified businesses
• Intended to provide individuals and pass-throughs some parity with 21% corporate tax rate under TCJA
Final Section 199A Regulations
7
• The deduction results in an effective maximum tax rate of 29.6% (i.e., 37% x (1- 20%)) to individuals.– This compares favorably to C corporations who distribute out
their income as dividends. They end up at a 39.8% effective tax rate.
• The statute gives eligible taxpayers a deduction equal to the lesser of:– 20% of the combined qualified business income (“QBI”)
component of the taxpayer, or– 20% of taxable ordinary income.
Qualified Business Income (“"QBI"”)
8
• “QBI” is the net amount of income, gain, deduction, and loss with respect to a qualified trade or business.
• “QBI” is similar to net income from the business, but does not include the following:– Reasonable compensation paid to the taxpayer,– Guaranteed payments paid to a partner,– Capital gains and losses,– Dividends,– Interest income (non-service charge type),– Expenses allocable to these types of income.
Qualified Trade or Business (“T/B”)
9
• What is a “Qualified Trade or Business”?– This is a facts and circumstances determination.
Generally to be regarded as a T/B, the individual must be involved in the activity with continuity and regularity for the primary purpose of engaging in the activity for profit.
– Sporadic or hobby type of activities would not be a T/B.
– Managing one’s own investments, even though substantial, is not a T/B.
– Some rental real estate may not be regarded as a T/B.
Final Section 199A Regulations
10
• The 20 % deduction applies at the partner or shareholder level for pass-through entities.– Individuals take into account their allocable share of
each qualified item of income, gain, deduction, and loss.– Individuals will be allocated their share of W-2 wages and
Unadjusted Basis Immediately After Acquisition (“UBIA”).o This is a per-share, per-day allocation for S
corporations.o For LLCs with special allocations the W-2 wages are
allocated as wage expense is allocated; “UBIA” is allocated as book depreciation expense is allocated.
Pass-Through Entities
11
• S corporations and partnerships must report each shareholder’s or partner’s share of the following items for each qualified T/B (or aggregated T/B) on Schedule K-1 so that the shareholder or partner may figure their deduction.– §199A “QBI”– §199A W-2 wages– §199A “UBIA”– Disclosure if any T/B is a specified service T/B– Disclosure of information for aggregated trades or
businesses
Pass-Through Entities
12
• The deduction does not affect basis calculations.– If an S corporation distributed out 100% of its
“QBI” but then also have to reduce basis by the§199A deduction. The result would be adistribution in excess of income creating a taxable event.
– The 20% deduction may potentially be limited for Specified Service Trades or Businesses (“SSTB”)
Specified Service Trades/Businesses (“SSTB”)
13
o Health
o Law
o Accounting
o Actuarial science
o Consulting
o Athletics
o Performing arts
o Financial services
o Brokerage services
o Investing and investment management trading or dealing in securities, commodities, etc.
o Principal asset being the reputation/skill of one or more EE’s.
Brokerage SSTB
14
• Includes services in which a person arranges transactions between a buyer and a seller with respect to securities for a commission or fee including services provided by stock brokers and other similar professionals.
• Excludes services provided by real estate agents and brokers, or insurance agents and brokers.
Investment Management SSTB
15
• Includes investing and investment management, in which a fee is received for providing investing, asset management, or investment management services, including providing advice with respect to buying and selling investments.
• Excludes the service of directly managing real property.
Dual T/Bs SSTB & Non-SSTB
16
• If the business is providing a small amount of SSTB services but also conducting non-SSTB activities, can treat all activity as a non-SSTB under the de minimis rule.– If gross receipts from the T/B are $25 million or less
and less than 10% of the gross receipts are from the performance of services in a specified service field, then the T/B is not considered specified service T/B.
– 5% test if over $25million in gross receipts.
§199A Deduction Limitations
17
• Limitation:
– 50% x allocable share of W-2 wages, or
– 25% x allocable share of W-2 wages plus 2.5% of the UBIA of qualified property owned by the business.
Definitions – W-2 Wages
18
• Qualified wages are amounts paid to an employee including elective deferrals, SEPs, Roth contributions, deferred compensation. Excludes management fees, independent contractor payments, etc.
• §199A(b)(4)(C) provides that an amount is not a W-2 wage unless it is reflected on a payroll taxreport.
Definitions – W-2 Wages
19
• For taxpayers conducting more than one T/B, the W-2 wages must be allocated among the various trades or businesses (or aggregated trades or businesses).
• Only the W-2 wages properly allocable to ""QBI"" are includible.– W-2 wages are properly allocable to ""QBI"" if the
associated wage expense is taken into account incomputing ""QBI"".
Definitions – Qualified Property
20
• Tangible, depreciable property which is held bythe T/B at the end of the year and which is used, at any point in the year, in the production of ""QBI"".
• The “regular depreciable period" of the propertymust not have ended prior to the last day of theyear.
• The depreciable period starts on the date theproperty is placed in service and ends on the later of:
– 10 years, or
– the last day of the last full year in the asset's "regular" (not “ADS”) depreciation period.
Definitions – Qualified Property
21
• Example – Essco, an S corporation, purchases a piece of machinery on November 18, 2014. The machinery is used in the T/B and is depreciated over 5-years. Even though the depreciable life of the asset is only 5-years, the owners of Essco will be able to take the unadjusted basis of $10,000 into consideration for purposes of this second limitation for ten full years, from 2014-2023, because the qualifying period runs for the longer of the regular useful life (5-years) or10 years.
Definitions – Qualified Property
22
• The basis taken into consideration is "unadjusted basis.”
– Cost basis not reduced by any depreciation deductions. §199A(b)(2)(B)(ii) requires that you take into consideration the basis of the property “immediately after acquisition.”
– §179 or bonus depreciation does not reduce UBIA.
– Land does not qualify as UBIA.
• For 2018, any asset that was fully depreciated prior to 2018, unless it was placed inservice after 2008, will not count towards basis.
Trade/Business Per Final Section 199A Regs
23
• Must have “trade or business” income• “Trade or business” determined by
reference to § 162 trade or business expenses– “Regular, continuous and considerable” activity
– Profit motive
• No cross reference to § 469(c)(7) rental real estate material participation tests
Rental Real Property
25
• The Tax Court has held that the rental of a single piece of real property can constitute a T/B.
• The IRS has stated that ownership and management of real property does not constitute a T/B as a matter of law.
• Owing rental property qualifies as a T/B if it is engaged in to earn a profit and activity is systematic and continuous. If not, rental ownership would be treated as an investment thus not qualifying for deduction.
Rental Real Property
26
• Need to ask how extensive the taxpayer’s activities are personally or through the use ofagents. Are they so extensive as rising to the level of a T/B?
– How many hours involved with the activity?
– What does the taxpayer do as to the activity?
– Has the taxpayer documented their participation?
Rental Real Property
27
• Factors for rental real estate activity as section 162 trade or business:– Type of property (commercial or residential)
– Number of properties rented
– Owner’s or agent’s day-to-day involvement
– Type and nature of services provided by lessor
– Lease terms (net v. traditional, duration)
• Owner with large number of commercial propertieswhere owner provides significant services day-to-day under traditional long-term lease most likely to be viewed by IRS as a trade or business
Rental Real Estate Self Rentals
28
• The rental or licensing of tangible orintangible property to a commonlycontrolled T/B is a T/B.– For this rule to apply, the same person or group of
persons must own (directly or indirectly) 50% ormore of the rental activity and the T/B.
– The rental of building to operating T/B are both treated as a T/B for §199A.
Rental Real Estate – IRS Pub. 535
29
• “Determining your qualified T/Bs.The ownership and rental of real property may constitute a T/B. Notice 2019-07 provides a safe harbor under which rental real estate enterprise will be treated as a T/B for purposes of the "QBI" deduction. For more information, on the safe harbor see Notice 2019-07. Rental real estate that does not meet the requirements of the safe harbor may still be treated as a T/B for purposes of the "QBI" deduction if it is a section 162 T/B.In addition, the rental or licensing of property to a commonly controlled T/B operated by an individualor a pass-through entity is considered a T/B under section 199A.”
Notice 2019-07: Safe Harbor Requirements
30
• Safe harbor treating a rental real estateenterprise as a trade or business, solely forpurposes of § 199A deduction
• Meet 3 requirements:
1. Keep separate income & expense books for each rental RE enterprise
2. Perform 250 or more hours of rental services
3. Maintain contemporaneous time spent logs
Notice 2019-07: Contemporaneous Records
31
• 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
– Who performed the services.
• The contemporaneous records requirement will
not apply to taxable years beginning prior to January 1, 2019.
Notice 2019-07: 250 Hour Requirement
32
• For 250+ hour requirement, rental servicesinclude:– Advertising to rent the real estate
– Negotiating and executing leases
– Verifying info in tenant applications
– Collecting rent
– Operating, maintaining and repairing property
– Managing the property
– Purchasing materials for the property
– Supervising employees and contractors
• Rental services done by owner, employees, agents and/or independent contractors can count toward the 250 hours
33
Notice 2019-07: 250 Hour Requirement
• These activities don’t count toward the 250hours:
– Financial or investment management activities
– Purchasing properties
– Studying financial statements or reports on operations
– Planning, managing or constructing long-term capital improvements
– Time spent traveling to and from the properties
34
• Not eligible for the safe harbor:– Real estate used by the taxpayer as a residence
– Real estate rented under a triple net lease (“NNN”)
• Although no safe harbor, NNN leases may still be a trade or business based on all facts andcircumstances
• Consider renegotiating NNN leases so owner can provide 250 hours of services annually(cumulatively on all properties that owner canaggregate)
Notice 2019-07: Ineligible activities
35
Triple Net Lease
• The IRS defines a triple net lease asincluding a lease agreement that requiresthe tenant to pay taxes, fees, andinsurance, and to be responsible formaintenance in addition to rent andutilities, etc.– This includes a lease agreement that requires
the tenant to pay for common areamaintenance expenses.
36
Notice 2019-07: Statement Required
• An affirmative statement must be attached to thereturn if you are using the safe harbor.
• The statement must be signed by the taxpayer, or anauthorized representative of an eligible taxpayer orrelevant pass-through entity (“RPE”)– “Under penalties of perjury, I (we) declare that I
(we) have examined the statement, and, to the best of my (our) knowledge and belief, the statement contains all the relevant facts relating to the revenue procedure, and such facts are true, correct, and complete.”
• The individual or individuals who sign must havepersonal knowledge of the facts and circumstances related to the statement.
37
Aggregation of Commonly Controlled T/Bs
• An individual or pass-through entity may be engaged in more than one T/B. Each T/B is a separate T/B for purposes of applying the W-2 wage limitation or the UBIA limitation.
• Taxpayer may choose to aggregatemultiple trades or businesses into a singleT/B for purposes of applying thelimitations.
38
Aggregation under Section 199A
• 199A final regs allow aggregation of certain trades and businesses
• May increase deduction amount
• Factors for § 199A aggregation:
– Whether businesses provide products or services
typically sold together
– Whether businesses share centralized back- officeservices
– Whether businesses are interdependent
• No cross reference to § 469 grouping rules
39
Aggregation under Section 199A
• The following requirements must be metfor a taxpayer or a group of taxpayers toaggregate T/B activities:– Must own, directly or indirectly, 50% or more of
each T/B for a majority of the tax year, including the last day of the tax year, and all trades or businesses use the same tax year end.
– None of the trades or business are a specified service T/B’s.
– The T/B’s meet at least two of economies of scale factors.
40
Aggregation – Economies Of Scale Factors
• Must meet two of these three economies of scale factors:– They provide products, property, or services that are
the same or that are customarily offered together.– They share facilities or share significant centralized
business elements such as personnel, accounting, legal, manufacturing, purchasing, human resources, or information technology resources.
– They are operated in coordination with, or reliance upon, one or more of the businesses in the aggregated group.
41
Final Treasury Regulations
• The final Treasury Regulations are comprised of seven sections as follows:o 1.199A-0 table of contents.o 1.199A-1 covers calculation rules as well as definitional guidance on the
standard of being engaged in a T/B, and loss carry-over rules.o 1.199A-2 covers the rules regarding the determination of W-2 wages and
unadjusted basis immediately after acquisition of Qualified Property.o 1.199A-3 provides guidance surrounding the terms and calculations
regarding ""QBI"", REIT Trust dividends, and qualified PTP income.o 1.199A-4 covers the rules relating to aggregation non-Specified Service
Trades or Businesses and Specified Service Trades or Businesses.o 1.199A-5 covers definitional guidance of Specified Service Trades or
Businesses.o 1.199A-6 covers computational guidance for individuals who own or are
beneficiaries of Relevant Pass-Through Entities, PTP, trusts and estates.o 1.643(f)-1 covers the treatment of multiple trusts, aggregation when the
trusts have significantly the same beneficiaries and the same grantors, namely that the IRS has the power to aggregate them into singular trusts.
42
Grouping under Section 469
• Activity losses deductible only if taxpayer“materially participates” in the activity
• Material participation means beinginvolved in the activity on a regular,continuous and substantial basis
• 7 tests for material participation, including participation for more than 500hours/year
43
Grouping under Section 469
• Activities may be grouped if the activities are an “appropriate economic unit” based on thesefactors:– Similar types of businesses
– Extent of common control
– Extent of common ownership
– Geographical location
– Interdependencies among the businesses
• Example: commercial and residential realestate development businesses were anappropriate economic unit. Lamas v.Commissioner.
44
Grouping under Section 469
• Rental activities can’t be grouped with otheractivities (even if an appropriate economicunit) unless:– The rental activity, or the other business activity, is
insubstantial in relation to the other, or– Each owner of the business activity has the same
proportionate ownership in the rental activity
• Example: husband and wife grocery storebusiness, and rental of building to grocerystore, can be grouped into a single trade orbusiness activity. Treas. Reg. § 1.469-4(d)(1)(ii), Ex. 1
45
Grouping under Section 469
• Rental RE activities are passive unless:– Grouped to meet material participation, or
– Taxpayer is a real estate professional under §469(c)(7) (750 hours AND more than half of taxpayer’s services are in RE)
• Rental RE can’t be grouped with non-REbusinesses to meet material participation forthe rental RE activity, Treas. Reg. § 1.469-9(e)(3)(i), but
• Rental RE can be grouped with other activities to find an appropriate economic unit. Stanley v. US.
46
Depreciation
• Section 199A deduction limited to either thetaxpayer’s proportionate share of a percentage of the W-2 payroll expense of the qualified business or a combination of a proportionate share of a lower percentage of the W-2 payroll expense of the qualified business plus 2.5% of the original cost of depreciable tangible property (not land) used in the qualified business
• RE owners with few W-2 employees will benefitfrom the provision allowing them to calculate the199A deduction cap by reference to 2.5% of theunadjusted cost of the depreciable tangible property
SERVICE. VALUE. RESULTS.
Changes Impacting the Real Estate Industry
Business Interest Expense Limitation
48
Business Interest Limitation
49
2018 Tax Law Changes
• Repeals the old “earnings stripping” rules for interest paid to related
persons who pay no US tax on the corresponding income
• Now applies to all business and limits net interest expense
deductions
• Interest may only be deducted the extent of 30% of “adjusted
taxable income.”
• Doesn’t include investment interest expense.
• Small taxpayer exception - doesn’t apply to businesses with average
receipts of less than $25M (Uses the test in Sec. 448(c), so must
aggregate receipts)
• Excess interest expense is carried forward indefinitely.
Business Interest Limitation
50
2018 Tax Law Changes
• Exceptions to this limitation
– On election, limitation does not apply to electing “real
property trades or businesses.” These businesses then have to
use the ADS depreciation method for nonresidential,
residential, and qualified improvement property.
▪ Includes real property development, redevelopment,
construction, reconstruction, acquisition, conversion,
rental, operation, management, leasing, or brokerage
trade or business
– Doesn’t apply to car dealerships with floor-plan interest.
Business Interest Limitation
51
2018 Tax Law Changes
• Adjusted taxable income is taxable income BEFORE:
– Any income/deduction/gain/loss not properly allocable
to a trade or business,
– Any business interest expense or income
– Any net operating loss deduction (Code Sec. 172)
– Any depreciation, amortization, or depletion
deductions (for tax years beginning before Jan. 1, 2022).
– Any qualified business income deduction (Code Sec.
199A)
Business Interest Limitation
• The deduction allowed to a business subject to this
limitation can not exceed the sum of:
– The taxpayer’s business interest income for the tax year;
– 30% of the taxpayer’s adjusted taxable income for the tea year;
plus
– The taxpayer’s floor plan financing interest (vehicle dealers)
for the tax year
• As mentioned, disallowed interest carries forward and will be
treated as business interest paid or accrued in the following tax
year. May be carried forward indefinitely.
52
2018 Tax Law Changes
Business Interest Limitation
53
2018 Tax Law Changes
• For partnerships, the limitation is first applied at
the partnership level
• Excess interest expense is allocated to the partners
and carried forward at the partner level
• Partner may deduct its share of excess business
interest in any future year, but only against excess
taxable income attributed to the partner by the
partnership whose activities gave rise to the excess
business interest
Business Interest Limitation
54
2018 Tax Law Changes
• Excess taxable income is the amount that bears the
same ratio to the partnership’s adjusted taxable
income as:
– The excess (if any) of 30% of the partnership’s
adjusted taxable income over the amount by
which the partnership’s business interest
exceeds its business interest income, bears to
– 30% of the partnerships adjusted taxable income
Excess Taxable Income Example
55
2018 Tax Law Changes
• Partnership AB is owned 50/50 by Partners A and B. Partnership A has adjusted taxable income of $200, no business interest income and $40 of business interest expense. Partnership AB has a limit of $60 on its interest deduction. The excess of this limit over the partnership’s interest is $20. As a result, excess taxable income is $66.67 (($20/$60)x$200). Each partners is allocated their ratable share of this amount.
Business Interest Limitation
56
2018 Tax Law Changes
• Example 1 – Partnership AB is a calendar year partnership owned
evenly by A and B. In 2018, assume $100,000 in adjusted taxable
income, $2,500 of business interest income and $18,000 in business
interest expense.
• Deduction can not exceed $32,500:
– Business interest income - $2,500
– 30% of adjusted taxable income - $30,000
– Floor plan interest - $0
• Since business interest expense is less than limitation, all
deductible at the partnership level.
Business Interest Limitation
57
2018 Tax Law Changes
• Example 2 – Partnership AB is a calendar year taxpayer owned
evenly by A and B. In 2018, assume $10,000 in adjusted taxable
income, $2,500 of business interest income and $18,000 in business
interest expense.
• Deduction can not exceed $5,500:
– Business interest income - $2,500
– 30% of adjusted taxable income - $3,000
– Floor plan interest - $0
• Partnership X can deduct $5,500 of it’s business interest expense.
The excess interest of $12,500 would be allocated to Partners A and
B and would carry forward to 2019
Business Interest Limitation
58
2018 Tax Law Changes
• Example 3 – In 2019, assume Partnership AB shows $150,000 in
adjusted taxable income, no business interest income and $30,000
in current year business interest expense.
• Deduction can not exceed $45,000:
– Business interest income - $0
– 30% of adjusted taxable income - $45,000
– Floor plan interest - $0
• Partnership X can deduct all $30,000 of it’s business interest
expense.
• Excess taxable income for 2019 is $50,000
(($15,000/$45,000)x$150,000) allocated evenly to A and B
59
Election Out of Interest Limitation
• As mentioned, limitation doesn’t apply to electing “real property trades or businesses”
– Includes real property development, redevelopment, construction, reconstruction, acquisition, conversion, rental, operation, management, leasing, or brokerage trade or business
• Must use the ADS depreciation method for nonresidential, residential, and qualified improvement property.
• Not eligible for bonus depreciation
61
Section 179 Deduction
Old Law: New Law:
Expensing Limitation $500,000 indexed for inflation ($510,000 in 2017)SUVs eligible up to $25,000
$1,000,000 for tax years beginning after 12/31/17, indexed for inflation in tax years beginning in 2019,SUV’s eligible for $25,000 deduction (inflation indexed)
Phase-out Threshold $2,000,000 indexed for inflation ($2,030,000 in 2017), dollar for dollar phase-out as property placed in service exceeds threshold
$2,500,000 for tax years beginning after 12/31/17, indexed for inflation in tax years beginning in 2019, dollar for dollar phase-out as property placed in service exceeds threshold
Effective Date Tax years beginning before 1/1/2018
Tax years beginning on or after 1/1/2018
62
Section 179 Deduction
Old Law: New Law:
EligibleProperty
Tangible personal property that is purchased for use in the active conduct of a trade or business, andincludes off-the-shelf computer software and qualified real property (i.e., qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property).
Tangible personal property that is purchased for use in the active conduct of a trade or business, and includes off-the-shelf computer software and qualified real property.
179(f) For purposes of this section, the term “qualified real property” means—(1) any qualified improvement property described in section 168(e)(6)*, and(2) any of the following improvements to nonresidential real property placed in service after the date such property was first placed in service:(A) Roofs.(B) Heating, ventilation, and air-conditioning property.(C) Fire protection and alarm systems.(D) Security systems.
*168(e)(6) QIP: improvement to interior portion of nonresidential real property after it was placed in service. Does not include enlargement of building, elevator or escalator, internal structural framework of the building
Implications for Real Estate
Industry
Expanded definition under 179(f)(2) will allow for 179 deduction for items under 179(f)(2) A-D above which do not qualify for bonus under 168(k) due to the “internal portion” and “internal structural framework of building” requirements.
63
Bonus Depreciation Section 168(k)
Old Law: New Law:
Eligible Assets • Tangible property with regular depreciable life of 20 years or less.
Also Includes:• Computer software• Water utility property• Qualified improvement property (QIP)
Not available for ADS assets
• Tangible property with regular depreciable life of 20 years or less.
Also Includes:• Computer software• Water utility property• Automatically applies to QIP which
now is intended to have 15 year life• Qualified film, TV, theater productionNot available for ADS assets
Percentage Deduction 50% bonus in 201740% bonus in 201830% bonus in 2019
No bonus in 2020 & forward
100% bonus: 9/28/2017 – 12/31/202280% bonus in 202360% bonus in 202440% bonus in 202520% bonus in 2026
No bonus in 2027 & forward
New or Used Property Only available for new assets, no used property
Removed requirement that asset be new, must be first use by taxpayer
64
Bonus Depreciation - Requirements
• In order to qualify for 100% bonus depreciation,
property must be both acquired and placed in service
after Sept. 27, 2017
― Buildings are deemed to be acquired on the date that
there is a binding contract for the sale of the
building (Reg. Sec. 1.168(k)-1(b)(4)(ii))
― Self-constructed buildings are acquired when
physical work of a significant nature begins (Reg.
Sec. 1.168(k)-1(b)(4)(iii)(B))
65
Qualified Improvement Property
• Lease requirement removed
• Related party restrictions removed
• 3 year after placed in service required removed
• 3 categories down to one
• Intended to be 15 year property eligible for bonus
depreciation
― IRS Chief Counsel Branch 7 Chief says IRS cannot fix
― Without congressional action QIP is 39 year S/L
― Taxpayers with election out of interest limitation won’t be
as affected
Section 461(l) Excess Business Loss Limitation
66
Limitation of Excess Business Losses – New Section 461(l)
Passive Activity Rules (IRC Section 469)
At Risk Limitations (IRC Section 465)
Basis Limitations (IRC Section 1366/704)
Excess Business Loss Limitation (461(l))
67
2018 Tax Law Changes
• Applies to non-corporate taxpayers
• “Excess Business Losses” cannot be
deducted
• Amounts disallowed under this section
will be treated as NOL’s carrying over to
the following tax year
“Excess Business Loss” Defined
68
2018 Tax Law Changes
• Excess of aggregate deductions attributable to the taxpayer’s trade or businesses over
• The sum of:
– Aggregate gross income from trades or businesses
– $250k S / $500k MFJ
Excess Business Loss Limitation (461(l))
69
2018 Tax Law Changes
• Applies to tax years beginning after
12/31/17 and before 1/1/2026
• The $250/$500k threshold amounts are
indexed for inflation for tax years
beginning after 12/31/18
• Applied at the partner/shareholder level
70
Deductible Expenses
• Most common ordinary and necessary deductibleexpenses for rental property:– Mortgage interest
– Property tax
– Operating expenses (materials, supplies)
– Depreciation
– Repairs and maintenance
– Utilities and insurance
– Advertising
• Cost of improvements (restoration, adaptation to a new use) are not deductible. The cost of improvements is recovered through depreciation.
71
Deductible Expenses
• TCJA makes adjustments to the fringebenefit rules (for amounts paid or incurred after 12/31/17):– Denies a deduction for employee transportation
fringe benefits. However, the TCJA retains the exclusion from income for such benefits received by an employee.
– Eliminates a deduction for transportation expenses that are the equivalent of commuting for employees, except as provided for the safety of the employee.
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Non-deductible Parking
• The IRS issued Notice 2018-99 whichprovides interim guidance on determining the amount of parking expenses that are notdeductible.– If a taxpayer pays a third party for employee parking
then the disallowance is the amount paid to thethird party.
– For facilities owned or leased by employers, the notice permits a taxpayer to use any “reasonable method” to compute its disallowed expenses using a safe harbor method.
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Non-deductible Entertainment - Notice 2018-76
• TCJA disallows deductions for entertainment expenses including expenses for a facility used in connection with entertainment.
• Can continue to deduct 50% of the cost of business meals if the taxpayer or employee is present and the food or beverages are not considered lavish or extravagant.
• If meals are provided during an entertainment activity,
they must be purchased separately from the
entertainment or the meal cost must be stated separately
on the bill.
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Deductible Entertainment
• The following entertainment expenses remainfully deductible:– Entertainment expenses for goods, services,
and facilities that are treated as compensation or a gift/award to an employee.
– Expenses for recreational, social, or similar activities and related facilities primarily for the benefit of employees who are not highly compensated employees.
– Expenses for entertainment sold to customers.
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Real Estate Planning Techniques
• Make timely election on tax return to treat all interests in rental real estate as a single rental real estate activity. Treas. Reg. § 1.469-9(g)– Makes it easier to meet material participation
• Keep contemporaneous time spent logs on REactivity AND other activities– Makes it easier to prove material participation – more than 500
or 750 hours/year AND more than ½ of total time on allactivities
• Consider renegotiating NNN leases so owner canprovide 250 hours of services annually (cumulatively on all properties that owner can aggregate)– Makes it easier to meet § 199A safe harbor
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Brian T. Lovett, CPA, CGMA, JDBrian is a tax partner based in Withum’s East Brunswick office and is a certified public accountant in the states of New Jersey and Pennsylvania.
He has extensive experience serving the tax needs of both public companies and closely-held businesses, including all aspects of tax compliance for partnerships, corporations and individuals.
Brian advises clients with regard to the structure and tax consequences of new business ventures, and assists with restructuring existing businesses for increased tax efficiency. A frequent speaker on various tax topics, Brian has spent the last two years digesting the Tax Cuts and Jobs Act and presenting its various changes throughout the country.
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Faculty
Guinevere Moore is a partner with the law
firm of Johnson Moore LLC in Chicago and
she is the Executive Director of US
Partnership Representative, Inc. She has
over a decade of experience representing
taxpayers in high stakes disputes with the
IRS. She represents taxpayers before the
IRS and in litigation before the United States
Tax Court, United States District Courts,
Courts of Appeals, and the United States
Supreme Court. She particularly enjoys her
client counseling role and advising clients on
how to navigate a dispute with the IRS.
Telephone: 312-549-9993
Email: moore@uspartreps.com;
Guinevere.moore@jmtaxlitigation.com
Website:
www.uspartnershiprepresentative.com;
www.jmtaxlitigation.com
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DHJJ.com
Kira Wheat is a Senior Tax Manager at DHJJ with over 14 years of experience serving a diverse client base, including high-net-worth individuals and closely held businesses.
She has expertise in the real estate, family office, service and investment fund industries.
Kira’s skills include a deep knowledge of individual, trust and partnership tax. She works extensively with real estate developers and operators as well as wealthy families. Her clients are often involved in multi-state and international activity. Her standard services include tax compliance as well as tax planning and consulting.
Kira Wheat, CPASenior Managerkwheat@dhjj.com630 420 1360
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