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Internal Revenue Code Section 199A – introduced a new 20% deduction against “trade or business income” for individuals…



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Internal Revenue Code Section 199A – introduced a new 20% deduction against “trade or business income” for individuals…

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When Congress added Internal Revenue Code Section 199A to the law it introduced a new 20% deduction against “trade or business income” for individuals and the rare estate or trust. This deduction was meant to equalize tax rates for individuals versus that used for regular or “C” corporations and their new 21% flat Federal income tax rate. The IRS was charged with the unenviable task of writing Regulations to guide taxpayers and preparers through the maze of conflicting information.

The new law, and the IRS’ Regulations both reference something called qualified trade or business income in Regulation 1.199A(c)(1) and define it as “the net amount of qualified items of income, gain, deduction and loss with respect to any qualified trade or business of the taxpayer.”  Then, further reading to Regulation 1.199A-1(b)(14) defines a trade or business as a trade or business under Internal Revenue Code Section 162. This unbelievably poor definition leads us to Sec. 162 which does not define a trade or business! Thus, the taxpayer is required to refer to other Regulations, notices and, most importantly for rentals, court cases.

Regulation 1.199A-3(b) makes it clear that Schedules C, F and K-1’s from operating businesses all constitute trade or business income. However, guidance on rental activities is poor. Clearly (See IRS Q&A April 2019) self-rental activities qualify for the deduction, as do activities by real estate professionals. Additionally, the IRS provided a “safe harbor” election for some rental property owners to use if they wanted to automatically qualify for the deduction. We strongly pointed out from the podium last year, and continue to point out, that the safe harbor election is not a guide and, in most cases, should not be made or used as a determining factor for whether rental property qualifies for the deduction. Why? Because it excludes nearly every other rental property from qualifying when in most cases the residential rental activity will qualify for the deduction without meeting the safe harbor rules. After one year of tax season experience with this new deduction we believe that few practitioners took the QBI deduction on residential rental property because they believed the safe harbor rules were the required ways needed to qualify when, in reality, they were only 1 of many ways to meet the “trade or business” test.

Before going further, we must advise the reader that any return taking the position that the rental activity qualifies for the deduction must recognize that it is now a trade or business requiring the issuance of 1099’s when applicable, and also applies the QBI rules to losses.

In the IRS’ Summary of Comments and Explanations of the Revisions to the final Regulations the Service declined to provide additional guidance for residential rental activities and essentially left the issue open to a facts and circumstances analyses of every rental activity. Because this lack of guidance leaves the preparer in a blind hole of what to do, the preparer is therefore forced to rely on the only guidance available for trade or business determination for rental activities: US Tax, District and appellate court cases. We believe, based on our exhaustive research of cases involving single family rental activities going back to 1942 that most single family rental activities DO rise to a trade or business level and we will provide an analyses of 15 court cases in this fall’s 1040 in depth classes to prove our argument. Of course, every rental must be analyzed for owner activity, but the preparer should not fall into the “passive activity” trap of IRC Section 469 and look at rental under those rules. In summary, subject to you attending and listening to our analyses in this fall’s classes, we think most single-family rental activities do rise to a trade or business level and do qualify for the 20% QBI deduction.

Disclaimer: The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of Manning & Associates and / or MANNINGTAX.COM.  This information is published for informational purposes only.


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August 2019 – IBA Small Business Report



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August 2019 – IBA Small Business Report

In partnership with WAATP; the Independent Business Association of Washington State monitors Olympia and attends legislative sessions on your behalf. IBA keeps you and your small business clients informed with a monthly Small Business Report.

Click here to Download the latest Report and find out what’s happening NOW!

August topics include:

  • Your Paid Family Leave Reporting is Due August 31st
  • Costly New State EAP Overtime Wage Increase Proposed
  • New Paid Sick Leave Policies Released
  • Small Business Fair September 21st in Renton


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IRS Press

Virtual Currency – What you need to know about some IRS changes



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Virtual Currency – What you need to know about some IRS changes

POSTED FOR EDUCATIONAL PURPOSES
IRS NEWS-WIRE – Issue Number:    IR-2019-132

IRS has begun sending letters to virtual currency owners advising them to pay back taxes, file amended returns; part of agency’s larger efforts

WASHINGTON — The Internal Revenue Service has begun sending letters to taxpayers with virtual currency transactions that potentially failed to report income and pay the resulting tax from virtual currency transactions or did not report their transactions properly.

“Taxpayers should take these letters very seriously by reviewing their tax filings and when appropriate, amend past returns and pay back taxes, interest and penalties,” said IRS Commissioner Chuck Rettig. “The IRS is expanding our efforts involving virtual currency, including increased use of data analytics. We are focused on enforcing the law and helping taxpayers fully understand and meet their obligations.”

The IRS started sending the educational letters to taxpayers last week. By the end of August, more than 10,000 taxpayers will receive these letters. The names of these taxpayers were obtained through various ongoing IRS compliance efforts.

For taxpayers receiving an educational letter, there are three variations: Letter 6173, Letter 6174 or Letter 6174-A, all three versions strive to help taxpayers understand their tax and filing obligations and how to correct past errors.

Taxpayers are pointed to appropriate information on IRS.gov, including which forms and schedules to use and where to send them.

Last year the IRS announced a Virtual Currency Compliance campaign to address tax noncompliance related to the use of virtual currency through outreach and examinations of taxpayers. The IRS will remain actively engaged in addressing non-compliance related to virtual currency transactions through a variety of efforts, ranging from taxpayer education to audits to criminal investigations.

Virtual currency is an ongoing focus area for IRS Criminal Investigation.

IRS Notice 2014-21 states that virtual currency is property for federal tax purposes and provides guidance on how general federal tax principles apply to virtual currency transactions. Compliance efforts follow these general tax principles. The IRS will continue to consider and solicit taxpayer and practitioner feedback in education efforts and future guidance.

The IRS anticipates issuing additional legal guidance in this area in the near future.

Taxpayers who do not properly report the income tax consequences of virtual currency transactions are, when appropriate, liable for tax, penalties and interest. In some cases, taxpayers could be subject to criminal prosecution.

More information on virtual currencies can be found on IRS.gov.

Courtesy of IRS Newswire, an IRS e-mail service. If you know someone who might want to subscribe to this mailing list, please forward this message to them so they can subscribe.  This message was distributed automatically from the mailing list IRS Newswire.


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