199A Safe Harbor: More Than Just A Simple Election

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The Qualified Business Income Deduction, or QBID, was the new deduction that had business owners in a frenzy during the 2018 tax season. Generally, this deduction is available when a person has net business income from a sole proprietor, partnership, S-Corporation or LLC. The deduction can mean a reduction in taxable income equal to up to 20% of your qualified trade or business income. While typically this deduction is unavailable to the enterprises that conduct business strictly in rental activity, there are some situations where rental activity qualifies. One such way is through a Safe Harbor election.

A Safe Harbor election is made in writing and attached to your income tax return.  Electing the Safe Harbor for the section 199A QBID deduction essentially serves as a notification to the IRS that you contribute over 250 service hours to the activity. During the 2018 tax year, the IRS did not require contemporaneous records be kept for the election. However, the 2019 tax year will bring about a new prerequisite for rental enterprises who wish to take advantage of the QBID deduction. Individuals, corporations, LLCs and partnerships who claim the section 199A Safe Harbor election must prove that 250 service hours were conducted within the rental activity in order to qualify for the 20% deduction.

Now that we have reached the tax year beginning in 2019, the IRS will begin requiring those who elect the Safe Harbor election to keep contemporaneous records of their service within the activity. The definition of the records includes time reports, logs or similar documents. A record of all hours of service, with descriptions of the service as well as who performed the activity, will be required to satisfy the IRS requirements. This does not mean that your records must be submitted to the IRS regularly. Simply maintaining the information and ensuring that these records are readily available to the IRS upon request satisfies the requirements for the Safe Harbor election.

Separate books and records are required to be maintained to reflect both income and expenses for each real estate enterprise. This means that if you have separate rental activities, you will be required to separate your record keeping to meet the IRS contemporaneous records requirements. A consultation with your legal professional may be necessary to ensure you have separated your businesses according to your current legal structure. Either way, don’t forget to keep your records separate and as detailed as possible to ensure your business satisfies the required documentation regulations.

Did you miss out on the 20% deduction because you did not know about the Safe Harbor Election? Don’t miss out on the deduction in 2019. Contact your tax preparer or a tax professional at AgriSolutions today to discuss the options available to you.

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Disclaimer – Descriptions provided in this article are presented as generalities. There are many factors not listed above which may impact your return. This article should not be considered legal or tax advice. For advice on a specific transaction, please contact the AgriSolutions Tax Department at taxes@agrisolutions.com.

Written By

Amanda Newgent

Amanda Newgent

Tax Accountant

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