Businesses should consider making expenditures that qualify for the business property expensing option. For tax years beginning in 2019, the expensing limit is $1,020,000 and the investment ceiling limit is $2,550,000. Expensing is generally available for most depreciable property, except for buildings, and off-the-shelf computer software.
Alternatively, businesses can claim a 100% first-year bonus depreciation deduction for machinery and equipment, new or used (with some exceptions). To qualify for either deduction for the 2019 tax year, the property must be purchased and placed in service by December 31, 2019.
RENTAL REAL ESTATE AND THE QBI DEDUCTION
One of the most confusing aspects of the 20% qualified business income deduction, enacted as part of the Tax Cuts and Jobs Act of 2017, is whether rental real estate activity qualifies as a trade or business for purposes of the deduction.
To assist taxpayers in addressing this issue, the IRS issued a safe harbor in Notice 2019-07 and Rev. Proc. 2019-38 to provide those taxpayers who generate income from real estate activity with clear guidance on the requirements to safely qualify their real estate activity as a trade or business for purposes of the qualified business income deduction.
For a rental real estate activity to qualify under the safe harbor, four requirements must be met:
1. Separate books and records must be maintained to reflect income and expenses for each rental real estate enterprise.
2. For rental real estate enterprises in existence less than four years, at least 250 hours of rental services must be performed per year with respect to that enterprise. For enterprises in existence for at least four years, in any three of the most recent five tax years, at least 250 hours of rental services must be provided.
3. For tax years beginning on or after January 1, 2020, the taxpayer must maintain detailed, contemporaneous records including a description of all services performed including the hours and dates of the service as well as who performed the service. For the 2018 and 2019 tax years, the taxpayer still bears the burden of showing that the hours requirements have been met.
4. Taxpayers must attach a statement to a timely-filed original tax return for each year in which the taxpayer relies on the safe harbor. The taxpayer must choose each year to use or not use the safe harbor.
Rev. Proc. 2019-38 reminds taxpayers that they may still qualify their rental real estate activities for the qualified business income deduction if they can meet the definition of a qualifying trade or business under Code Sec. 199A. Also, a trade or business may qualify if the property is rented or licensed to a trade or business conducted by an individual which is commonly controlled.