C Corporations Still Do Not Provide Common Ownership

• September 26, 2019
• Paul Neiffer

In response to our post from yesterday, we received the following comment:

“So how does this affect triple net leases paid from a C Corp? Do those rent payments paid by a farming C Corp to an individual owner who is also a C Corp shareholder qualify as 199A income for the individual?”

If a farmer pays rents from a C corporation to himself or any entity under “common ownership”, it does not automatically qualify as qualified business income ‘QBI” since it technically is not common ownership.  A C corporation can never be part of common ownership for Section 199A purposes.

However, if the farmer is able to meet the 250 hour requirement of the safe harbor rules of the Revenue Procedure then it would qualify.  It is unlikely that any farmer will meet the 250 hour requirement for cash rental activities, but I know many farmers in the Midwest spend a lot of time mowing waterways and maintaining the land.  If the landlord does that work and it exceeds 250 hours (including agents and employees), then the safe harbor allows automatic treatment of the rental income as QBI.

There remains other options for the farmer:

• The farmer can always elect S corporation status for the C corporation.  This will automatically create common ownership for the rental activity and no hours are required.  In that case, we want no participation by the landlord.  This also requires the least amount of paperwork with FSA
• The C corporation could set up a new partnership/LLC and transfer their farming assets (not the equipment, etc.) to the partnership.  One of more of the owners of the C corporation would be a token 1-2% owner of the partnership/LLC.  This new entity will create common ownership.  However, this requires paperwork changes with FSA and this may need to be unwound in several years when Section 199A sunsets.
• Another option is to have the rental lease agreement be changed to a new farmer or farm entity that may then sublease the ground to the C corporation.  Since the lease income is being paid by a non-C corporation, this could qualify.  It is messy and requires additional paperwork with FSA.

Remember, this really only works if the farmer’s income is under the threshold amount.  If the farmer is over the threshold, even if the rental income now qualifies, it likely results in little or no QBI deduction since it has no wages paid or qualifying property AND it can’t aggregate with the C corporation.

The best answer is likely to switch to an S corporation.  We usually don’t like farm C corporations unless there is a large amount of tax-free fringe benefits.  If those don’t apply to your situation, switching to an S corporation may be the best answer since that allows aggregation too.

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