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Common Ownership = No Hours Required!

We had a reader send in the following comment:

“It sounds like bringing a rental to the level of trade or business (the 250 hours) would make it subject to SE tax in all cases except the common control scenario? Specifically, we have land held outside the operating entities, either by individuals or separate pass-through entities, primarily to protect the land but also to reduce SE tax. (I am in the 8th district.) Do you think that qualifying the rental entities income as QBI, via common ownership, now makes that rental/pass-through income subject to SE tax? “

The quick answer is no. It is not subject to SE tax. The common ownership rules trump the safe harbor rules. If your farm operation pays rent to you or a pass-through entity, then no hours are required related to the rental income. By default, this income qualifies as QBI (unless it is being paid by a C corporation).

We will continue to want to have a lease calling for no landlord participation and paying fair market value leases. By having this lease, you will continue to have the income be QBI and more importantly, none of the rental income will be subject to self-employment tax.

The only time you ever need to look at the safe harbor rules is if you are not receiving rent from an entity that is part of the common group. Then you either meet the safe harbor rules or are able to argue that it rises to the level of a trade or business.

The bottom line – If you receive rent as part of a common group, no hours are required and you get QBI for all of that rental income even if one or more of the owners do not have ownership in the farm tenant.

, Farm Leadership, Farm Operations, Farm Taxes | 20 Comments ยป

  • Principal
  • CliftonLarsonAllen
  • Walla Walla, Washington
  • 509-823-2920

Paul Neiffer is a certified public accountant and business advisor specializing in income taxation, accounting services, and succession planning for farmers and agribusiness processors. Paul is a principal with CliftonLarsonAllen in Walla Walla, Washington, as well as a regular speaker at national conferences and contributor at agweb.com. Raised on a farm in central Washington, he has been immersed in the ag industry his entire life, including the last 30 years professionally. Paul and his wife purchase an 180 acre ranch in 2016 and enjoy keeping it full of animals.

Comments

  • Deb
  • February 13, 2019

Please provide clarification for common ownership rules involving a trust. Mom died and left the farm land in a trust. 10 trust beneficiaries, 8 of which are siblings and 2 are children of a deceased sibling. Two of the siblings farm the land and the trust receives a share of the crop. The trust pays no production costs–only some insurance and real estate taxes. Would the trust categorize this as QBI for all beneficiaries?

  • Paul Neiffer
  • February 24, 2019

This will all be QBI since brothers and sisters are now related parties under Section 267 and the trust and beneficiaries are treated essentially the same.

  • Joann Lakie
  • February 11, 2019

This is a question on the safe harbor rules in meeting the 250 hours. It is my understanding that as long as one individual meets the hours then it will qualify as a trade or business for QBI. Some one asked the question if you can add the hours among the owners or employees to reach the 250 hours. Can you clarify who’s interpretation is correct.

  • Art
  • February 5, 2019

Farming C- corporation owned by two brothers pays rent to two LLC’s. Each LLC is owned by one brother and spouse. For 2018, we can use proposed regulations to include LLC rental income as QBI. For 2019, is the only way the rental income will qualify for QBI is if the LLC’s meet the safe harbor rules? Or does the fact that the rent was paid from a C-corporation disqualify the QBI in all cases?
Thank you

  • Paul Neiffer
  • February 7, 2019

The C corporation just prevents the common ownership from treating it as QBI after 2018. If it rises to the level of a trade or business (which does not require 250 hours), then it is QBI. It does not matter if it is being paid by a C corporation.

  • Fay Manning
  • February 5, 2019

I have clients that receive cash farm rent income from non related parties. The land owner pays the land taxes, insurance, repairs etc. The renter pays for all the planting and harvesting expenses. The land owner doesn’t make any decisions concerning the planting and harvesting of crops. Does this qualify for QBI and if so, is the net income subject to SE tax? If it doesn’t qualify for QBI then it isn’t subject to SE tax on the net income? Who are related parties for the QBI and rentals? (Nephew?)

A taxpayer and his spouse are in a partnership that owns 20+ residential rental houses. What are the qualifications that they have to meet in order to consider this rent income QBI? Does each rental house need to have its own bank account or just the partnership itself? Does the taxpayer have to meet the 250 hour qualification for each house or for the entity as a total? If this rent income is QBI, does that make it subject to SE tax?

  • Paul Neiffer
  • February 7, 2019

If one of the common grandparents are living, the rental income is QBI under the common owner rules. The landlord may have enough involvement to be QBI anyway.

If you own 20+ homes, you are a trade or business. Don’t worry about hours. You are allowed to aggregate all of the hours for the safe harbor, but you already are a trade or business. You don’t need the safe harbor.

  • Carol
  • February 5, 2019

My two brothers and I inherited some farmland from our parents. The land is in all of our names. I cash rent my third to my brother who is a farmer. Do I automatically qualify for the QBI credit, or what requirements must I meet in order to qualify?

  • Dave Beeck
  • February 5, 2019

Dad owns 100% of land, son owns 100% of operating farm and pays cash rent to Dad. Is this common ownership for Dad to get QBI?

  • Denise
  • February 1, 2019

I have a family who inherited a farm many years ago, formed a partnership, and rent it out. Over the years they have paid for some expenses such as repairs and lime. Most years their only expenses are property taxes, insurance, tax prep, etc. Most of them live away and just receive their check. Due to the fact the partnership is responsible for at least some repairs, lime, etc., would this be eligible for QBI. I am actually a little confused about it. Thank you for any help you can giver me.

  • Jewell Chastain
  • January 31, 2019

Land rent entity receives rents from a commonly owned entity and a non-related entity. Does all of the income qualify as QBI?

  • Arthur Kranz
  • January 29, 2019

Five siblings (equal owners) formed an LLC a few years ago and file a partnership return, The LLC owns farmland which it cash rents to one of the siblings who is a full time farmer. This sibling makes the decisions about the manner in which the land is farmed. The LLC collects the cash rents and pays the real estate taxes, insurance and minor maintenance expenses. Under these circumstances, is the rental income considered “QBI”?

Thank you.

  • Paul Neiffer
  • January 30, 2019

Siblings are related parties so this is 100% common ownership. It is QBI.

  • C G Theo
  • January 29, 2019

Great

  • Jewell Chastain
  • January 25, 2019

Can you please clarify the common ownership rules with regard to pass thru entities? For example: NNN crop Lease agreement is between Entity #1 and #2. Entitiy #1 is a 2 partner LLC owned 50-50 by unrelated partners Y & B. Entity #2 is a general partnership farming entity and is owned by 4 multi-member LLC’s. Two of the LLC’s are owned 50-50 by husband and wife, partners W and X. The other 2 are owned 50-50 by husband and wife, partners Y and Z. Y is also the son of W and X, and the Y Partner in Entity #1. Would Entity #1 qualify for QBI under the common ownership rules due to Entity #2 being owned 100% thru common ownership? Or, do you consider Entity #2 as owned by the LLC’s and the LLC’s have no ownership in Entity #1?

  • Paul Neiffer
  • January 29, 2019

You should still get 100% common ownership. The LLCs are deemed to be owned by the owners, etc.

  • Brett
  • January 24, 2019

Just to clarify my understanding of common control/group can you comment on the following three situations:

1) Son is the active farmer with a Schedule F and rents land from dad. Dad has no participation in the farming operations. Does Dad’s rental income qualify as QBI?

2) Same situation but land is owned 50/50 by Dad and 1 uncle. Does just Dad’s 50% rental income qualify or does uncles 50% as well?

3) Same situation but land is owned 25% each by Dad and 3 uncles. Does just Dad’s 25% qualify? Or since the common ownership is below 50%, none of it qualifies?

  • Paul Neiffer
  • January 29, 2019

In each case, son via dad’s relationship is deemed to own 100%. All of the rental income will be QBI.

  • LuAnn
  • January 23, 2019

I would like clarification on a tax situation. A family that consists of mom, dad and 4 children, have an LLC. Mom and dad together own 80% and each child owns 5%. One of the children pay $100,000 land rent to the LLC and is the sole farmer. Is this QBI and is it passed out to all members of the LLC?

  • Paul Neiffer
  • January 29, 2019

Mom and dad are deemed to own 100% of each entity. Therefore, all rental income is QBI.

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