Not All Rental Income In Controlled Group Qualifies as QBI
We just got the following comment from a reader:
“Requesting comments on the safe harbor of controlled groups for QBI. I rent half my owned farms from my wife who owns the other half. From her rent she pays her mortgage, taxes, repairs etc. and shows the net rental income on her schedule E. I of course file on schedule F . There are no threshold issues. Is this considered safe harbor for QBI?
Wind turbines are going up on these farms with yearly rental income. Is this rental income considered QBI?”
This is a two-part question. On the first part regarding the rent income received by the wife, this should qualify as QBI since she and her husband are part of the same controlled group (husband and wife are treated as one person for most tax laws). Therefore, since they are under the threshold, we don’t care about wages or qualified property, therefore, they will add their Schedule F income to the net rental income shown on Schedule E and take their 20% Section 199A deduction (plus or minus any cooperative distributions and limited by any taxable income constraints).
For the second part, this is likely not QBI. The wind turbine rental income is received as part of a common controlled group, however, the actual income is not paid by any member of the controlled group. In this case, since the income is essentially triple net with no services by the farmer or his wife, it is likely simply rental income and not available for the Section 199A deduction. At least this is what the proposed regulations indicate at this time. We will need to see the final regulations for the final answer.
Right now to qualify for the common control safe harbor on lease income, the rents must be paid by part of the common controlled group. If it is paid by an outside party, that rental income will not qualify even though it was paid into the common group.
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.
Under the following scenario how would the 199a deduction be determined?
Taxpayer is 100% shareholder in S corporation and draws a salary of $80,000. S corporation owns an interest in a partnership that provides engineering services. The only source of income for the S corporation is the partnership K-1 which includes ordinary income and guaranteed payments. I assume the partnership K-1 will shows the partners share of W-2 wages and business asset basis. At the individual level, the taxpayer has the W-2 from the S corporation, and other wages and pass thru’s. He files a joint return and taxable income exceeds the threshold. Will you only count the partner’s share of the partnership income, wages, and assets, and ignore the salary from his S corporation for purposes of the calculation? My assumption is the income from the K-1 will be QBI but the wages from the S corporation will not be included in the wage limitation since the S corporation is not providing engineering services?
Engineering partnership K-1 to S corporation.
S corporation has income from K-1 and pays salary to shareholder
1040 taxable income exceeds threshold
20% calculation uses only information passed from partnership K-1 to S corporation to 1040 and ignores salary and assets from s corporation.
Does this sound correct?
Thanks!