Issues from Tax Season 2019

The 2019 tax season produced a variety of questions, but one particular, the IRS Code Section, stood out.

The Tax Cuts and Jobs Act of 2017 (TCJA) introduced IRC Sec. 199A and a 20% deduction for an amount known as “qualified business income” (QBI). This tax deduction dominated the scene this tax season, producing a substantial tax deduction for many taxpayers, along with a lot of confusion and interpretation concerns in the world of tax preparation.

One of the more common tax questions that we fielded here at the Tax Help Desk these past few months dealt with the real estate rental property; the taxpayer’s passive rental income from those properties, and whether or not the rental income qualified the taxpayer for the 20% tax deduction under the new IRC Sec. 199A.

Well, the answer to that question is a definite maybe! Congress and the IRS left us with a rather vague definition of the rental property’s eligibility. The Tax Cuts and Jobs Act of left us with the need to determine if a taxpayer’s passive rental income qualified for the 20% tax deduction under IRC Sec. 199A, with a definition that asks if the rental activity “rise to the level of a trade or business.”

That was pretty much it, initially. There were no quantitative measures to test or use as a guide. There were no number of rental properties, no hours of participation, and no test to determine if our taxpayers were eligible for the 20% tax deduction on their rental activity income.

Since the deduction under IRC Sec. 199A for rental activity income is not based in IRC Sec. 469—which is the code section used for passive rental activities—we could not use the history of testing and hours of activity in that specific code section. Because the deduction, under IRC Sec. 199A, is based within the business deduction IRS Code Section of 162.

We did receive some IRS guidance in the form of Notice 2019-7 that provided a “safe harbor” for rental activities that we, as tax practitioners, now have. Therefore, with the provisions and conditions of this IRS notice, we can safely take a 20% tax deduction for our taxpayer’s net rental income as being a part of the QBI within the 1040 tax return, if the four (4) conditions are met.

However, uncertainty remains with some properties and situation that do not fit within the provisions of the IRS notice and under IRC Sec. 199A, as a whole. The determination of whether our taxpayer’s rental activity is eligible for the IRC Sec. 199A deduction is still one of those uncertain issues that a new Tax Act, and its new and vague provisions can produce.

Another part of the “new” IRC Sec. 199A tax deduction that produced a lot of questions and issues is what the Tax Act has labeled specified service trade or businesses (SSTB). The general rule is that if our taxpayer is otherwise eligible for the qualified business income (QBI) deduction under IRC Sec. 199A— but is classified as being in one of many “service” trade of businesses—then they can lose the benefit of the 20% of QBI deduction if they have higher levels of income.

Here, the level of income is the key, if a single filing taxpayer has income under $157,500, or a joint filing taxpayer have income under $315,000, the 20% deduction under IRC Sec. 199A is allowed in full. Once those income thresholds are exceeded the 20% deduction is reduced and/or eliminated.

The list of “service” businesses includes those in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services or brokerage services. The term specified “service trade or business” also includes taxpayers who participate in investing and investment management, trading or dealing in securities, partnership interests, or commodities. However, the list does not include taxpayers in the service businesses of engineering, architecture, or insurance.

So, the TCJA offered a real nice new tax deduction, that taxpayers do not even have to make a monetary expenditure for but, as with all new tax law changes, there are always restrictions, limits, phaseouts and exceptions.

Another tax issue that was common this tax season involved the IRA, or pension plan, distribution that run through an estate from the death of the owner of the retirement plan. This tax issue always results in dozens of tax questions each, and every, tax season.

The first thing to remember about inherited IRAs and pension plan assets, is that they do not benefit from the stepped-up basis rules of IRC Sec 1014, so the subsequent distribution becomes a fully taxable event. The inherited IRA or pension distribution is governed under IRC Sec. 691 and the tax concept known as “income in respect of a decedent.” So, the bottom line here is the post-death distribution to the estate, or the beneficiary, is taxable; although NOT subject to the 10% penalty under IRC Sec. 72(t).

The distributions also generally need to start as early as December 31st of the year following the year of death.

The rules can be a bit more complicated than this, depending on whether the decedent turned 70 ½ before death, and if there are no listed beneficiaries or multiple beneficiaries, if the estate is named beneficiary, and if there is a surviving spouse involved.

The questions on this issue are frequent and varied, but the bottom line often surrounds the “at death” clauses, or beneficiary designations in the actual IRA plan document or pension plan instrument…so gaining access to or obtaining a copy of the retirement plan document is key to most of the answers to issues involving death and retirement plans.

Should any NSA member reading this need more information on IRC Sec 199A, or really any other “new” tax provision stemming from the Tax Cuts and Jobs Act of 2017 (TCJA) please reach out to us here at the Tax Help Desk, as we would be happy to try and assist with any tax issue that you may have. Remember that the Tax Help Desk is available as part of your NSA Member benefits.

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