Following the recently proposed Section 199A regulations in August, we have been fielding questions from farmers regarding common ownership and how section 199A (20% of business income deduction) may apply. Here is a general overview for guidance around these regulations, as well as a caution for rental entities.
Common ownership, in the most general of terms, is a way for two entities with common ownership to work together to qualify for the 199A deduction. (Otherwise, if there is only one entity and it is a rental of land for a non-common ownership entity to do the farming, then the deduction may be lost.)
While most land rentals are not considered a trade or business, the IRS has proposed that should you satisfy the common ownership rules, you will be able to aggregate the cash rental entity and the farming entity to qualify for the deduction.
Farm Cash Rental Income
Farmers who have land holdings that are part of a “Common Group” (at least 50% common ownership in each entity) can qualify the lease income as trade or business income for the deduction. This is true even if the farmer is under the threshold.
However, landlords with no active farm operation, or have no rental operation as part of a common group, might not qualify. And due to the fact that cash lease landlords aren’t treated as trade or business – and crop share landlords don’t typically share production expenses – there is much debate on whether these will qualify. (The accounting industry is asking the IRS for more clarity regarding lease income in particular.)
Do You Have a Common Ownership?
Consider this example for clarity: Three brothers farm together as a partnership. Each of them own farm land that is rented to the partnership. This is not common ownership because none of the brothers own at least 50% of the partnership. Therefore, in this scenario, none of the cash rent income will qualify for the Section 199A deduction.
To fix this scenario – the three brothers separately farm their ground and contract with the partnership for equipment, etc. If they are under the threshold ($157,500 – or $315,000 if married filing jointly), wages and qualified property aren’t a factor. If over the threshold, each farm should separately pay wages to qualify for the full deduction.
Brother and sisters are not related parties for purposes of common ownership, according to the proposed regulations. Only lineal ancestors and decedents qualify as related parties.
This is meant to be an overview of the proposed regulations under Section 199A, please reach out to K·Coe Isom’s tax experts with questions regarding the applicability in calculating your Section 199A deduction.
