Following the long-awaited “final” regulations released by the IRS late on Friday, January 18, some in the Ag industry appreciated the additional clarity, while others remained underwhelmed. The guidelines contained, as is customary, some complexities surrounding their applicability and effects. K·Coe Isom’s tax experts have been evaluating the finalized IRS regulations related to 199A specifically, in comparison to the proposed regulations issued back in August 2018, and here are some key takeaways for farm and ranch operations:
- Common Control Expansion and QBI Deduction Eligibility for Rental Income: The group of individuals and entities for purposes of the “common control” exception that will benefit family-owned businesses now includes spouse, siblings, ancestors, and lineal descendants. Under this newly-expanded guideline, they can automatically qualify rental income received (from other individuals or entities under “common control”) as Qualified Business Income (QBI). This QBI is income that is eligible for the new 20% business deduction under section 199A. (Note: income from C-corporations will not qualify for these purposes.)
- Safe Harbor Revenue Procedure Available: For situations not automatically qualifying as QBI under “common control” exceptions, the IRS has introduced a proposed revenue procedure providing a “safe-harbor.” Under this guidance, a rental enterprise will be treated as a trade or business for purposes of Section 199A if they meet certain parameters. Key provisions include:
- 250 hours of qualifying services performed each year by the taxpayer
- Separate set of books and records for each enterprise
- Net leases not eligible
- Unfortunately, typical farm cash rental situations will find it challenging to meet this safe-harbor exception
- Gains from the sale of breeding livestock, and other Section 1231 gains, will not qualify for this deduction.
- For those taxpayers above certain taxable income levels ($315,000 for Married Filing Jointly, and $157,500 for others) that are subject to wage and property base limitations, aggregation elections may be available to help minimize the negative impact.
It’s important to assess the impact of these guidelines, and the new regulations in their entirety, with a CPA who understands your agribusiness and can create a long-term strategy. Contact a K·Coe Isom tax advisor with questions surrounding the new regulations, or to request an assessment and/or tax strategy for your operations.