Under the Tax Cuts and Jobs Acts of 2017, certain owners of rental properties may be eligible for a significant tax deduction. The law allows for a 20 percent deduction against “qualified” business income for pass-through businesses. In determining whether someone qualifies for this deduction, a key consideration is whether the taxpayer engages in a “qualified trade or business” for purposes of Section 199A of the Internal Revenue Code. In some cases, it can be difficult to determine whether a business meets these qualifications, and the IRS has issued additional guidance about safe harbor for rental real estate businesses.

Qualifying for Safe Harbor

According to the IRS, the 20% qualified business income (QBI) deduction can only be taken against business income, rather than real estate investments. To achieve the required classification as a qualified trade or business, the IRS has set forth two major requirements for owners of rental real estate.

First, real estate property must be directly owned by an individual taxpayer or by an eligible pass-through entity. Second, the taxpayer must document 250 hours of rental services each year. Rental services encompass numerous activities, such as arranging advertising, collecting rent, supervising employees, and performing maintenance. Such activities that are performed directly by the owner or by an employee, agent, or independent contractor on behalf of the business will count toward the 250-hour requirement.  

If you have been hit with a penalty by the IRS, you might believe that you have no other choice than to pay. This is an incorrect assumption, as there are numerous circumstances where the IRS may not require you to pay a penalty. In order to take advantage of this relief, you must fully comply with certain IRS procedures.

Importantly, if you believe you may be assessed a penalty, you can preemptively apply for abatement when you act quickly. Also, if you have already paid a penalty, you may still request abatement. In all cases of tax penalty abatement, time is of the essence. 

Do You Qualify for Tax Penalty Abatement?

The IRS offers penalty abatement to those who have a reasonable cause for late filing, late payment, or accuracy-related issues (negligence penalties). Reasonable causes include natural disasters and medical emergencies. If the IRS has made a mistake with regard to your return, you may also qualify for penalty abatement. Depending on your specific circumstance, you may also qualify for a one-time abatement of a penalty.

Historically, business owners have been able to utilize tax deductions based on the cost of assets bought for business use and the depreciation of those assets. However, the recent Tax Cuts and Jobs Act (TCJA) modified the rules regarding the deduction of expenses under Section 179(a) and the deduction of depreciation under Section 168(g). These changes affect business taxes filed for years 2018 and beyond.

Section 179(a): Business Asset Deductions

This law permits businesses to deduct the purchase price of certain assets as an expense for the year the business begins to use the property. The recent updates to the law raised the maximum expense deduction to $1 million (up from $500,000). The updated law also raised the phase-out limit to $2.5 million (up from $2 million).

This deduction is available for tangible property like tools and technology used in business. The deduction is also available for qualified real property. Under the TCJA, qualified real property includes qualified improvement property, as well as certain types of improvements to nonresidential property, which includes: 

The federal government has long been concerned with assets and businesses based abroad but owned by United States citizens. The IRS regularly looks to address income that is purposefully generated outside the country to avoid taxation. As part of the efforts to ensure that foreign investments are taxed correctly, the Tax Cuts and Jobs Act (TCJA), which was passed last year, made sizable changes to taxation rules, such as the addition of regulations mandating that global intangible low-taxed income produced by controlled foreign corporations be included in a taxpayer’s taxable income.

What Is a Controlled Foreign Corporation?

A controlled foreign corporation (CFC) is an American corporation that operates in another country with U.S. shareholders who hold 50% or more of the control of that corporation. American shareholders, directors, or officers of one of these businesses must report their income from the foreign corporation and pay taxes on that income. 

New Laws Under the Tax Cuts and Jobs Act

The TCJA provides that a U.S. taxpayer who possesses at least 10% of the value or voting rights in at least one CFC must now report global intangible low-taxed income from these CFCs as currently taxable income. This holds true even if there are no distributions to shareholders. 

One change ushered in by the Tax Cuts and Jobs Act of 2017 permits eligible employees of privately held corporations to postpone paying income tax on the value of qualified stock options and restricted stock units (RSUs) granted to them by their employers. Under the law, one can postpone payment of this tax for up to 5 years.

This law is meant to encourage employee stock ownership in startup or early-stage businesses. It applies to stock options that are exercised and RSUs that are settled as of or after December 31, 2017. 

The IRS has announced and clarified many requirements that affect whether a person may be eligible for tax deferral. For example, in order for a company to be eligible, at least 80% of its domestic employees must have received stock options during a single calendar year.