USA QBI deduction for Real estate LLC renting to S corp with same owner.

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I own a commercial building through a real estate LLC (single-member) and rent it to a S Corporation that I am the sole owner also.

Does the LLC qualifies for the deduction under section 199A?

I just read the IRS Rev. Proc. 2019-38 where it states that "Certain rental real estate arrangements" are "excluded.... (C) Real estate rented to a trade or business conducted by a taxpayer...". Am I correct to think that I do not qualify for the deduction?
 

DrStrangeLove

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My first answer is to check with your CPA and/or tax attorney. Free advice is often the most expensive kind.

My second answer is that the safe harbor provision you're asking about isn't available for "(C) Real estate rented to a trade or business conducted by a taxpayer or an RPE which is commonly controlled under § 1.199A-4(b)(1)(i)."

26 CFR § 1.199A-4(b)(1)(i) reads:

"The same person or group of persons, directly or by attribution under sections 267(b) or 707(b), owns 50 percent or more of each trade or business to be aggregated, meaning in the case of such trades or businesses owned by an S corporation, 50 percent or more of the issued and outstanding shares of the corporation, or, in the case of such trades or businesses owned by a partnership, 50 percent or more of the capital or profits in the partnership".

From the language, it seems that since you own 100% of both the LLC and the S corporation, they're under common control under 26 CFR § 1.199A-4(b)(1)(i), and so you can't hide in the safe harbor. That would seem to be true regardless of which option you can choose on Form 8832 electing how to tax your LLC (corporation, partnership or disregarded entity).

Again, check with your CPA and/or tax attorney. But it doesn't sound to me like you can take the safe harbor.

Plus, intuitively, why would the IRS allow you to claim a deduction for essentially renting real estate to yourself? Disallowing the safe harbor is an anti-abuse provision for just this situation. You're the sole owner of an LLC that owns (read: holds) the building that your solely-owned S corp is renting. From a GAAP perspective, the rental payments are going from left hand to right hand; this isn't even income. Why would the IRS let you reduce your tax with a shell game?
 
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My first answer is to check with your CPA and/or tax attorney. Free advice is often the most expensive kind.
Thanks for the advice and I see that in lots of responses here, but I would rather be informed correctly than relying only on CPAs and tax attorneys that I hire. Researching online is also not free, it takes time. I appreciate anyone spending their time answering my question without compensation.

My second answer is that the safe harbor provision you're asking about isn't available for "(C) Real estate rented to a trade or business conducted by a taxpayer or an RPE which is commonly controlled under § 1.199A-4(b)(1)(i)."

26 CFR § 1.199A-4(b)(1)(i) reads:

"The same person or group of persons, directly or by attribution under sections 267(b) or 707(b), owns 50 percent or more of each trade or business to be aggregated, meaning in the case of such trades or businesses owned by an S corporation, 50 percent or more of the issued and outstanding shares of the corporation, or, in the case of such trades or businesses owned by a partnership, 50 percent or more of the capital or profits in the partnership".

From the language, it seems that since you own 100% of both the LLC and the S corporation, they're under common control under 26 CFR § 1.199A-4(b)(1)(i), and so you can't hide in the safe harbor. That would seem to be true regardless of which option you can choose on Form 8832 electing how to tax your LLC (corporation, partnership or disregarded entity).

Again, check with your CPA and/or tax attorney. But it doesn't sound to me like you can take the safe harbor.
In this case, the issue is actually simpler than that.
Yes, you are right, as I also thought, I cannot use the safe harbor to qualify for the deduction.

However, you are wrong about the purpose of the law. I don't need the safe harbor. I actually qualify for the QBI deduction under section 199A as a self-rental.
The same revenue procedure 2019-38, section 2.02 explains the self-rental exeption:
".02 Trade or business. Section 199A(d) defines a qualified trade or business as any trade or business other than a specified service trade or business (SSTB) or a trade or business of performing services as an employee. Section 1.199A-1(b)(14) defines trade or business for purposes of section 199A as a trade or business under section 162 other than the trade or business of performing services as an employee. In addition, § 1.199A-1(b)(14) provides that rental or licensing of tangible or intangible property (rental activity) that does not rise to the level of a section 162 trade or business is nevertheless treated as a trade or business for purposes of section 199A, if the property is rented or licensed to a trade or business conducted by the individual or a relevant passthrough entity (RPE) which is commonly controlled under § 1.199A-4. Sections 1.199A-5(b) and 1.199A-5(d) define an SSTB and the trade or business of performing services as an employee, respectively."

It was just a matter of understanding the text correctly. Had I read it entirely, I would not have wasted your time here, sorry....

Plus, intuitively, why would the IRS allow you to claim a deduction for essentially renting real estate to yourself? Disallowing the safe harbor is an anti-abuse provision for just this situation. You're the sole owner of an LLC that owns (read: holds) the building that your solely-owned S corp is renting. From a GAAP perspective, the rental payments are going from left hand to right hand; this isn't even income. Why would the IRS let you reduce your tax with a shell game?
"the rental payments are going from left hand to right hand". Correct. But it is income. I am definitely taxed for it at the LLC level!

"Disallowing the safe harbor is an anti-abuse provision for just this situation". Not so. If I understand right, it ended up written that way after modifications to avoid using the QBI deduction for individual renting to a corp that they also control.

Thanks for taking the time to look into the issue.
 

DrStrangeLove

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Then you'll have no problem filling out the Form 8275 yourself. Good luck!
 

Samir

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When dealing with issues like this. I would only accept an answer from someone who is willing to fight the IRS for free if they're wrong. Otherwise, always best to side on just paying tax. Later on in an audit if it is discovered that you overpaid, you get the money back with interest.
 
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Then you'll have no problem filling out the Form 8275 yourself. Good luck!
I did read that form 8275 might be a useful disclosure to file in case of self-rental and qbi but I am not understanding why.
Schedule E for the rental company describes the rental business as a self-rental. That should be disclosure enough to justify the business to qualify.

The previous and current cpas didn’t find it necessary either.

Why do you think it would be necessary?
 

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