Owners of pass-through entities may be able to take a 20 percent deduction for their qualified business income (QBI) (Code §199A). This personal deduction lowers the effective tax rate on profits from business activities. The question that many tax professionals have been asking since the QBI deduction was created by the Tax Cuts and Jobs Act of 2017 is whether this write-off applies to real estate activities. The IRS has helped to answer this question with respect to certain rental properties. See Notice 2019-7.
Background
The QBI deduction applies only to eligible income from a trade or business. Unfortunately, Code §199A governing the deduction does not clearly define the term “trade or business.” It refers to the definition of a trade or business under Code §162, other than the trade or business of performing services as an employee (an employee cannot qualify for the QBI deduction).
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