Is my understanding right for the QBI deduction on rental income and issuing 1099 misc to contractors?

Forum|Forum|6 years ago
February 27, 2020
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A rental activity must rise to the level of 'a trade or business' to claim 20% QBI deduction no matter whether the landlord use Safe Harbor or Sec. 162.

The instructions to Form 1099-MISC emphatically say to report on Form 1099-MISC only when payments are made in the course of a trade or business.

So my understanding is that:

1. If a landlord wants to use QBI deduction, he/she must issue1099 misc to contractors.

2. If a landlord thinks his/her rental activity is passive, he/she doesn't have to issue1099 misc but QBI deduction cannot be used as the rental activity is not considered as a trade or business.

VictoriaD75

Issuing a 1099-MISC is a completely separate issue from the activity qualifying for QBI. If you have made payments to contractors (contracted employees) greater than $600, you must complete and file a 1099-MISC.

The tax law provides a safe-harbor under which income from rental real estate (even if treated as passive) can qualify as qualified business income (QBI). The requirements are:

250 hours or more are spent by the taxpayer with respect to the rental activity
Contemporaneous records of the time are maintained
Separate books and records for the rental activity are maintained

Time spent related to the rental activitiy on advertising, negotiating with tenants, verifying applications, daily operation, repair and maintenance, purchase of materials, and supervision of employees all count toward the required 250 hours. Time spent purchasing or financing the acquisition of the property and time spent traveling to and from the property do not generally qualify.

QBI on Rental Income

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A

AmeliesUncle

Mostly correct.

1099-MISCs would be required if you are claiming QBI based in it being a Section 162 "Trade or Business".

The "Safe Harbor" qualifies it as "Trade or Business" for purposes of the QBI deduction. The Safe Harbor specifically says those rules only apply for purposes of the QBI deduction. It may not necessarily be a "Trade of Business" for purposes of the requirement for issuing 1099-MISCs. But in my opinion it should be done to eliminate any problems and to strengthen the claim for QBI.

If it does not rise to the level of a "Trade or Business" (with by Section 162 or by the Safe Harbor), no 1099-MISCs are required.