2022 Industry Planning: Rental Real Estate as Qualified Business Income

Preface: “Find out where the people are going, and buy the land before they get there.” — William Penn Adair, politician

2022 Industry Planning: Rental Real Estate as Qualified Business Income

If you operate a rental real estate enterprise, you may qualify to claim the business income deduction under Section 199A in one of two ways.

Qualified Business Income Deduction (QBID)

Congress enacted Section 199A to provide a deduction to non-corporate taxpayers of up to 20 percent of the taxpayer’s qualified business income from each of the taxpayer’s qualified trades or businesses, including those operated through a partnership, S corporation, or sole proprietorship. Individuals, estates and trusts can also deduct 20 percent of aggregate qualified real estate investment trust (REIT) dividends and qualified publicly traded partnership income. The deduction is effective for tax years beginning after December 31, 2017, and before January 1, 2026.

The QBI deduction is calculated as the lesser of:

• combined qualified business income (up to 20% of qualified business income, plus 20% of REIT dividends and publicly traded partnership income); or

• 20% of the excess (if any) of taxable income over net capital gain.

In order to qualify for the deduction, the business must be a qualified trade or business which is defined as any trade or business other than a specified service trade or business (SSTB) or the trade or business of performing services as an employee.

Rentals meet the definition of a qualified trade or business in one of two ways:

• real estate rentals to a commonly owned business; or

• under a safe harbor for certain rental real estate activities.

Rentals to a commonly owned business

A rental activity is treated as a qualified trade or business if it rents or licenses tangible or intangible property to a commonly owned trade or business. A business and a rental activity are commonly owned if the same person or group of persons directly or indirectly owns at least 50 percent of each of them. Businesses can meet this common-ownership test even if they are not otherwise eligible for aggregation.

Safe Harbor for Rental Real Estate Enterprise

Under a safe harbor, a rental real estate enterprise is treated as a trade or business for purposes of Section 199A only if:

• separate books and records are maintained to reflect income and expenses for each rental real estate enterprise;

• at least 250 hours of rental services are performed per year; and

• for tax years beginning after 2019, the taxpayer maintains sufficient contemporaneous records.

Call our office if you’d like to discuss how you might arrange your rental business to meet the requirements for Section 199A and take full advantage of the deduction.

2022 Tax Planning: Mileage and Home Office Deductions

Preface: “For those who have dreamed of being of farmer at heart, working from a barndominium is the ideal lifestyle.” – Vermont enthusiast

2022 Tax Planning: Optional Standard Mileage Rates

Businesses generally can deduct the entire cost of operating a vehicle for business purposes. Alternatively, they can use the business standard mileage rate, subject to some tax rule exceptions. The deduction is calculated by multiplying the standard mileage rate by the number of business miles traveled. Self-employed individuals also may use the standard rate, as can employees whose employers do not reimburse, or only partially reimburse, them for business miles driven.

Many taxpayers use the business standard mileage rate to help simplify their tax recordkeeping. Using the business standard mileage rate takes the place of deducting almost all of the costs of your vehicle. The business standard mileage rate considers costs such as maintenance and repairs, gas and oil, depreciation, insurance, and license and registration fees.
Beginning on January 1, 2022, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) are:

• 58.5 cents per mile for business miles driven, up from 56 cents for 2021
• 18 cents per mile driven for medical or moving purposes, up from 16 cents for 2021
• 14 cents per mile driven in service of charitable organizations, no change from 2021

Mileage related to unreimbursed business expenses and moving expenses are limited to certain taxpayers as a result of the Tax Cuts and Jobs Act for tax years 2018 through 2025.

The standard mileage rate for business is based on an annual study of the fixed and variable costs of operating an automobile. The rate for medical and moving purposes is based on the variable costs.

Taxpayers may have the option of calculating the actual costs of using their vehicle rather than using the standard mileage rates. If instead of using the standard mileage rate you use the actual expense method to calculate your vehicle deduction for business miles driven, you must maintain very careful records. You must keep track of the actual costs during the year to calculate your deductible vehicle expenses. One of the most important tools is a mileage logbook.

Our office can help you compare the benefits of using the business standard mileage rate or the actual expense method.

2022 Tax Planning: Home Office Deduction

Taxpayers who use their home for business may be eligible to claim a home office deduction. It allows qualifying taxpayers to deduct certain home expenses on their tax return. This can reduce the amount of the taxpayer’s taxable income. Here are some things to help taxpayers understand the home office deduction and whether they can claim it:

The home office deduction is available to both homeowners and renters for tax purposes. There are certain expenses taxpayers can deduct for taxes. They include mortgage interest, insurance, utilities, repairs, maintenance, depreciation, and rent. Taxpayers must meet specific requirements to claim home expenses as a deduction. Even then, the deductible amount of these types of expenses may be limited.

The term “home” for purposes of this deduction:

A) Includes a house, apartment, condominium, mobile home, boat, barndominium, or similar property.

B)  Also includes structures on the property. These are places like an unattached garage, barndominium, studio, barn or greenhouse.

C) Doesn’t include any part of the taxpayer’s property used exclusively as a hotel, motel, inn or similar business.

There are two basic requirements for the taxpayer’s home to qualify as a deduction:

A) There must be exclusive use of a portion of the home for conducting business on a regularly basis. For example, a taxpayer who uses an extra room to run their business can take a home office deduction only for that extra room so long as it is used both regularly and exclusively in the business.

B) The home must be the taxpayer’s principal place of business. A taxpayer can also meet this requirement if administrative or management activities are conducted at the home and there is no other location to perform these duties. Therefore, someone who conducts business outside of their home, but also uses their home to conduct business may still qualify for a home office deduction.

Expenses that relate to a separate structure not attached to the home will qualify for a home office deduction. It will qualify only if the structure is used exclusively and regularly for business.

Taxpayers who qualify may choose one of two methods to calculate their home office expense deduction:

A) The simplified option has a rate of $5 a square foot for business use of the home. The maximum size for this option is 300 square feet. The maximum deduction under this method is $1,500.

B) When using the regular method, deductions for a home office are based on the percentage of the home devoted to business use. Taxpayers who use a whole room or part of a room for conducting their business need to figure out the percentage of the home used for business activities to deduct indirect expenses. Direct expenses are deducted in full.

Contact Us

If you would like to discuss this tax planning opportunity and understand the ways in which you use your home regularly and exclusively for your business can minimize your tax bill, please call our office at your earliest convenience.

2021 Individual Tax Planning: Itemized Deductions

Preface: If I had to run a company on three measures, those measures would be customer satisfaction, employee satisfaction and cash flow. – Jack Welch

2021 Individual Tax Planning: Itemized Deductions

There are two approaches you can take deductions on your individual federal income tax return: a) you can itemize tax deductions or b) use the standard tax deduction. Tax deductions reduce the amount of your taxable income.

The standard deduction amount varies depending on your income, age, and your filing status. The amount is also adjusted annually for inflation. For 2021 the standard deductions amounts are $12,550 for married couples filing separately. $18,800 for heads of households. $25,100 for married couples filing jointly.

Certain taxpayers cannot use the standard deduction:

        •  A married individual filing separately whose spouse itemizes deductions.
        • An individual who files a tax return for a period of less than 12 months because of a change in his or her annual accounting period.
        • An individual who was a nonresident alien or a dual-status alien during the year.

Itemized deductions include amounts you paid for state and local income or sales taxes, real estate taxes, personal property taxes, mortgage interest. You may also include gifts to charity and part of the amount you paid for medical and dental expenses.

Often taxpayers would usually benefit most by itemizing if itemized deductions exceed the standard deduction amounts above:

          •  Made large contributions to qualified charities
          • Paid substantial interest or taxes on your personal home
          • Had large “other” tax deductions
          • Had large uninsured medical or dental expenses

The higher standard deduction under Tax Reform means fewer taxpayers are itemizing their deductions. However, taxpayers may have an opportunity to itemize this year by keeping these tips in mind:

Deducting state and local income, sales and property taxes. The deduction that taxpayers can claim for state and local income, sales and property taxes is limited. This deduction is limited to a combined, total deduction of $10,000. It is $5,000 if married filing separately. Any state and local taxes paid above this amount can’t be deducted.

Refinancing a home. The deduction for mortgage interest is also limited. It’s limited to interest paid on a loan secured by the taxpayer’s main home or second home. For homeowners who choose to refinance, they must use the loan to buy, build, or substantially improve their main home or second home, and the mortgage interest they may deduct is subject to the limits described in the next bullet under “buying a home.”

Buying a home. People who buy a new home this year can only deduct mortgage interest they pay on a total of $750,000 in qualifying debt for a first and second home ($375,000 if married filing separately). For existing mortgages, if the loan originated on or before December 15, 2017, taxpayers continue to deduct interest on a total of $1 million in qualifying debt secured by first and second homes.

Donating items and deducting money. Many taxpayers often find unused items in good condition they can donate to a qualified charity. These donations may qualify for a tax deduction. Taxpayers must have proof of all cash and non-cash donations.

Deducting mileage for charity. Driving a personal vehicle while donating services on a trip sponsored by a qualified charity could qualify for a tax break. Itemizers can deduct 14 cents per mile for charitable mileage driven in 2022.

If you have any questions related to itemized deductions or tax planning in general, please call our office.

Tips for Individuals Selling Their Home

Preface: “Home isn’t a place, it is a feeling.” – Anonymous

Tips for Individuals Selling Their Home

The Internal Revenue Service has some important information to share with individuals who have sold or are about to sell their home. If you have a taxable gain from the sale of your main home, you may qualify to exclude all or part of that taxable gain from your income. Here are ten tax planning tips to keep foremost in mind when selling your home. 

  1. In general, you are eligible to exclude the taxable gain from income if you have owned and used your home as your main home for two years out of the five years prior to the date of its sale (partial exclusions for shorter periods are allowed under certain extenuating circumstances).
  2. If you have a gain from the sale of your main home, you may be able to exclude up to $250,000 of the gain from your income ($500,000 on a joint return in most cases).
  3. You are not eligible for the exclusion if you excluded the gain from the sale of another home during the two-year period prior to the sale of your home.
  4. A surviving spouse who qualifies for the exclusion may exclude up to $500,000 of gain on the sale of a principal residence if the sale occurs not later than two years after the date of his spouse’s death and he or she has not remarried as of the date of sale.
  5. If you can exclude all of the gain, but receive a Form 1099-S, you must report the sale on your tax return.
  6. If you have a gain that cannot be excluded, it is taxable. You must report it on Form 1040, Schedule D, Capital Gains and Losses.
  7. You cannot deduct a loss from the sale of your main home.
  8. Generally, taxpayers must report forgiven or canceled debt as income on their tax return. This includes people who had a mortgage workout, foreclosure, or other canceled mortgage debt on their home. Taxpayers who had debt discharged after December 31, 2017, can’t exclude it from income as qualified principal residence indebtedness unless a written agreement for the debt forgiveness was in place before January 1, 2018.
  9. If you have more than one home, you can exclude a gain only from the sale of your main home. You must pay tax on the gain from selling any other secondary home. If you have two homes and live in both of them, your main home is ordinarily the one you live in most of the time.
  10. When you move from your home address, be sure to update your mailing address with the IRS and the U.S. Postal Service to ensure you receive refunds or correspondence from the IRS. Use Form 8822, Change of Address, to notify the IRS of your address change.