Rental Real Estate Safe Harbor Under Section 199A

Understand the aspects of the rental real estate safe harbor and which expenses meet the standard for qualified business income for rental properties.

When the Tax Cuts and Jobs Act of 2017 added the qualified business income (QBI) deduction (also called the Section 199A deduction), it didn’t clarify when a rental activity rises to the level of a qualified trade or business. On September 24, 2019, the Internal Revenue Service (IRS) finalized a limited safe harbor for taxpayers who are direct and indirect owners in rental real estate enterprises (Rev. Proc. 2019-38).

Who Qualifies?

rental real estate

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Subject to certain limitations, taxpayers who qualify for the safe harbor are eligible for the 20% QBI deduction. If your enterprise is profitable, taking this deduction may be a good tax strategy — at least through 2025 when it is set to expire if Congress does not extend it.

The enterprise can include multiple properties in the same general category, either commercial or residential. To be eligible under the safe harbor rules, the rental real estate enterprise must meet the following requirements:

  • Perform 250 or more hours of rental services each year. Enterprises that have been in existence for more than four years, must meet this requirement in three of the last five years. Owners, employees, agents or independent contractors can perform these hours.
  • Maintain separate books and records for each rental real estate enterprise. These records should document the hours and dates of all services performed, provide a description of all services performed and include a list of who performed the services. (Beginning in 2020, these records will have to be maintained contemporaneously.)
  • Submit a signed statement stating that all of the tests have been satisfied for each year this deduction is claimed.

Which Services Can Be Included?

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For purposes of the safe harbor rule, rental services include the following: daily operations, maintenance, repairs, rent collection, payment of expenses, provision of services to tenants and efforts to rent the property (such as advertising). They do not, however, include financial or investment management services, arranging financing, procuring property, reviewing financial statements or operating reports or time spent traveling to and from the rental property.

The following types of rental properties are specifically excluded from claiming the QBI deduction:

  • Property used as residence for any part of the year, such as a vacation home.
  • Property subject to a triple net lease.
  • Property rented to a business with common ownership.
  • Property where a part is treated as a specified service business excluded from claiming the QBI deduction.

How Do Losses Affect The Reduction?

Remember that if your rental property generates losses, the QBI deduction may not be the best tax strategy for your enterprise to pursue. Those losses would reduce the 20% deduction. For some rental real estate enterprises with losses, claiming the QBI deduction can cost thousands. It may make more sense to simply deduct your losses against your ordinary income. As with any tax planning strategy, you need to evaluate the pros and cons in your specific situation.

To verify your situation with a qualified professional, contact us today.

© 2020

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The SECURE Act: Major Last-Minute Retirement Plan Changes

The SECURE Act has ended 2019 with Congress planning to enact a number of changes that will significantly affect your retirement plan. Learn more here.

Despite all the gridlock in Washington, as well as an impeachment, the SECURE Act is poised for imminent passage and signing into law. It changes a number of important retirement plan rules. The act runs over 120 pages, so the experts will be poring over it for some time. Meanwhile, a number of sources have weighed in on what they think are the key provisions. (Note that last-minute alterations and more detailed analysis may lead to additional changes in the coming weeks.)

What Will The SECURE Act Allow?

SECURE Act

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The Society for Human Resource Management listed several changes as particularly noteworthy. The act will allow:

  • An increase in the business tax credit to make setting up 401(k) plans more affordable for small businesses.
  • Unrelated small employers to organize themselves for an “open” 401(k) multiple-employer plan (MEP). This would presumably reduce the costs and administrative work each company would otherwise bear alone.
  • Delay of the 401(k) required distribution from the current age of 70 1/2 to 72. Critics have pointed out that only the well-off are really affected by this, people who can put substantial assets into a 401(k) and don’t need money from the fund immediately.
  • Automatic enrollment of safe-harbor 401(k) plans to increase the cap on automatically raising payroll contributions.
  • A 401(k) safe harbor for in-plan annuities. This provision has also faced criticism, as many industry experts do not believe annuities are a good value in these situations.

The Major Changes Caused by The SECURE Act

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Kiplinger also put together a list of major changes, noting that the act:

  • Removes the age restriction for IRAs. If you work into your 70s and beyond, you can still contribute.
  • Makes it easier for part-time workers to join their employer’s 401(k) plan.
  • Allows a parent to take out up to $5,000 penalty-free from a 401(k) plan for costs connected to a birth or adoption. Kiplinger noted that this may encourage younger workers to start funding retirement plans earlier, as parenthood is on the horizon much sooner than retirement.
  • Eliminates the “stretch” provision. Until now, nonspouse IRA beneficiaries could stretch the required distribution of the IRAs over their own lifetimes. Going forward, with a few exceptions, beneficiaries will have to take full disbursement by the end of 10 years. This could mean a lot more of the inheritance going to the government.

Finally, the government will be repealing the controversial Cadillac tax on high-end health plans. This repeal is part of a year-end spending bill.

Applying The SECURE Act

All these changes will be phased in at different times. There are also exceptions and other subtleties. Whether you’re concerned about your own family’s issues or plans that your company runs, it’s best to keep in close touch with financial professionals to make sure you make a smooth transition to the new rules.

© 2020

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Introducing Crypto Audit Defense with CryptoTaxAudit

The best investment any crypto owner can make is in our new crypto audit defense service, CryptoTaxAudit. Learn more today to protect yourself all year!

You’ve most likely heard of audit defense services, but what about crypto audit defense? The area of taxes regarding cryptocurrencies has been a confusing and stressful experience for crypto traders. More guidance has finally been coming out, but this also means more crack-down is soon to follow. During the year 2020, the IRS is expected to begin examining and auditing tax returns by crypto traders. So how should you be prepared as a crypto trader? There’s now a solution that provides crypto audit defense with our new service CryptoTaxAudit

Why You Need A Crypto Audit Defense Service

enrolled agent crypto

As a crypto trader you need special protection. Traditional audit defense services from companies like TurboTax, TaxACT, and H&R Block are inadequate coverage for crypto owners. They don’t have expertise in defending crypto returns. They only cover a specific year’s return, protect you for only three years instead of the needed six years, and don’t defend the anti-money laundering forms.

Our audit defense service provides the expert protection that you need as a crypto trader. 

  • We have expertise in defending crypto returns.
  • We protect the anti-money laundering forms.
  • Our protection covers returns from any year, not just a specific year’s returns.
  • We protect you for all six years that are needed.
  • While other services are reactive we’re proactive and include tools like our book Do My Crypto Tax Returns Need Surgery a crypto tax health check included for free so you reduce your chances of getting an IRS letter in the first place. 

How Does Our Crypto Audit Defense Work?

crypto audit defense

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By paying a small annual fee, you’re a member of CryptoTaxAudit. This means that we defend you in any IRS examination of your crypto activity that you receive notice of. 

While a member, if you get a letter from the IRS, you pay a small fee for the initial consultation call where we develop a strategy for your case. Then any further work we do on that case is at no charge, including: 

  • drafting written responses
  • escalating IRS management
  • researching laws
  • communicating with the IRS
  • updating you on the progress
  • and more…

The Crypto Audit Defense That Will Truly Protect You

We’re committed to helping as many crypto owners as possible with their tax responsibilities. It’s a new and evolving technology but doesn’t have to be stressful and costly for you. 

Even if you’ve received a letter from the IRS but don’t have a membership with CryptoTaxAudit, we can still help you with crypto audit representation

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Yet Another ‘Real Housewives’ Star in Tax Trouble

Anyone can find themselves in tax trouble, even ‘Real Housewives of Orange County’ star Kelly Dodd who owes more than $23,000 to IRS.

One of the stars of the Bravo reality TV series Real Housewives of Orange County is in debt to the IRS.

Kelly Dodd and her ex-husband Michael Dodd owe $23,386.62 for unpaid taxes for the years 2015 and 2016, according to documents obtained by The Blast.

Tax Trouble Can Happen To Anyone

Kelly and Michael Dodd were married for 11 years, until their divorce in 2018.

Dodd joined the cast of Real Housewives of Orange County during the show’s 11th season.

Her fiery Latin lineage and unfiltered opinions have been bringing the heat ever since she joined the cast,” Bravo’s website says.

Dodd is not the first cast member from the Real Housewives series to get in tax trouble. In the last year, four other cast members have faced IRS liens.

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IRS Releases Radically New Form W-4

The IRS has just released the new Form W-4. Learn about the new changes involved, what it means for your tax filing, and benefit helpful resources.

The IRS has been promising a new version of Form W-4, Employee’s Withholding Certificate, for some months, and it recently published it, with a brief announcement in its e-News service. The form is very similar to a draft version published earlier in 2019. Although the IRS has not yet published extensive new guidance, it did outline the changes in a FAQ list last updated in August 2019.

What's New in Form W-4

At that time, the IRS noted, “Allowances are no longer used for the redesigned Form W-4 to increase transparency, simplicity and accuracy. In the past, the value of a withholding allowance was tied to the amount of the personal exemption. Due to changes in law, currently you cannot claim personal exemptions or dependency exemptions.”

Visual Changes in Form W-4

form W-4

According to the IRS, a few of the visual changes that were made in the last draft shared include:

  • It is now a full page.
  • There are no withholding allowances (which is why the title of the form changed to “Employee’s Withholding Certificate”).
  • Steps 1 through 5 to guide employees through the form.
  • Instructions, worksheets, and tables follow the first page.

Probably the biggest question for both companies and employees is “Does everyone have to fill out the new form?” The answer, according to the August guidance, is no. The IRS says, “Employees who have submitted Form W-4 in any year before 2020 are not required to submit a new form merely because of the redesign. Employers will continue to compute withholding based on the information from the employee’s most recently submitted Form W-4.”

Form W-4 Resources

We will have further updates when the IRS provides additional guidance.

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Businessman Evaded IRS Assessments, Leading to $1.5 Million Loss

According to court records, a Pittsburgh businessman evaded IRS assessments, leading to his conviction of guilt for tax evasion. Learn more.

He evaded IRS assessments by telling his company’s bookkeeper to stop issuing checks and to have his company pay his personal expenses.

This Pennsylvania businessman pleaded guilty in federal court to tax evasion.

According to court records, Robert Rionda Jr., of Pittsburgh, Penn., owned and operated Arms Insurance Group from 2002 through May 2014. In October 2011, the IRS opened a case on Rionda for unpaid income taxes for the 2009, 2010 and 2011 tax years. In May 2012, the IRS’s attempts to obtain payments from Rionda were unsuccessful, and the IRS levied his personal bank accounts.

Evading IRS Assessments

IRS assessments

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Rionda responded to IRS levies by directing the company’s bookkeeper to stop issuing salary checks to Rionda and his wife and pay all of his personal bills from the company’s bank accounts rather than from his personal bank accounts.

Over the next several years, Rionda continued to file apparently accurate corporate returns on behalf of Arms Insurance Group, as well as personal income tax returns, but he made only minimal payments to the IRS for the personal income taxes he owed.

Don't Hide from IRS Assessments

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During the years 2009 to 2014, Rionda received distributions from the company each year which varied from approximately $376,000 to $1.6 million. He sold the company to his son in 2014 but continued to receive distributions through 2016.

The total tax loss, including assessed interest and penalties, is more than $1.5 million. Rionda faces up to five years in prison and a fine of up to $250,000.

© 2019

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Responding to an IRS Letter of Audit or Examination – What’s Involved

Even the possibility of getting an IRS letter can cause alarm, especially for crypto traders. But rather than worry, learn what’s involved and be prepared.

You open your mailbox and there’s an IRS letter asking about your crypto tax return. To respond to the audit, what work needs to be done and by who? It can be easy to panic and feel alarmed, but the best thing you can do first is to understand the process and your options.

What To Know If You Get an IRS Letter

IRS letter

To understand what’s involved, and how best you can respond, I’m going to tell you about the five main activities during an examination of crypto transactions and records.

  • Substantiation is the producing of receipts, records, and evidence of any income or expenses under question. It includes gathering all exchange transaction records and off-exchange transactions related to cryptos. Only the taxpayer knows where these records are, so collecting them is their responsibility.
  • Accounting involves summarizing taxpayer records into tax reporting categories or forms. It is a taxpayer’s responsibility, but this work can be hired out. An example of this is using a crypto-capital gains calculation service to analyze transaction records to generate a list of gains. It is a complicated activity and critical to documenting the gains for the IRS.
  • Reporting involves preparing or amending tax returns to report income and expenses or anti-money laundering forms. During an IRS examination or audit of crypto reporting, this work is done by Crypto Tax Audit at no charge for its subscribers; otherwise, Crypto Tax Audit will provide this at a reasonable fee.
  • Representation is the strategizing and responding to tax authorities. It involves communicating with the IRS or tax authorities on the taxpayer’s behalf whether in writing or verbally, on all matters. This includes responding to letters, negotiating fast track mediation or settlement, negotiating with IRS Appeals office, requesting abatement, preparing taxpayer financial statements, applying for Currently Non-Collectable status or preparing Offers-In-Compromise petitions, keeping the taxpayer updated, and performing all other taxpayer dispute and collection options available in the tax code or Internal Revenue Manual.

For crypto-related examinations and audits, Crypto Tax Audit performs these services at no charge for its subscribers; otherwise, Crypto Tax Audit performs these services for a reasonable fee.

  • Controversy is the term used to describe when a taxpayer and the IRS disagree on how a matter should be treated under the tax laws and regulations. It is a significant activity because all crypto-related transactions are new and stretch how laws and regulations are interpreted. Controversy work requires legal training because it involves statutory interpretation and analysis of prior court cases, IRS rulings, and commentary from the congressional Joint Committee on Taxation. For crypto-related examinations and audits, Crypto Tax Audit does this work at no charge to its subscribers. This is an area of significant interest and investigation by Crypto Tax Audit to prevent the most persuasive arguments during IRS representation.
  • Litigation is needed when all efforts at escalation, appeals, and use of the tax advocate service do not provide a satisfactory result. A case can be taken to US Tax Court or Federal District Courts. A fresh legal case is prepared for arguing the tax controversy before a judge. Less than 4,000 cases per year are heard because the IRS uses its Appeals group to settle cases out of court if possible. While taxpayers can represent themselves at tax court, hiring an experienced tax litigation lawyer will increase the chances of winning. Paying for a lawyer is the taxpayer’s responsibility. Crypto Tax Audit will assist subscribers at no charge on crypto-related litigation efforts.

Read More: Latest Release of IRS Crypto Tax Information – Interview with Brad Kimes on XRP

What Can an IRS Letter Entail?

IRS letter

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Not all matters require all these skill areas. Often the cost is the driving consideration.

If your IRS letter is about collecting on a debt that is not disputed, then representation service is all that a taxpayer needs.

If your IRS letter is questioning the math on a return or the omission of reporting, then usually representation and sometimes reporting services are needed.

If your IRS letter is about a formal examination or audit, then more work may be needed. Substantiation, possibly bookkeeping, reporting, representation, and controversy work are needed.

Learn More: Our Services

Protect Yourself in the Case of an IRS Letter

As a service of Donnelly Tax Law, a Crypto Tax Audit annual subscription can ensure the best protection against crypto tax risks.

It’s the proactive way to have peace of mind and know you’re protected regarding your crypto taxes.

To learn more, visit CryptoTaxAudit.com

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