One of the pro-business legacies left by President Trump that cannot be obliterated by the Biden administration is the Tax Cuts and Jobs Act (TCJA) signed in December 2017 and in effect since the 2018 tax returns.
In that law, a 20 % Qualified Business Income Deduction (QBI) was created for small business owners and some rental property owners.
That law has resulted in huge savings for our clients over the last 3 years. Basically, it is a 20% reduction of the taxes on your “business” profits. And “business” has a specific definition in the law.
For restaurants, the fact that you are a “business” is clear. But there is a grey area when it comes to rental properties.
DOES YOUR RENTAL PROPERTY QUALIFY
Many restaurant owners own rental property. Some own the buildings that their restaurants are located in and pay rent to themselves.
The question posed by the IRS is: does the rental property constitute a business for purposes of the QBI deduction?
- If you rent your property under a “net-net-net” lease where the tenant pays for all expenses (other than the note on the building), then you do not qualify for QBI.
- If you rent your property to a business you own at least 50% of, then you do qualify for QBI (except for SSTB’s defined below). So a building you own that collects rent from a restaurant you own qualifies for QBI (even if it is a “net-net-net” lease).
- If at least 250 hours are spent on your rental by you and your employees, agents and workers and those hours are documented, you qualify.
- If you personally use your rental (such as a vacation condo) for a number of days that exceed the greater of 14 days or 10 % of the number of days during the year that the property is rented then you do not qualify.
- There are special rules for certain “Specified Service Trade or Business (SSTB). Restaurants do not fall into this definition so are not affected by these rules.
When we prepare your taxes each year, we are taking the QBI deduction automatically for your restaurant and restaurant building. But if you have rental properties that you own less than 50% or may not be classified as a business, it would be wise to give us a call to plan properly to make sure you qualify.
