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Allocating QBI between Shareholders

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Level 2

On the sale of S Corporation stock if the cutoff method is used and the total income for the year is 50K, which is broken down to SH 1 as 40K and SH 2 as 10K which is reflected on the K-1's is the QBI allocated the same way or is the QBI allocated prorata based on the days owned in the year?

Second question:  On rental property if you have commercial property and residential property can you aggregate both types of property or do they have to be kept separate?  If you do not aggregate  is the 250 safe harbor applied to each property or to the total properties?

Thank you.  

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Regarding the rental property, remember that you may have an easier way to address the "does property create QBI?" question... you can use the Section 162 standard.

The final regs have a pretty darn good discussion of this topic. But the basic rule (in case someone hasn't yet begun their research) is taxpayer needs to show regularity, continuity and a profit motive. That may actually be a pretty easy standard to apply if one does a bit of research.

I also did a pretty long blog post about this here:

https://evergreensmallbusiness.com/section-199a-rental-property-trade-or-business-definition/

P.S. I think there's a related thorny issue here too. What about someone with properties generating qualified business losses. That's supposed to be tracked, too, and carried forward.

Someone who talks a lot about tax (maybe Tony Nitti?) proposed (half joking I assume) that taxpayers might want to intentionally fail the safe harbor rules in order to avoid having to accumulate and later take the hit for negative QBI. Would be interesting to see what pracititioner consense on that "gambit" is...

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Level 15

For the first question - it should be allocated the same way as the K-1 income.. So that means a manual override.


ex-AllStar
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Level 15

On your second question, no, you cannot treat commercial and residential properties as one rental enterprise.  The 250-hour requirement must be met by each rental enterprise.

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Still an AllStar
Highlighted

Regarding the rental property, remember that you may have an easier way to address the "does property create QBI?" question... you can use the Section 162 standard.

The final regs have a pretty darn good discussion of this topic. But the basic rule (in case someone hasn't yet begun their research) is taxpayer needs to show regularity, continuity and a profit motive. That may actually be a pretty easy standard to apply if one does a bit of research.

I also did a pretty long blog post about this here:

https://evergreensmallbusiness.com/section-199a-rental-property-trade-or-business-definition/

P.S. I think there's a related thorny issue here too. What about someone with properties generating qualified business losses. That's supposed to be tracked, too, and carried forward.

Someone who talks a lot about tax (maybe Tony Nitti?) proposed (half joking I assume) that taxpayers might want to intentionally fail the safe harbor rules in order to avoid having to accumulate and later take the hit for negative QBI. Would be interesting to see what pracititioner consense on that "gambit" is...

View solution in original post

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