This article explains why ProConnect Tax may not include rental real estate income in a Qualified Business Income (QBI) calculation and how to identify a property or activity as qualified.
ProConnect Tax doesn't automatically include most Schedule E rentals in QBI calculations due to guidance in IRS Pub. 535 which says rental real estate qualifies for a QBI deduction if it meets the requirements of a safe harbor or is a section 162 trade or business.
The program will calculate QBI for Schedule E activities marked as land, self-rentals, real estate professionals, or as claiming safe harbor. If none of those conditions apply, an override is available to indicate the activity is a qualified trade or business.
- Notice 2019-07 also provides a safe harbor under which a rental real estate enterprise will be treated as a trade or business for purposes of the QBI deduction.
To input a qualified trade or business override
- Under Income in the left-hand menu, select Rental and Royalty Income (Sch E).
- Click on the Qual. Bus. Inc. Deduction section from the dropdown menu in the upper-right corner of the input screen.
- Enter a 1 in Business is a qualified trade or business: 1=yes, 2=no [Override].
To claim safe harbor for a Schedule E activity
- Under Income in the left-hand menu, select Rental and Royalty Income (Sch E).
- Click on the Qual. Bus. Inc. Deduction section from the dropdown menu in the upper-right corner of the input screen.
- Enter the correct number in Rental real estate enterprise number if claiming safe harbor.
- Enter a 1 in Business is a qualified trade or business: 1=yes, 2=no [Override].
To make this election, you must also attach a signed PDF to the return stating that all qualifications for safe harbor have been met. To attach the PDF:
- Under General in the left-hand menu, select Electronic Filing.
- Select e-file PDF/Miscellaneous.
- Click on e-file Attachment in the upper-right corner of the input screen.
- Click on the button Attach PDF and browse to your PDF copy of the signed Safe Harbor Election statement.
- Enter a description in the field Description of file.
- Using the dropdown in the field Link to form (defaults to main form), input 67 and then select 67=QBI Rental Real Estate Safe Harbor Election Statement.
The PDF must be attached in order to clear the following diagnostic:
"Schedule E #X: The safe harbor election was claimed for this rental property. Pursuant to IRS Notice 2019-07, a signed statement PDF must be attached to the return stating that all qualifications for the safe harbor have been met." US - Ref 51860
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