Interested in Safe Harbor? Start 2019 on the right track

The following changes in the Tax Cuts and Jobs Act (TCJA ) may provide property owners with a significant advantage under section 199A – qualified business income deduction. It applies to this filing season (2018) and continues through 2023. Property owners/ managers may exercise this benefit known as ‘safe-harbor.’ Certain ‘safe-harbor’ business records requirements are waived for this first year.

What is the benefit? A twenty percent (20%) deduction for ‘pass-through’ qualified business income.
For property managers anxious to dive in head-first, read on. Also keep an eye out for further guidance from the IRS. (link)

That said, the following are a few things to get you started:

a. Before e-filing, verify compatibility with the tax software you’ve selected. As of the writing of this article, some commercial software is in the process of incorporating this deduction. (Ah, the beauty of technology to make 11th hours critical adjustments instantly!) For manual filers, ensure your bookkeeper or off-the-shelf software is aware of the new 199A provisions.
b. Determine whether your rental(s) will be considered by the IRS a ‘real estate rental’ This is something that could matter – greatly. The IRS does not require your rental(s) business to be incorporated for this distinction. The deduction is generally available to eligible taxpayers whose 2018 taxable incomes fall below $315,000 for joint returns and $157,500 for other taxpayers.
c. 250 management hours is the magic number you need to rise to the level of a ‘safe-harbor’ business according to the IRS (link). This requirement goes into effect next year, however. Document, Document, Document. Starting now, track hours spent by asking vendors to notate their hours on services performed on each property. For the most current list of qualified ‘activities’ see the IRS website. (link).

c1. Here is a list of what qualifies:
(i) advertising to rent or lease the real estate;
(ii) negotiating and executing leases;
(iii) verifying information contained in prospective tenant applications;
(iv) collection of rent;
(v) daily operation, maintenance, and repair of the property;
(vi) management of the real estate; (vii) purchase of materials; and
(viii) supervision of employees and independent contractors
c2. Here is what type of records you need to keep:
…….contemporaneous records, including time reports, logs, or similar documents, regarding the following:
(i) hours of all services performed;
(ii) description of all services performed;
(iii) dates on which such services were conducted; and
(iv) Who performed the services. Such 8 records are to be made available for inspection at the request of the IRS.

c3. An attached statement accompanying your taxes:

The text of this affidavit, according to Notice 2019-17 (Revenue procedure for safe harbor)

.06 Procedural requirements for application of safe harbor. A taxpayer or RPE must include a statement attached to the return on which it claims the section 199A deduction or passes through section 199A information that the requirements in Section 3.03 of this revenue procedure have been satisfied. The statement must be signed by the taxpayer, or an authorized representative of an eligible taxpayer or RPE, which states: “Under penalties of perjury, I (we) declare that I (we) have examined the statement, and, to the best of my (our) knowledge and belief, the statement contains all the relevant facts relating to the revenue procedure, and such facts are true, correct, and complete.” The individual or individuals who sign must have personal knowledge of the facts and circumstances related to the statement.

The contemporaneous records requirement will not apply to taxable years beginning before January 1, 2019.

d. Along these lines, immediately prepare separate subfolders for each property within your email client. Drop all correspondence, bills, leases, reports and other activity into each subfolder. Take photos of paper bills and drop these into the electronic folders. Retain all e-receipts and contractor/tenant correspondence. Suggestion: Re-label / Re-index the subject lines of these documents, noting: a. Your hours spent, b. Type of issue, and c. Payment amount. It is possible to keep electronic ‘e-mail’ in place of hard copy folders–be diligent to ensure the records are complete.

As of the writing of this article, it might be worthwhile waiting for your commercial tax software to update your information to take the pass-through deduction this year. Since the recordkeeping requirement begins next year (2019), let me know whether this was helpful. Also drop me an email about your record keeping efforts.