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199A deduction

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  • 199A deduction

    I would appreciate input regarding the 50/80 regulation proposed by the IRS for 199A deduction. There are 10 partners in our practice and we have a different LLC that owns the real estate and the same 10 partners own the real estate LLC as well that rents out the building to our practice. Since each partner owns only 10 percent of the real estate LLC, are we able to take the section 199A deduction for the income from the building even if the taxable income is above the $415,000 limit or in other words since each partner owns less than 50 percent of the entity that owns the office building, do they qualify for the 199A deduction regardless of the taxable income? Thanks in advance.

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      • #4
        In reply to the OP -

        §1.199A-5(c)(2) says that if a trade or business rents property to a specified service trade or business and there is “50 percent or more common ownership” that the rental portion is considered a specified service trade or business.

        50 percent or more common ownership means that you add up the ownership percentage of all the common owners.  In your case this equals 100% common ownership.

        Once you meet the 50 percent, the regulation says “that portion of the trade or business of providing property or services to the 50 percent or more commonly-owned SSTB will be treated as a separate SSTB with respect to the related parties.”

        There’s even an example in the regulations of a law firm with your situation of having the practice in one entity and the building in another with common owners between the two.

        If you rent out part of the building to an unrelated business that portion of the rental income could be qualified business income that is not a specified service trade or business if it rises to the level of a trade or business, which is difficult to do.