Banking & Finance

CPA advises careful review of deductions for 2019

Tweaks to IRS rules on real estate investment may benefit land owners in certain situations.

January 24, 2020
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Most of the provisions of the 2017 federal tax overhaul went into effect in 2018, but the mass scale of the changes mean extra careful review will be required during the 2019 federal tax filing season, according to a local accountant.

Erik Schumacher, CPA and principal at the Kentwood office of Rehmann, 2330 East Paris Ave. SE, said last year during tax season, many Rehmann accountants advised their clients to extend their tax returns until October 2019 to allow time for the Internal Revenue Service (IRS) to issue finalized guidance and clarification on some of the hazier provisions of the tax reform bill.

“The way tax laws change when they’re this dramatic or this significant is there is a general framework passed through Congress, then it is upon the shoulders of the IRS to interpret that and provide more specific guidance and rules of how the legislative language is to be interpreted or how the IRS will administer it,” Schumacher said.

“There always is a lag between legislative language being passed and the IRS coming up with their interpretation and their rules.”

Throughout 2019, the IRS issued several bulletins outlining its interpretations of the law and procedures for complying at irs.gov.

Schumacher highlighted a few that will be important to individuals and business owners preparing to file returns in 2020 for the 2019 tax year.

On Dec. 19, 2019, the IRS issued final regulations providing details about investment in qualified opportunity zones (QOZ), which Schumacher defined as “state-designated, economically distressed/low-income census tracks.” The zones were created to “revitalize economically distressed communities using private investments rather than taxpayer dollars,” according to a fact sheet from FundRise, a Washington, D.C.-based fintech company.

Investment in a QOZ allows the taxpayer to receive a temporary tax deferral on the capital gains invested in the zone “if corresponding amounts are invested into a qualified opportunity fund (QOF),” according to the IRS in a statement.

Some of the designated opportunity zones are in Grand Rapids, including large parts of the southeast side and West Side. A link to a map of opportunity zones is available at cdfifund.gov/pages/opportunity-zones.aspx

People do not need to live, work or own a business in a QOZ in order to reap tax benefits; they merely need to invest in an eligible area.

The final regulations from the IRS make clear that “if you held the investment (made in the QOZ) for 10 years and when you sell it, it has appreciated in value, that gain is not subject to any federal income tax,” Schumacher said.

“There are two benefits to it: a temporary deferral and slight reduction in tax on your current gain and potential permanent exclusion on the appreciation of the (QOF) investment,” he said.

The opportunity is available to any taxpayer, including individuals, businesses and trusts, Schumacher said.

The other updated guidance Schumacher said is important to note is the final regulations that came out on Sept. 24, regarding “the qualified business income deduction and safe harbors around real estate activities and what qualifies/what doesn’t.”

The IRS said in a statement that the safe harbor allows “certain interests in rental real estate, including interests in mixed-use property, to be treated as a trade or business for purposes of the qualified business income deduction.”

“The qualified business income deduction was a deduction created to reduce the effective tax rate on qualifying business income that’s held through a partnership or S Corp, essentially a pass-through entity or sole proprietorship,” Schumacher said.

The safe harbor is available for taxpayers who seek to claim the deduction with respect to a “rental real estate enterprise,” which the IRS defines as “an interest in real property held to generate rental or lease income” that “may consist of an interest in a single property or interests in multiple properties.”

The taxpayer or pass-through entity seeking to claim safe harbor “must hold each interest directly or through an entity disregarded as an entity separate from its owner, such as a limited liability company with a single member,” the IRS guidance says.

Links to the IRS statements on the updated QOZ and rental real estate safe harbor guidance are available at bit.ly/QOZguidanceIRS and bit.ly/safeharborguidanceIRS.

Schumacher said the most important takeaway for taxpayers is that they should come prepared to ask questions of their CPA about eligibility for both deductions under the new guidance.

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