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Why does my Farm Rental Income Qualify for QBID in TurboTax?

Forum|Forum|2 years ago
January 30, 2024
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I am puzzled as to how TurboTax came to the conclusion that my income from my farm rental qualifies for the "Qualified Business Income Deduction" (QBID).

Here is the situation: I live in California, and inherited some farmland a few years ago in the midwest. Accordingly, I receive a share of the income from the crops, and I pay for a portion of the fertilizer, and all the property taxes. Although I visit the farm annually, and communicate with the farmer a few times per year, and occasionally advise him when he asks what kind of crops I want, etc., I do NOT "Materially Participate" (e.g., I do not run the operations, or spend more than a few hours at the farm each year). Also, the farm is not an LLC or any other type of corporation. I simply receive payments, and report this income (and expenses) on IRS Form 4835.

Recently, I read some articles about QBI, and concluded that it is not easy to find a simple answer to this question. TurboTax somehow concludes that this income qualifies for the QBID when I use it to file my IRS Form 1040. Nevertheless, I would like to ask the TurboTax community:

Based on the information provided above, does this income qualify for a QBID? Why or why not?

TurboTax Home & Biz Windows

Best answer by rwilsond

This is the article I was referencing:

https://lawprofessors.typepad.com/agriculturallaw/2020/02/what-is-a-trade-or-business-for-purposes-of-irc-199a.html

I wrote to the author (Roger McEowen), of some key articles that were referenced and suggested by some of those replying to my QBI-related questions, and he replied. He has also graciously given me permission to quote his reply on this forum. Here is what I emailed to him (in Italics):

Although I found your writings very informative, I would like your opinion regarding my very common situation below, please:

I inherited about 150 acres of cropland in the Midwest a few years ago.
Accordingly, I rent this land to a farmer and receive a 1/3rd share of the proceeds from the crops.
I pay for my portion of the fertilizer, and all property taxes.
Although I visit with the farmer annually for a few hours, speak with him over the phone occasionally, and sometimes advise him regarding what kind of crops to plant, etc., I do not "Materially Participate" or attempt to run the farm operations.
The farmer and I have an annual lease that details our responsibilities (e.g., I am not an employee of the farm or farmer, nor do I have employees).
Neither the farm, nor the arrangement, is an LLC or any other type of corporation.
I report this income (and expenses) on IRS Form 4835.

Based on this common arrangement, as described, would my share of farm income qualify for the QBID?

Mr. McEowen replied with: "I think that is likely QBI based on your facts as stated."

Although, I have probably exhausted this topic for all it is worth in this forum, I still welcome any additional replies - especially any that can provide details and a 'basis' for thoughts, findings, conclusions, etc.

M

MonikaK1

It depends on all of the relevant facts and circumstances. You may wish to revisit the TurboTax interview for your farm rental activity to confirm that you answered all of the questions as intended.

Rental real estate is treated as a trade or business for purposes of the Qualified Business Income Deduction under section 199A if it meets any of the following three tests:

The rental real estate rises to the level of a section 162 trade or business.
The rental real estate is a rental real estate enterprise meeting the requirements of the safe harbor provided in Revenue Procedure 2019-38 (and the direct owner of the property chooses to rely on the safe harbor).
The rental or licensing of property is to a commonly controlled trade or business operated by an individual or a passthrough entity as described in Treas. Reg. section 1.199A-1(b)(14). This is often referred to as a self-rental.

A link to a PDF version of the Revenue Procedure, a summary of its provisions, and many more questions and answers are available at this IRS webpage.

The "safe harbor" provision, if it is relied upon, has four requirements, all of which must be met.

Please see this TurboTax help article regarding rentals and the QBID and this one regarding the QBI in general. Here is another Community discussion on this topic.

**Say "Thanks" by clicking the thumb icon in a post**Mark the post that answers your question by clicking on "Mark as Best Answer"

Rick19744

Some comments on your question:

You are correct in that you will not find a "simple" answer. This is the case for many tax issues, as many issues rely on specific facts and circumstances. That's just the way tax law works.
It is possible for "rentals" to qualify for the QBID even without material participation.
Simply renting out land for cash without any other involvement will not qualify as QBI.
However, you appear to be doing more than just collecting cash for rent. Based on your facts you pay for a portion of the fertilizer, property taxes (so this isn't a triple net lease), and you share in the income generated from the crops.
So while we don't have all the facts involved, I believe there may be a position that this qualifies as QBI as you have some involvement.

*A reminder that posts in a forum such as this do not constitute tax advice.Also keep in mind the date of replies, as tax law changes.

R

rwilsondAuthor

Thank you Rick19744 for your reply - I agree with all you said.

Btw - As you may (or may not) agree, trying to get a clear answer to seemingly simple questions by reading related articles from various sources, results in opening one can of worms after another (one reference/source begets another, and so on ... and they sometimes circle back to the starting point).

For my question, it seems to ultimately boil down to finding an answer to the question: Does such an arrangement qualify as a "Trade or Business" with consideration of Internal Revenue Code Section 162? Unfortunately, it appears that Section 162 provides no clear definition of Trade or Business (at least when it regards non-employees).

But another question for you, please. You said "So, while we don't have all the facts involved...". Can you give me an example of a fact or two that wasn't provided in my original post, that would be relevant to answering my original question? (FYI - this is not a high-income situation that might disqualify the farm income from the QBID).

J

JuneJS

I wrote to the author (Roger McEowen), of some key articles that were referenced and suggested by some of those replying to my QBI-related questions, and he replied. He has also graciously given me permission to quote his reply on this forum. Here is what I emailed to him (in Italics):

Although I found your writings very informative, I would like your opinion regarding my very common situation below, please:

I inherited about 150 acres of cropland in the Midwest a few years ago.
Accordingly, I rent this land to a farmer and receive a 1/3rd share of the proceeds from the crops.
I pay for my portion of the fertilizer, and all property taxes.
Although I visit with the farmer annually for a few hours, speak with him over the phone occasionally, and sometimes advise him regarding what kind of crops to plant, etc., I do not "Materially Participate" or attempt to run the farm operations.
The farmer and I have an annual lease that details our responsibilities (e.g., I am not an employee of the farm or farmer, nor do I have employees).
Neither the farm, nor the arrangement, is an LLC or any other type of corporation.
I report this income (and expenses) on IRS Form 4835.

Based on this common arrangement, as described, would my share of farm income qualify for the QBID?

Mr. McEowen replied with: "I think that is likely QBI based on your facts as stated."

Although, I have probably exhausted this topic for all it is worth in this forum, I still welcome any additional replies - especially any that can provide details and a 'basis' for thoughts, findings, conclusions, etc.

I have a similar situation on QBI and farm rental income. It is clear as mud. So pathetic that taxes have to be this unclear. I imagine different tax preparers interpret this different ways - which is very unfair.