Stockman Kast Ryan + Co, LLP (SKR+CO), the largest locally-owned certified public accounting firm in Southern Colorado, announces the hiring of Phillip Young as chief financial officer (CFO). In this newly created position, Phillip will work closely with the Partner group on Firm-wide strategy in support of sustainable growth and strategic planning.

Phillip brings more than a decade of experience providing both the strategic vision and the daily oversight of professional firms’ operations, finance and accounting departments, with an emphasis in personal injury law firms operations and finance.

“Phillip brings a wealth of experience in professional services firms,” shared SKR+CO Managing Partner Trinity Bradley-Anderson. “His background in finance and operations will serve as a strategic addition to the SKR+CO team.”

Prior to joining SKR+CO, Phillip was the chief operating officer/chief financial officer at Carter Mario Law Firm in Milford, Connecticut. Phillip formerly lived in Colorado Springs, Colo when he worked as CFO/VP Administration for McDivitt Law Firm.

Phillip has a Bachelor of Science in accounting from University of North Carolina Wilmington.

The full impact of COVID-19 is unknown. While we wait for questions to be answered many are asking what can we do right now? What’s next for our families? What’s next for family businesses and the people who work for them? Planning for our future generations is the greatest gift we can give, particularly during times of uncertainty.

Background
Many closely-held businesses have been impacted by the COVID-19 pandemic, leading to depressed company valuations. The current federal estate, gift, and generation-skipping transfer (GST) tax exemption is $11.58 million per person. That, coupled with the low AFR and Section 7520 rates, provides an opportune time to transfer wealth out of estates without using up exemptions.

Opportunity
There are estate tax planning techniques that can be implemented which transfer the greatest amount of value from an estate while using the least amount of exemption. Transferring assets while they have a low value is a technique that is used to lock-in or freeze those low values in anticipation the asset will one day significantly increase in value. This transfers the appreciation in excess of the frozen value out of the estate with the added benefit of preserving the exemption for additional transfers.

Estate Planning Strategies

GRATS
A grantor retained annuity trust (GRAT) is a powerful technique that allows a transfer of assets to a trust, in exchange for an annuity over a fixed term of years. After the annuity is paid off the assets transferred are owned by the trust for the benefit of the trust beneficiaries, normally the children.

A transaction can be structured to create a “zeroed-out” GRAT, where the annuity is structured in a manner so that the transaction does not produce a taxable gift. The calculation of the GRAT annuity payment is based on the Section 7520 rate in effect at the time of the transfer (for June 2020, the Section 7520 rate is 0.6%), thereby allowing more value to be transferred to the trust without using the exemption.

When transferring assets to the next generation, families are concerned about transferring too much to the younger generation, creating cashflow constraints and transfers that do not use their exemption in an effective manner. The zeroed-out GRAT can achieve financial stability, optimal estate tax results and flexible estate planning options. This simple, effective and time-tested strategy can achieve:

  1. Financial stability. The GRAT can be structured to provide an annuity which suits the cashflow needs of the grantor.
  2. Optimal Estate Tax Results. Provided the grantor survives the trust term, assets inside the trust, and all future appreciation, are not subject to estate taxes in perpetuity.
  3. Flexible Estate Planning Options. If the assets transferred to the GRAT do not provide sufficient cashflows to cover the annuity, they are transferred back to the grantor. This reverse transfer back is tax-free and does not impact the grantor’s exemption or trigger additional income taxes. The only cost incurred is administrative fees.

IDGT
An intentionally defective grantor trust (IDGT) is an effective and efficient technique to transfer assets to a trust for future generations. Once the assets are gifted to the trust, they are considered taxable gifts and property of the trust. Those assets can remain in trust for multiple generations, allowing the gift to benefit both children and grandchildren, if desired.

The transaction can be structured as a sale of assets to an IDGT in exchange for a promissory note. This structure is typically an alternative to the aforementioned GRAT. However, this sale is not considered a taxable gift and does not create any gain for income tax purposes. The IDGT promissory note payment is based off the AFR in effect at the time of the transfer (for June 2020, the long-term AFR is 1.01% for promissory note terms longer than nine years), allowing more value to be transferred without using your exemption.

A sale to an IDGT is typically more successful than funding a GRAT as the AFR rate used as the interest rate in the promissory note is generally lower that the Section 7520 rate used to value GRATs. The promissory note can also be structured as an interest-only note with a balloon payment upon maturity, whereas a GRAT must be structured as an annual annuity. Moreover, sales to an IDGT allow for the immediate allocation of GST exemption. With a GRAT, the grantor cannot allocate GST exemption until the end of the GRAT term.

The sale to an IDGT can achieve financial stability, optimal estate tax results, and multigenerational estate planning options. This efficient, effective and time-tested strategy can achieve:

  1. Financial stability. The IDGT can be structured to provide a promissory note that suits the cashflow needs of the grantor.
  2. Optimal Estate Tax Results. Assets inside the trust, and all future appreciation, are not subject to estate taxes…ever.
  3. Flexible Estate Planning Options. A sale to an IDGT can effectively transfer assets to the next generation, while minimizing transfer taxes.

GIFTS
Giving money to a family member in excess of the annual exclusion ($15,000 in 2020) will be a taxable gift. A simple way to provide cash to a family member is to make a loan to them. Historically, if the loan has an interest rate of at least the AFR, the IRS will respect the loan and not claim the transaction to be a gift. With the historically low AFR, cash can be loaned to a family member without creating a burden from charging the family member a high interest rate. June 2020 AFR rates are at historic lows (June 2020 short-term AFR is .18% which applies for terms less than three years, mid-term AFR is 0.43% for terms three years through nine years, and long-term AFR is 1.01% for terms longer than nine years).

The intra-family loan achieves financial stability, optimal estate tax results, and cashflow. This simple, effective and time-tested strategy can achieve:

  1. Financial stability. The intra-family loan can be structured to provide a promissory note which suits the cashflow needs of the family member.
  2. Optimal Estate Tax Results. Current intra-family loans can be refinanced to take advantage of the current AFR.
  3. Cashflow. The loan proceeds can be invested in securities that produce a higher rate of return than the current AFR, allowing the family member continuous cashflow.

Planning for the future is not a task to be taken lightly, even in the best of times. During times of uncertainty it becomes even more important. The three estate planning strategies summarized above provide options.

Conclusion: The zeroed-out GRAT is an effective strategy to take advantage of the increased exemption, low Section 7520 rate, and current economic environment. These three factors significantly increase the amount of wealth a family can transfer to the next generation while using a minimal amount of their exemption. Alternatively, a sale to an IDGT can be an effective strategy to transfer wealth to multi-generations and take advantage of the extremely low AFR. Finally, low interest intra-family loans allow families to provide liquidity to various family members without overburdening the family with onerous interest payments.

President Trump is providing support to healthcare providers fighting the COVID-19 pandemic. On March 27, 2020, the President signed the bipartisan CARES Act that provides $100 billion in relief funds to hospitals and other healthcare providers on the front lines of the coronavirus response. This funding will be used to support healthcare-related expenses or lost revenue attributable to COVID-19 and to ensure uninsured Americans can get testing and treatment for COVID-19.

Immediate infusion of $30 billion into healthcare system

Recognizing the importance of delivering funds in a fast and transparent manner, $30 billion is being distributed immediately – with payments arriving via direct deposit beginning April 10, 2020 – to eligible providers throughout the American healthcare system. These are payments, not loans, to healthcare providers, and will not need to be repaid.

Who is eligible for initial $30 billion

How are payment distributions determined

What to do if you are an eligible provider

Is this different than the CMS Accelerated and Advance Payment Program?

Yes. The CMS Accelerated and Advance Payment Program has delivered billions of dollars to healthcare providers to help ensure providers and suppliers have the resources needed to combat the pandemic. The CMS accelerated and advance payments are a loan that providers must pay back. Read more information from CMS.

How this applies to different types of providers

All relief payments are being made to providers and according to their tax identification number (TIN). For example:

Priorities for the remaining $70 billion

The Administration is working rapidly on targeted distributions that will focus on providers in areas particularly impacted by the COVID-19 outbreak, rural providers, providers of services with lower shares of Medicare reimbursement or who predominantly serve the Medicaid population, and providers requesting reimbursement for the treatment of uninsured Americans.

Ensuring Americans are not surprised by bills for COVID-19 medical expenses

The Trump Administration is committed to ensuring that Americans are protected against financial obstacles that might prevent them from getting the testing and treatment they need from COVID-19.

SOURCE: https://www.hhs.gov/provider-relief/index.html; Content created by Assistant Secretary for Public Affairs (ASPA); Content last reviewed on April 13, 2020

UPDATED 3/19/20, 10:30 a.m.

IRS Updates on Tax Payments

**Please note: we are planning a client webinar for early next week to explain how the tax deferrals will work. Event details will be posted on our website.**

The U.S. Treasury Department and Internal Revenue Service (IRS) issued guidance allowing all individual and other non-corporate tax filers to defer up to $1 million of federal income tax (including self-employment tax) payments due on April 15, 2020, until July 15, 2020, without penalties or interest. 

To clarify, the federal tax payment deferrals include 2019 tax payments as well as 2020 first quarter estimated federal tax payments.

This applies to federal taxes, states taxes vary. Colorado officials said they would mirror IRS guidance as it is updated amid the pandemic. See the American Institute of CPAs (AICPA)’s state-by-state guide for more information.

The guidance also allows corporate taxpayers a similar deferment of up to $10 million of federal income tax payments that would be due on April 15, 2020, until July 15, 2020, without penalties or interest. 

The current guidance does not change the April 15 filing deadline, or the requirement to file for an extension if you do not file by April 15. We anticipate this also may change; however, we are working diligently toward these deadlines.

Read the full IRS guidance here.

We are monitoring the Treasury Website and the IRS Website for updates and will continue to post the latest information to our Coronavirus Updates page.

SKR+CO Document Exchange – New Secure In Person Dropbox:

SKR+CO installed a secure dropbox on the 3rd floor of our building. Clients may drop documents off securely, should you prefer to do so in person. Please use an envelope, clips or rubber bands to keep your documents organized.

Access to the 4th floor will only be available to SKR+CO essential personnel, effective immediately.

USPS mail services, secure email and the client portal are also available to exchange and securely share documents with your CPA. As always, please call your CPA with questions — our receptionist is happy to connect you as we work remotely.

SKR+CO Client Information:

In an abundance of caution, please avoid unnecessary trips to the SKR+CO office. Instead, we highly encourage:

Sharing documents digitally via the SKR+CO client portal and/or secure email, both located on our client center page.

If possible, please share and/or sign documents electronically via our portal or secure email.

SKR+CO Operations:

Business Recovery Information:

Webinar: We are preparing a webinar for clients regarding business recovery.

Social Media: We will share information placed on our update page through our social media platforms, should you prefer accessing information via those channels.

Business Recovery: Please review the Business Recovery Guide

Additional information from the IRS regarding coronavirus can be found here: https://www.irs.gov/coronavirus

We will list closure status or other updates on our website and our social media channels.

“After the natural disasters in the fall of 2013, the Colorado SBDC disaster relief team worked with federal, state and local resources to produce a comprehensive guide to assist Colorado businesses in preparing for, responding to, and recovering from natural disasters and emergencies.” Click here for the guide . More information can be found on the SBDC Website

Stay up to date with the latest SKR+CO information. Sign up for our newsletter where we will update you with new information as it becomes available to us. You can join our newsletter by signing up at the bottom of our Client Center page.

Are you missing an opportunity to reduce your property tax liability? Nearly all local taxing jurisdictions, including municipalities, counties, and boards of education, generate tax revenue through the imposition of property tax, which is one of the most substantial sources of local government revenue. For many businesses, property tax is the largest state and local tax obligation, and one of the largest regular operating expenses incurred.

Unlike other taxes, property tax assessments are based on the estimated value of the property, and thus, are subject to varying opinions. Businesses that fail to take a proactive approach in managing their property tax obligations may be missing an opportunity to reduce their tax liability.

Below are 10 common property tax myths, and the truths that counter them.

MYTH #1: If a property’s value does not increase year to year, the property tax liability should remain the same.
TRUTH: The annual tax rate is determined by the tax levy necessary to fund the applicable governmental budget for services such as schools, libraries, park districts, fire departments and police. Essentially, the governmental budget is divided by the total assessment within a jurisdiction to calculate the tax rate. The tax rate is applied to a property’s individual assessment to calculate tax. Rates can fluctuate annually and can result in higher or lower taxes even if your property value stays consistent.

MYTH #2: Fair market value is equivalent to assessed value.
TRUTH: Fair market value is an estimate of the price at which property would change hands in an arm’s length transaction. Assessed value is a valuation placed on a property by the assessor, which forms the basis of a property owner’s annual property tax. Assessed value is typically a percentage of the fair market value and takes into account factors such as quality of the property and market conditions. Taxpayers should reconcile jurisdictional ratios in order to understand what is considered the fair market value of their property.

MYTH #3: Property tax bills can be appealed.
TRUTH: Unfortunately, you cannot challenge your property’s value once you receive the tax bill. An appeal must be filed within a set window of time after receiving your assessment notice, which in some cases could be a year prior to receiving the tax bill. If an appeal is not filed during the determined period, a taxpayer would have to wait to appeal until the next year’s assessment.

MYTH #4: Obsolescence adjustments do not apply to newer properties.
TRUTH: Property is typically taxed on a value that takes into account the ordinary diminishment of value occurring because of factors such as physical wear, age, and technological advancements. Obsolescence is an additional form of impairment resulting from internal or external factors affecting value, such as functionality of equipment, processes that inhibit business, or external forces that have impacted financial performance. Regardless of the age of the property, obsolescence factors should be annually reviewed to determine the fair market value of property.

MYTH #5: Assessors establish annual property tax rates.
TRUTH: Property tax rates are set by local governments based on the budget necessary to fund governmental services. Property taxes typically fund city, municipality, county and school district services provided to the community. Assessors determine the value of your property so that the tax burden can be distributed. Assessors do not determine the property tax. The amount of tax payable is calculated by the tax rate applied to your property’s assessed value.

MYTH #6: During a property tax audit, the taxpayer’s role is complete once information is provided to the auditor.
TRUTH: Left alone, auditors can make inaccurate or aggressive decisions. They heavily rely on asset listings and balance sheets to determine if items have been appropriately reported. Taxpayers have a lot to gain by staying in contact with auditors throughout the process. Auditors should know the story that goes with the data. Are all assets on the list physically located on property? Are construction in progress (CIP) assets held on site or at a vendor? Is the supplies balance an annual or year-end balance? In the absence of taxpayer direction, auditors will make assumptions based on limited data. Once audit results are finalized, taxpayers can appeal, but now the burden of proof may have shifted.

MYTH #7: Reducing my property taxes makes me appear to be a bad corporate citizen.
TRUTH: For many businesses, property taxes are their greatest state and local tax burden and, on average, account for approximately 38 percent of the total state and local tax liability. Property owners should ultimately be paying their fair share of property taxes and not more. As property taxes are a cost of doing businesses, certain businesses that overpay may need to make decisions that result in reduced work force or reduced business output. The reductions necessitated by higher tax liabilities may have more negative impact on the community than ensuring that the property taxes remain fair.

MYTH #8: Assessor’s record cards are accurate.
TRUTH: A property record card is a document retained by the assessing jurisdiction that includes assessment information about your property used to determine the value. A property record card includes information such as building dimensions, total land acreage, zoning or use of property, construction detail and other elements to describe the property. Any discrepancies or outdated information may affect the value of your property. Property owners should obtain their property record cards to determine if errors exist that need to be corrected and could result in a lower assessment.

MYTH #9: I pay more property tax in jurisdictions that tax both real and personal property.
TRUTH: Property subject to taxation for property tax purposes can vary by jurisdictions. The tax can be imposed on real estate or personal property. All states tax real property and approximately 38 states tax personal property. Regardless of types of property taxed, the governmental budget will determine amount of tax needed to fund services and the property tax burden will be distributed among taxable values. Therefore, a property owner’s tax liability may be as significant in a jurisdiction that only taxes real property.

MYTH #10: A tenant cannot appeal property taxes. TRUTH: Tenants may have the ability to directly appeal property values in situations where the owner provides written consent or the lease terms allow the tenant to appeal. Property taxes are typically passed through to the tenants, therefore it benefits the tenant to review the annual assessment to determine if an appeal opportunity exists to reduce the property’s assessment

Do you drive a heavy vehicle for work? It could lighten your tax load. If you’re a business owner, your SUV, pickup truck or van may be eligible for 100% first-year bonus depreciation. But it must:

What does 6,000 pounds look like?

See below for some business vehicles that can do the heavy lifting.

Other rules apply. Contact your trusted advisor for details.

The U.S. Department of Labor (DOL) has released the finalized rule on overtime exemptions for white-collar workers under the Fair Labor Standards Act.  It is expected to expand the pool of nonexempt workers by more than 1 million.

The new rule is scheduled to take effect on January 1, 2020. Affected employers should consider prompt action to reduce the impact to their bottom lines

The new rule

Under the finalized overtime exemptions regulations, an employer generally cannot classify an employee as exempt from overtime obligations unless the employee satisfies three tests:

  1. Salary basis test. The employee is paid a predetermined and fixed salary that is not subject to reduction because of variations in the quality or quantity of the work performed.
  2. Salary level test. The employee is paid at least $684 per week or $35,568 annually.
  3. Duties test. The employee primarily performs executive, administrative or professional duties.

The DOL’s final rule specifically increased the salary level test (previously $455 per week or $23,00 annually). Therefore, if an employee’s salary exceeds the new level, the employee will be ineligible for overtime if he or she primarily performs executive, administrative or professional duties. If their salary falls below it, the employee is nonexempt, regardless of duties.

Employers can use nondiscretionary bonuses and incentive payments (including commissions) that are paid annually or more frequently to satisfy up to 10% of the standard salary level test. If an employee does not earn enough in such bonuses or payments in a given year to remain exempt, the employer can also make a catch-up payment within one pay period of the end of the year. However, the payment will count only toward the prior year’s salary amount.

Highly compensated employees

Neither the salary basis nor the salary level test applies to certain employees (for example, doctors, teachers and lawyers). The new rule provides a more relaxed duties test for certain highly compensated employees (HCEs) who are paid total annual compensation of at least $107,432 (including commissions, nondiscretionary bonuses and other nondiscretionary compensation) and at least $684 salary per week.

The final rule sets the total annual compensation threshold at the 80th percentile of weekly earnings of full-time salaried employees nationally.

The DOL opted against automatic adjustments to salary thresholds every three or four years. Instead, the final rule simply indicates the department’s intent to update the earnings thresholds “more regularly in the future,” following the notice-and-comment rulemaking process.

Preparation tips

Employers should begin taking measures to achieve compliance — and minimize the hit to their finances — when the final rule takes effect. Your business may already be well-prepared if you have previously gone through this process. Take care, though, to not rely on past findings as circumstances may have shifted.

A good first step is to check employees’ salary levels against the new thresholds. It may be advisable to give raises to employees who fall just under a threshold and routinely work more than 40 hours per week. Or consider redistributing workloads or scheduled hours to prevent newly nonexempt employees from working overtime.

This also is a good time to review employees’ job duties against the tests for the various exemptions. Check duties on a regular basis, as this is a ripe area of litigation for employees who contend that they deserve overtime despite their job titles. Courts and the DOL agree that actual duties, not job title or even job description, are what matters.

If, according to the final rule, you reclassify currently exempt workers as nonexempt, you must establish procedures for accurately tracking their time to ensure proper overtime compensation. Reclassified employees may require some training on timekeeping procedures.

Plan accordingly

Some employers may find that the new overtime rule substantially increases their compensation costs, including their payroll tax liability.

Contact your trusted advisor to ensure your company is in compliance with the new rule, as well as all payroll tax obligations.

Year-end tax planning will be just as complicated as it was last year due to the complexity of new tax regulations for businesses and individuals. This is of the essence as tax planning strategies to reduce your 2019 tax bill must be taken before year end.

Take advantage of planning strategies for individuals

Individuals often can reduce their tax bills by deferring income to the next year and accelerating deductible expenses into the current year. To defer income, for example, you might ask your employer to pay your year-end bonus in early 2020 rather than in 2019.

To accelerate deductions, consider increasing your IRA or qualified retirement plan contributions to the extent that they’ll be deductible. Such contributions also provide some planning flexibility because you can make 2019 contributions to IRAs, and certain other retirement plans, after the end of the year.

Other year-end tax planning strategies to consider include:

Offsetting capital gainsIf you sold stocks or other investments at a gain this year — or plan to do so — consider offsetting those gains by selling some poorly performing investments at a loss.

Reducing capital gains is particularly important if you are subject to the net investment income tax (NIIT), which applies to taxpayers with modified adjusted gross income (MAGI) over $200,000 ($250,000 for married couples filing jointly). The NIIT is an additional 3.8% tax on the lesser of 1) your net income from capital gains, dividends, taxable interest and certain other sources, or 2) the amount by which your MAGI exceeds the threshold.

In addition to reducing your net investment income by generating capital losses, you may have opportunities to bring your MAGI below the applicable NIIT threshold by deferring income or accelerating certain deductions.

Charitable givingIf you plan to make charitable donations, consider donating highly appreciated stock or other assets rather than cash. This strategy is particularly effective if you own appreciated stock you would like to sell but you don’t have any losses to offset the gains.

Donating stock to charity allows you to dispose of the stock without triggering capital gains taxes, while still claiming a charitable deduction. Then you can take the cash you’d planned to donate and reinvest it in other securities.

Contact your trusted advisor to discuss end of year planning for you and your business.

With the holiday season right around the corner, it is a good time for business owners to focus on strategic planning for next year. Here are some ways to get started.

Begin with your financials

A good place to find inspiration for strategic objectives is your financial statements. They will tell you whether you are excelling or struggling so you may decide how strategically ambitious or cautious to be in the coming year.

Use the numbers to look at key performance indicators such as gross profit, which tells you how much money you made after your production and selling costs were paid. It’s calculated by subtracting the cost of goods sold from your total revenue. Also calculate current ratio, which is calculated by dividing current assets by current liabilities. It helps you gauge the strength of your cash flow.

A CFO or CPA-prepared budget can serve as more than just a management tool – it also can be presented to lenders and investors who want to know more about your start-up’s operations and its expected financial results. Review your findings with your CPA or a CFO consultant if you do not already have a CFO on staff.

Examine other areas

Human resources is another critical area of strategic planning. Consider last year’s employee turnover rate. High turnover could be a sign of poor training, substandard management or low morale. Any of these problems could undercut the strategic objectives you set.

Examine sales and marketing. Did you meet your goals for new sales last year, as measured in both sales volume and number of new customers? Did you generate an adequate return on investment for your marketing dollars?

Finally, take a close look at your production and operations. Many companies track a metric called customer reject rate that measures the number of complete units rejected or returned by external customers. Sometimes a business must improve this rate before it moves forward with growth objectives. If yours is a service business, you should similarly track and assess customer satisfaction.

Set new objectives

With a review of your financials and key business areas complete, you can more reasonably set goals for next year under the banner of your strategic plan. On the financial side, for instance, your objective might be to boost gross profit from 20% to 30%. But how will you lower your costs or increase efficiency to make this goal a reality?

Or maybe you want to lower your employee turnover rate from 20% to 10%. Strategize what will you do differently from a training and management standpoint to keep your employees from jumping ship this year.

Act now

Don’t let year end creep any closer without reviewing your business’s recent performance. Then, use this data to set realistic goals for the coming year.

Contact your trusted advisor to choose the best metrics numbers and put together a solid strategic plan.

Owners of certain rental real estate interests have final guidance on what qualifies for the qualified business income (QBI) deduction.

QBI in a nutshell

QBI equals the net amount of income, gains, deductions and losses — excluding reasonable compensation, certain investment items and payments to partners for services rendered. The deduction is subject to several significant limitations; however, QBI generally allows partnerships, limited liability companies (LLCs), S corporations and sole proprietorships to deduct as much as 20% of QBI received.

Many taxpayers involved in rental real estate activities were uncertain whether they would qualify for the deduction. The final guidance leaves no doubt that individuals and entities that own rental real estate directly or through disregarded entities (entities that are not considered separate from their owners for income tax purposes, such as single-member LLCs) may be eligible.

Covered interests

The safe harbor applies to qualified “rental real estate enterprises.” For purposes of the safe harbor only, the term refers to a directly held interest in real property held to produce rents. It may consist of an interest in a single property or multiple properties.

You can treat each interest in a similar property type as a separate rental real estate enterprise or treat interests in all similar properties as a single enterprise. Properties are “similar” if they are part of the same rental real estate category (that is, residential or commercial). In other words, you can only hold commercial real estate in the same enterprise with other commercial real estate. The same applies for residential properties.

Bear in mind, if you opt to treat interests in similar properties as a single enterprise, you must continue to treat interests in all properties of that category — including newly acquired properties — as a single enterprise. If, however, you choose to treat your interests in each property as a separate enterprise, you can later decide to treat your interests in all similar commercial or all similar residential properties as a single enterprise.

Notably, the guidance provides that an interest in mixed-use property may be treated as a single rental real estate enterprise or bifurcated into separate residential and commercial interests.

Safe harbor requirements

The final guidance clarifies the requirements you must fulfill during the tax year in which you wish to claim the safe harbor. Requirements include:

Keeping separate books and records. You must maintain separate books and records reflecting income and expenses for each rental real estate enterprise. If the enterprise includes multiple properties, you can meet this requirement by keeping separate income and expense information statements for each property and consolidating them.

Performing rental services. For enterprises in existence less than four years, at least 250 hours of rental services must be performed each year. For those in existence at least four years, the safe harbor requires at least 250 hours of rental services per year in any three of the five consecutive tax years that end with the tax year of the safe harbor.

The rental services may be performed by owners or by employees, agents or contractors of the owners. Rental services include:

Financial or investment management activities, studying or reviewing financial statements or reports, improving property, and traveling to and from the property do not qualify as rental services.

Maintaining contemporaneous records. For all rental services performed, you must keep contemporaneous records that describe the service, associated hours, dates and the individuals who performed the service. If services are performed by employees or contractors, you can provide a description of them, the amount of time employees or contractors generally spent performing those services, and time, wage or payment records for the individuals.

This requirement does not apply to tax years beginning before January 1, 2020. The IRS cautions, though, that taxpayers still must establish their right to any claimed deductions in all tax years, so be prepared to document your QBI deduction.

Providing a tax return statement. You must attach a statement to your original tax return (or, for the 2018 tax year only, on an amended return) for each year you rely on the safe harbor. If you have multiple rental real estate enterprises, you can submit a single statement listing the requisite information separately for each.

Excluded real estate arrangements

The safe harbor is not available for all rental real estate arrangements. The guidance excludes:

The guidance states that taxpayers that do not qualify for the safe harbor may still be able to establish that an interest in rental real estate is a business for purposes of the deduction.

Next steps

The final safe harbor rules apply to tax years ending after December 31, 2017, and you have the option of instead relying on the earlier proposed safe harbor for the 2018 tax year. Plus, you must determine annually whether to use the safe harbor.

Contact your trusted advisor to determine whether you are eligible for this and other valuable tax breaks.