Page 9 - Supplement to Income Tax 2019

Recent Tax Developments*

In addition, if you maintain a fleet of vehicles of more 3. You maintain contemporaneous records beginning
than four vehicles that you use simultaneously, the standard after December 31, 2018, including time reports,
mileage rate cannot be used for any of the vehicles. logs, or similar documents, regarding the following:
For each mile that you claim the standard mileage rate for (i) hours of all services performed; (ii) description
a business vehicle that you own (rather than lease), you must of all services performed; (iii) dates on which such
reduce your basis in the vehicle by a deemed depreciation services were performed; and (iv) who performed the
rate set by the IRS. For 2019, the deemed depreciation rate services. Such records are to be made available for
will be 26 cents per mile (a penny more than in 2018). inspection at the request of the IRS.

Employee reimbursements for 2019 mileage. Employees If you have multiple rent-producing properties, each
who use their vehicles for work and who are reimbursed is a separate enterprise, but you may treat (aggregate) all
under an “accountable” plan in 2019 will not be taxed similar properties as a single enterprise. But commercial
on reimbursements up to the 58-cents-per-mile standard and residential real estate cannot be combined in the
business rate. same enterprise.
Note: The IRS has said that rental property used by you as
Safe Harbor for Real Estate Activities under a residence for any part of the year is not eligible for this safe

the QBI Deduction harbor. In addition, real estate rented or leased under a “triple
(pages 590, 705) net lease” is not eligible. A triple net lease refers to an agreement
that requires the tenant or lessee to pay taxes, fees, and insurance,
and to be responsible for maintenance activities of the property
To potentially claim the 20% qualified business income in addition to rent and utilities.
(QBI) deduction, you must be in a trade or business. To
deal with the confusion about when real estate activities
constitute a trade or business, the IRS has created a safe Social Security & Medicare Taxes on 2019
harbor for a “rental real estate enterprise” (Notice 2019- Wages & Self-Employment Earnings
07). This is defined as an interest in real property held
for the production of rents and may consist of an interest (pages 526, 535, 758-761)
in multiple properties. If you meet the three safe harbor
conditions for a rental real estate enterprise, your real estate For 2019, Social Security taxes apply to the first $132,900
activities are treated as a trade or business for purposes of of wages (up from $128,400 in 2018). Since the tax rate
the QBI deduction, and only for purposes of this deduction. fixed by law is 6.2%, the maximum amount of Social
Even if you don’t meet all of the safe harbor conditions, you Security that can be withheld from an employee’s 2019
can still try to demonstrate that you have a profit motive wages is $8,239.80 ($132,900 × 6.2%). The employer must
and other indices of being in a trade or business. pay the same amount.
Safe harbor conditions. To rely on this safe harbor, you Self-employed individuals figuring self-employment
must meet all of the following conditions: tax on Schedule SE will pay Social Security tax of 12 .4%
1. You maintain separate books and records to (both the employee and employer 6.2% share) on
reflect income and expenses for each rental real their first $132,900 of net earnings. To the extent self-
estate enterprise; employed individuals also have wages, the Social Security
2. For taxable years beginning prior to January 1, 2023, tax applies to no more than $132,900 of wages and net
you perform 250 or more hours of rental services per earnings combined.
year with respect to the rental enterprise. For taxable All wages are subject to the Medicare tax withholding
years beginning after December 31, 2022, in any 3 rate of 1.45%. On Schedule SE, self-employed individuals
of the 5 consecutive taxable years that end with the pay the Medicare tax of 2.9% (employee and employer
taxable year (or in each year for an enterprise held 1.45% shares) on all net earnings from self-employment.
for less than 5 years), 250 or more hours of rental There is no ceiling for the Medicare tax, so it applies to all
services are performed per year with respect to the
rental real estate enterprise. The services must be wages and net earnings from self-employment for the year.
performed by you, or by your employees, agents, Self-employed individuals will be able to claim 50%
and/or independent contractors. Time spent on of the self-employment tax figured on Schedule SE as an
investor-type activities doesn’t count. above-the-line deduction on Schedule 1 of Form 1040.

Supplement to J.K. Lasser’s Your Income Tax 2019 | 5