Investing in American real estate? Want to increase profits? You should pay attention to the tax benefit known as QBI (an acronym for Qualified Business Income Deduction), which guarantees you a tax deduction of up to 20% of your income from the investment. What is the benefit, who is entitled to it and how can it be claimed? All this and more in the article before you.
What is the QBI Regulation? And why should you know it?
Trump’s tax reform came into effect in 2017. As part of the reform, the tax rate applicable to companies was reduced to 21%. However, business unions that are not companies did not receive the aforementioned benefit, in order to provide a certain benefit to small businesses and encourage their growth, section 199A of the QBI Regulation came into effect.
This benefit allows individuals eligible for the benefit to write off expenses of up to 20% of the profits generated as part of business activity. Business activity also includes rental income, so this benefit is especially relevant for Israelis who invest in real estate in the United States. Thus, a real estate investor who meets the criteria set by law will be entitled to a deduction of 20% of his business income.
Individual and the Qualified Business Income Deduction
The regulation applies to individuals, whether they have made their investment directly or have made their investment indirectly through the use of a transparent entity for tax purposes:
- An individual who invests directly
- An individual who invests indirectly through an LLC.
- A number of individuals who jointly invest indirectly through an LLC.
- An incorporated company that was marked at the time of its establishment as a tax fund – S-CORPORATION.
The regulation does not apply to C-CORPORATION companies and other non-transparent tax-deductible companies.
What is the “income from business activity” to which the benefit will apply?
As noted, the benefit applies to income from business activity: income that is actively and directly derived from the business activity. In other words, it does not apply to salaries, revenues from the provision of services, dividends, and foreign income. Moreover, business income is clearly distinct from income for tax purposes – the individual’s total income.
The question arises as to what income will be recognized as income from business activities. As a rule, this is a slightly amorphous test, but there are parameters that may be used to determine whether this is a business activity:
- Is the rent collection done by the assessee or a management company on his behalf?
- Are repairs to the property carried out by the assessee or by a management company on his behalf?
- Is the management of the property done by the assessee or by a management company on his behalf?
- The amount of time and resources invested in the property.
- The scope and characteristics of the activity.
What are the eligibility criteria for the benefit?
Beyond the fact that in order to receive the benefit, the person must be an individual with income from business activity as described above, the person must also meet the following criteria:
The annual income of the taxpayer does not exceed $163,000 (as of 2020).
Asset value criterion
If the source of business income is real estate investment, the benefit will only be given up to 2.5% of the base cost of real estate assets.
What happens if you don’t meet the income criteria?
Failure to meet the income criterion does not mean immediate disqualification of the benefit, but its main meaning is a lower rate benefit.
Where the income of the taxpayer exceeds the threshold described, the taxpayer will receive a benefit in one of the following rates, whichever is lower:
- 50% of the total salary of business employees.
- 25% of the salary paid +2.5% of the base for U.S. taxation (cost of depreciable assets).
How is the deduction done?
First, let’s make it clear that the deduction does not come at the expense of other deductions. As long as you have previous tax deductions, the QBI deduction will be added to them.
Like all deductions, this deduction is requested through the annual income tax return submitted by the individual. In the tax report, the taxpayer includes his global worldwide income, and in the section designated for this, refers to his income from business activities and seeks recognition of the QBI benefit. Insofar as it is a business activity carried out by a transparent entity, it is necessary to address the deduction also in the annual income tax report of that entity, in the space designated for that purpose.
Knowing the benefit and filling out the forms properly are necessary in order to enjoy the benefit, so we recommend consulting an expert tax advisor before submitting the forms
The QBI benefit is given to small businesses and may increase your investment profits significantly. This can be achieved only by correctly classifying the income as part of the annual income tax report.
Want to check your eligibility for the benefit? Want to ensure you fill out the forms properly so you will in fact receive it? MasAmerica’s team has vast amounts of knowledge and experience and can help you increase revenue effortlessly.
This should not be seen as legal advice. It is recommended to consult with Masamerica’s team before any action. The service is provided by a professional team, who speak English and Hebrew fluently and includes lawyers and accountants with American licensees.