Jeff and Karla Johnson are both employed and have W-2 wages (combined) of $167,000 and taxable income of $143,000. They own two rental properties, both single-family houses that produce net income of $4,300 and $3,100 respectively. These figures are for the 2020 year. Issue: Does the Section 199A qualified business income deduction (Section 199A) apply to the net income from the rental properties? HELP..... The deduction applies only to the income from a business. So the first question is whether a rental of a house is a trade or business. There is case law on this point and you will NEED to address these cases. There is also discussion in the preamble to the proposed and final section 199A regulations and in the regulations themselves. However, you need to understand that you are an advocate for the client. You also need to know the standard for taking a position on a tax return (Circular 230 and AICPA SSTS No. 1). 

Note that you will need to go deeper if the reference is to “applicable standards: or some such language. This is NOT AN EASY ISSUE. Your memo must be long enough to address the issues. I cannot tell you what this would be, but since you will be citing court cases and regulations it will need to be at least 2-3 pages. It could be longer but you do not want to prevent the reader from actually reading it. This is a factual issue, so if you cite any cases be sure to provide detail about the facts. The memo is stronger if it actually explains the analysis applied to the specific facts of the case rather than a hit-and- run citation of many cases.

Answer rating: 100% (QA)

No the deduction does not apply to the income from the rental properties because a rental of a ... View the full answer