The Tax Cuts and Jobs Act created the Qualified Business Income (QBI) deduction, which can allow eligible taxpayers to deduct up to 20% of their qualified business income.
One requirement for claiming the QBI deduction is that the activity must generally rise to the level of a Section 162 trade or business. Whether a farm rental reported on Form 4835 qualifies depends on the specific facts and circumstances of the rental activity.
To be considered a Section 162 trade or business, the activity must generally be conducted:
- With continuity and regularity, and
- Primarily for income or profit
There is no single test that automatically determines whether a farm rental qualifies. Instead, you'll need to evaluate your individual situation based on the facts surrounding the rental activity.
What Factors Does the IRS Consider?
According to IRS guidance, several factors may help determine whether a rental activity rises to the level of a Section 162 trade or business, including:
- The type of property being rented
- The number of properties rented
- The day-to-day involvement of the owner or the owner's agent
- The nature of the rental arrangement
Because rental activities can vary widely, the IRS has not established a bright-line rule that applies in every case. A farm rental that qualifies as a trade or business in one situation may not qualify in another.
How Do You Determine Whether Your Farm Rental Qualifies?
You'll need to review the facts and circumstances of your rental activity and determine whether your involvement is substantial enough to be considered a trade or business under Section 162.
If you're unsure whether your farm rental activity qualifies for QBI treatment, consider reviewing IRS guidance or consulting a qualified tax professional. The determination can significantly affect your eligibility for the QBI deduction.