Your original comment described the sole proprietorship as providing the same service as the new LLC you’re treating as an S corporation.

Seems like that’s probably the same business (same customers? some products? maybe same computer?)… why not do the accounting right and handle the business the first year as Schedule C sole proprietorship and second year on 1120S for LLC?

You maximize your S corp savings by doing the Section 351 transfer correctly. You may also reduce your audit risks. (This last remark is based on my and other CPA’s anecdotal observation that short-year unincorporated businesses and short-year S corps can seem to trigger audits.)

Ya, decidedly not as simple as I thought.

Thank you for the guidance – wondering if that is really the only way to go about it and if so to clarify whether the ‘incorporation’ you describe is a one-time tax year transfer or if I would be actually rolling the sole proprietorship into the corp, which I wouldn’t want to do.

Thank you!

I would read the regulations and Notice 2019-07 as saying that you could use Section 162 to determine individually whether any of the properties you list show a profit motive and enough regularity and continuity to count as a qualified business. And that would be my preferred way to address this.

Note: The storage unit self rental, if rented to another business you own, is automatically and easily a qualified business as per the regulations.

If you did want to use the safe harbor, that might work… note that you’d need two safe harbor uses, right? One for the residential properties and another for the storage unit. Per the notice, you can’t combine residential and commercial properties within same safe harbor grouping as per this language:

02 Rental real estate enterprise. Solely for purposes of this safe harbor, a rental real estate enterprise is defined as an interest in real property held for the production of rents and may consist of an interest in multiple properties. The individual or RPE relying on this revenue procedure must hold the interest directly or through an entity disregarded as an entity separate from its owner under § 301.7701-3. Taxpayers must either treat each property held for the production of rents as a separate enterprise or treat all similar properties held for the production of rents (with the exception of those described in paragraph .05 of this section) as a single enterprise. Commercial and residential real estate may not be part of the same enterprise. Taxpayers may not vary this treatment from year-to-year unless there has been a significant change in facts and circumstances.

Regarding an election to aggregate, I haven’t thought about that as a way to legitimize treating a collection of rental properties as a qualified business. But that approach, which I think might mean you aren’t using the safe harbor, would seem to work.

Again, though, I would think relying on Section 162 rule (“do you have a profit motive and does your rental operation show continuity and regularity?”) probably gets you to where you want to be.

You may have already seen this other blog post but in case not it goes into details of Section 162 rule: Section 199A rental property trade or business definition.

Hi Neal, I’m reading the notice to say the statement is required on a return (any return) that relies on the safe harbor. The language I’m looking at from the notice:

.06 Procedural requirements for application of safe harbor. A taxpayer or RPE must include a statement attached to the return on which it claims the section 199A deduction or passes through section 199A information that the requirements in Section 3.03 of this revenue procedure have been satisfied. The statement must be signed by the taxpayer, or an authorized representative of an eligible taxpayer or RPE, which states: “Under penalties of perjury, I (we) declare that I (we) have examined the statement, and, to the best of my (our) knowledge and belief, the statement contains all the relevant facts relating to the revenue procedure, and such facts are true, correct, and complete.” The individual or individuals who sign must have personal knowledge of the facts and circumstances related to the statement.

I think only the contemporaneous time log requirement kicks in in 2019 but not 2018 based on this language from the notice:

The taxpayer maintains contemporaneous records, including time reports, logs, or similar documents, regarding the following: (i) hours of all services performed; (ii) description of all services performed; (iii) dates on which such services were performed; and (iv) who performed the services. Such records are to be made available for inspection at the request of the IRS. The contemporaneous records requirement will not apply to taxable years beginning prior to January 1, 2019.

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Most conventionally, I think, you’d incorporate the Schedule C sole proprietorship, transferring all of its assets and liabilities, including uncollected receivables and open accounts payables to the new corporation. This is called a Section 351 transfer btw…

When you do this, the income earned in 2017 by the sole proprietorship and then collected in 2018 when you’re a corporation becomes the corporation’s income. Ditto for unpaid bills. And in this case, you don’t file a Schedule C in 2018 for the trailing 2017 activity.

You probably want to amend your 1120S return to add these trailing bits of income and expenses to the S corp return… and that’ll have effect of automatically combining the QBI calculations. It will also increase your S corporation savings.

Tip: You would also want to add a Section 351 transfer statement to the 1120S return and your 1040 return.

A question: last year was the first year that I operated as a single-member S Corp. I received Schedule C income from 2017 for the same service that the S Corp provides that due to cash accounting will land in 2018, so I will have both Schedule C and K-1 QBI for providing the same (199A eligible) service.

My assumption was that I would calculate the deduction separately for the two pools of QBI (since I will be deducting retirement contributions from both pools and the adjustments for that deduction are calculated differently) and then add the deductions together and include on the 1040.

Seems simple enough but wondering if it is indeed…

The place I get confused on is applying the safe harbor and this aggregation component.
Assume none of these are held in the same company.

An example would say you have:
1. storage unit that is self-rental,
2. a beach condo that has a property manager that manages collecting rent, pays fees, housekeeping and maintenance. Owner pays property taxes, insurance, utilities.
3. Another condo operating similarly to #2 above but managed by someone else
4. Another residential rental that is currently in a long term lease with minimal expenses.