Question: Paul, Ringo, George and John are attorneys with their own separate law firms, each lawyer owning 100% of their respective company. One of the companies is a C corporation, the other three are Schedule C disregarded entities. The four law firms form a partnership and purchase a building with four floors, each entity owning a 25% partnership interest in the partnership, and each law firm renting one whole floor in the building. The building will be the sole partnership asset. The lawyers would like to qualify for the qualified business income (QBI) deduction with their new rental partnership. Does the use of the partnership entity qualify the rental income for the QBI deduction?
Answer: No. Although the partnership’s rental activity does not generally rise to the level of a §162 trade or business, for QBI deduction allowance purposes, Reg. §1.199A-4(b)(1)(i) would treat an entity as a trade or business, where there is 50% or more common ownership. To meet the common ownership requirements, the same person or group of persons must own [directly or by attribution under §§267(b) or 707(b)] 50% or more of the rental activity and the tenant’s §162 trade or business. This is not the case with the lawyers; their partnership group owns 100% of the rental, while it does not own any portion of the respective law firms. As such, the partnership rental income will not qualify for the QBI deduction.
