January 29, 2019

199A Deduction Regulations Made Final

Recently, the IRS released final regulations providing guidance on the Qualified Business Income Deduction, also known as the Section 199A deduction. This guidance was originally released as proposed regulations back in August, and after a few tweaks and adjustments, they were made final on January 18^th of this year. While the proposed regulations were helpful, taxpayers could not legally rely on them. They let taxpayers know how the IRS viewed certain aspects of the tax law, but they could not move forward with their tax plans until the regulations were finalized. Now that they are, taxpayers and their accountants can fully understand how this deduction will impact their 2018 taxes, and they can solidify their tax plans for 2019 and beyond. To help clients, prospects and others, Wilson Lewis has provided a summary of key changes below.

Finalized Regulations

The final regulations adopt most of the provisions in the proposed regulations, with a few differences.

• Based on comments and questions from the public, the IRS has clarified that “net capital gains” for purposes of calculating the deduction will include qualified dividend income.
• In the proposed regulations, trusts and estates were considered “relative pass-through entities” (RPE) to the extent they were able to pass through QBI and W-2 wages. The final regulations expand the definition of RPEs by including common trust funds and religious organizations if those entities file a Partnership income tax return, and if they are owned by at least one individual, estate, or trust.
• The regulations adopted most of the proposed regulation’s stance on aggregating trades or businesses, with a few exceptions.
  • Taxpayers can choose to aggregate their businesses on future tax returns if they so wish; no longer must they make an aggregation decision in 2018 that will carry forward indefinitely. However, the decision to aggregate cannot be made on an amended return, with the exception of tax year 2018.
  • The rules surrounding aggregating RPEs has shifted; the new regulations permit RPEs to aggregate businesses that they operate directly or through lower-tier RPEs.
• Taxpayers who were previously treated as employees may still be eligible for the deduction if in the previous three years they were treated as nonemployees. The proposed regulations did not originally allow for this three-year lookback period.
• The final regulations explain in detail how property contributed to a partnership in a Section 721 transaction, or to an S corporation in a Section 351 transaction, must be valued. The basis amounts are reduced or increased based on the amount of money the transferee receives or pays.
• The regulations also go into detail about how replacement property under Section 1031 or 1033 are recorded for purposes of calculating the QBI Deduction.

New Proposed Regulations

In this same pronouncement, the IRS released a new set of proposed regulations that addresses three aspects of the 199A deduction that weren’t addressed in either the August 2018 proposed regulations or the January 2019 finalized regulations.

1. Section 199A Suspended Losses – When a taxpayer is in a loss position, their unused QBI losses get carried over to the next year. In these proposed regulations, the IRS states that unused losses are taken into account on a first-in, first-out basis and are considered to be from a separate trade or business.
2. Regulated Investment Company Dividends – Regulated Investment Companies (RIC), whether exchange-traded funds (ETFs) or real estate investment trusts (REITs), are permitted to pay 199A dividends to their shareholders as long as those dividends are reported as such.
3. Split-Interest Trusts – Trusts with separate and independent shares for multiple beneficiaries should be treated as a single trust for applying the 199A thresholds.

Contact Us

These final Section 199A regulations have been highly anticipated. Unfortunately, even though these are finalized, taxpayers remain in a state of limbo. There are still many questions that remain unanswered, and it may take months for this second set of proposed regulations to be made final. Taxpayer may be forced to file their 2018 returns before these regulations are finalized. Luckily, your Wilson Lewis tax advisors can help. Even though these new proposed regulations are not yet final, much of the QBI Deduction has clear-cut rules to follow. If you have questions about the information about the final regulations or need assistance with tax planning, Wilson Lewis can help. For additional information call us at 770-476-1004 or click here to contact us. We look forward to speaking with you soon.