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Aggregation Rules in 199A Regs Need Clarification

Posted on Sep. 3, 2018

Real estate professionals might find themselves wondering whether they can aggregate seemingly similar businesses under the proposed passthrough deduction regulations.

In some cases, an owner of numerous interests in passthrough businesses that operate real estate may have to determine whether the renting of property and the sale of condominiums are the same or are services customarily offered together, Adam S. Feuerstein of PwC said on a webcast hosted by his firm August 30.

That’s because an individual looking to aggregate businesses for the passthrough deduction must satisfy two of three factors spelled out in the regs, Feuerstein said. And that’s on top of satisfying ownership requirements and ensuring that none of the businesses can be statutorily prohibited from using the deduction, he added.

Under the proposed regulations (REG-107892-18) released August 8, the three factors are: The businesses must provide products and services that are the same; they must share facilities or centralized elements; or they must be operated in coordination with, or reliance on, other businesses in the group.

“This is a place where I imagine there will be comments because it may be difficult for a lot of businesses to be combined or to satisfy these rules,” Feuerstein said.

The IRS and Treasury relied on the definition of trade or business in section 162 for the deduction and pulled from other code sections in crafting the rules, but created a new framework for combining businesses in section 199A.

Feuerstein explained that a real estate partnership that has lower-tier joint ventures is likely making calculations on a partnership-by-partnership basis, including separate trades or businesses within entities, but it’s the individual owner who can potentially aggregate.

Let’s Create Some Basis

Section 199A was enacted as part of the Tax Cuts and Jobs Act (P.L. 115-97). It allows a 20 percent deduction for passthrough business owners up to specific income thresholds, after which some owners are barred from using the deduction. Those who are eligible for the deduction also are subject to wage and basis limitations.

For those not barred from using the deduction above the income thresholds, the deduction is limited by W-2 wages paid to employees and 2.5 percent of the unadjusted basis in property immediately after acquisition — basically, the cost of the property.

George Manousos of PwC said taxpayers must think about how they want to treat fixed assets if section 199A is in play.

If a taxpayer acquires property under a de minimis amount of $5,000 for fixed assets, that amount could be expensed on a return under section 162, Manousos said. However, the taxpayer could instead choose to capitalize that amount and put it on the books as a $5,000 asset. The result would be that the taxpayer would then have a basis of $5,000 for section 199A purposes, and under new section 168(k), that amount could be fully expensed anyway, he added.

Feuerstein said that people who buy buildings often have to determine the class of the property. The building could be depreciable over 39 years, but a component of the building might be depreciable over a seven-year period (which would be extended to 10 years for purposes of the unadjusted basis immediately after acquisition of qualified property). Under section 199A, that property class determination is now slightly different, he noted.

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