IRS Revises Final Regs on Section 199A Passthrough Deduction

Internal Revenue Service

The IRS has published a corrected version of final regulations (T.D. 9847) providing taxpayers with computational, definitional, and antiavoidance guidance on the deduction for qualified business income (QBI) under <a href="/research/federal/usc26/199A" resolve="/lr/resolve/199a/1xfpg" title="199A">section 199A</a>. The revised text includes, among other edits, corrections to the definition and computation of excess <a href="/research/federal/usc26/743#cpm6-0000003" resolve="/lr/resolve/743b/cpm6#cpm6-0000003" title="743(b)">section 743(b)</a> basis adjustments for purposes of determining the unadjusted basis immediately after an acquisition of qualified property and corrections to the description of an entity disregarded as separate from its owner for purposes of section 199A and <a href="/research/federal/cfr26/1.199A-1" resolve="/lr/resolve/1199a-1/292gk" title="1.199A-1">reg. section 1.199A-1</a> through <a href="/research/federal/cfr26/1.199A-6" resolve="/lr/resolve/1199a-6/292gq" title="1.199A-6">1.199A-6</a>.  The final regs adopt, with changes, proposed regs (<a href="/lr/resolve//28b8d">REG-107892-18</a>) issued in August. Separately, the IRS issued guidance (<a href="/lr/resolve//292dy">Notice 2019-7</a>) proposing a safe harbor under which a rental real estate enterprise will be treated as a trade or business solely for purposes of section 199A. Further, the IRS issued proposed regs (<a href="/lr/resolve//292f4">REG-134652-18</a>) on the treatment of previously suspended losses that constitute QBI and on the determination of the section 199A deduction for taxpayers that hold interests in regulated investment companies, charitable remainder trusts, and split-interest trusts. Section 199A, as added by the Tax Cuts and Jobs Act, provides a deduction of up to 20 percent of income from a domestic business operated as a sole proprietorship or through a partnership, S corporation, trust, or estate. Section 199A applies to tax years between 2017 and 2026. The final regs contain several sections, each of which provides rules relevant to the calculation of the section 199A deduction. The operational rules under the final regs clarify the definition of net capital gain and slightly reword the proposed regs’ definition of trade or business. Thus, <a href="/research/federal/cfr26/1.199A-1#292gk-0000019" resolve="/lr/resolve/1199a-1b14/292gk#292gk-0000019" title="1.199A-1(b)(14)">reg. section 1.199A-1(b)(14)</a> defines trade or business as a trade or business under <a href="/research/federal/usc26/162" resolve="/lr/resolve/162/cnq9" title="162">section 162</a> other than the trade or business of performing services as an employee. The regs state that determining whether a trade or business exists is a factual determination. The final regs, addressing the determination of W-2 wages and unadjusted basis immediately after the acquisition (UBIA) of qualified property, refer to concurrently issued guidance (<a href="/lr/resolve//292f0">Rev. Proc. 2019-11</a>) on the definition of W-2 wages, including amounts treated as elective deferrals. Also, the final regs provide clarifying language in response to criticism that relying on <a href="/research/federal/usc26/704#cpfs-0000006" resolve="/lr/resolve/704c/cpfs#cpfs-0000006" title="704(c)">section 704(c)</a> to allocate UBIA could lead to unintended shifts in that allocation. Moreover, the final regs provide generally that the UBIA of qualified like-kind property that a taxpayer receives in a <a href="/research/federal/usc26/1031" resolve="/lr/resolve/1031/cq04" title="1031">section 1031</a> like-kind exchange is the UBIA of the relinquished property. Responding to comments on the treatment of real estate investment trust dividends, the final regs reference the concurrently issued proposed regs, which do not provide for the passthrough of qualified publicly traded partnership income by RICs. Treasury and the IRS, however, request comments on issues that would arise if such passthroughs were allowed. Treasury and the IRS further noted their agreement with commentators that aggregation should be allowed at the entity level. Accordingly, the final regs permit a relevant passthrough entity (RPE) to aggregate trades or businesses it operates directly or through lower-tier RPEs, and the regs clarify the rules on reporting and disclosure. The final regs also clarify that the antiabuse rule found in the proposed regs is designed to thwart the creation of even one single trust with a principal purpose of avoiding, or using more than one, threshold amount. If such trust creation violates the rule, the trust will be aggregated with the grantor or other trusts from which it was funded for purposes of determining the threshold amount for calculating the deduction under section 199A, the preamble to the regs states. Taxpayers may rely on the rules in reg. sections 1.199A-1 through 1.199A-6, in their entirety, or on the proposed regs issued in August for tax years ending in calendar year 2018.

(1) The <a href="//s3.amazonaws.com/pdfs.taxnotes.com/2019/2019-4051_TNTDocs_199A-Final-Regulations_supportdoc.pdf">original</a> version of the final regulations were released on January 18, 2019; (2) At 84 FR 15953-15954, April 17, 2019, the IRS made <a href="/lr/resolve/corrections/29csb" id="293m8-0001526" title="corrections">corrections</a> to the following Treasury Decision which have been incorporated below; (3) At 84 FR 15954-15955, April 17, 2019, the IRS made <a href="/lr/resolve/corrections/29cs4" id="293m8-0001527" title="corrections">corrections</a> to the following Treasury Decision which have been incorporated in the associated regulations.

The IRS has published a corrected version of final regulations providing taxpayers with computational, definitional, and antiavoidance guidance on the deduction for qualified business income under section 199A. The revised text includes, among other edits, corrections to the definition and computation of excess section 743(b) basis adjustments and corrections to the description of an entity disregarded as separate from its owner.

The IRS has published a corrected version of final regulations (T.D. 9847) providing taxpayers with computational, definitional, and antiavoidance guidance on the deduction for qualified business income (QBI) under section 199A. The revised text includes, among other edits, corrections to the definition and computation of excess section 743(b) basis adjustments for purposes of determining the unadjusted basis immediately after an acquisition of qualified property and corrections to the description of an entity disregarded as separate from its owner for purposes of section 199A and reg. section 1.199A-1 through 1.199A-6.  The final regs adopt, with changes, proposed regs (REG-107892-18) issued in August. Separately, the IRS issued guidance (Notice 2019-7) proposing a safe harbor under which a rental real estate enterprise will be treated as a trade or business solely for purposes of section 199A. Further, the IRS issued proposed regs (REG-134652-18) on the treatment of previously suspended losses that constitute QBI and on the determination of the section 199A deduction for taxpayers that hold interests in regulated investment companies, charitable remainder trusts, and split-interest trusts. Section 199A, as added by the Tax Cuts and Jobs Act, provides a deduction of up to 20 percent of income from a domestic business operated as a sole proprietorship or through a partnership, S corporation, trust, or estate. Section 199A applies to tax years between 2017 and 2026. The final regs contain several sections, each of which provides rules relevant to the calculation of the section 199A deduction. The operational rules under the final regs clarify the definition of net capital gain and slightly reword the proposed regs’ definition of trade or business. Thus, reg. section 1.199A-1(b)(14) defines trade or business as a trade or business under section 162 other than the trade or business of performing services as an employee. The regs state that determining whether a trade or business exists is a factual determination. The final regs, addressing the determination of W-2 wages and unadjusted basis immediately after the acquisition (UBIA) of qualified property, refer to concurrently issued guidance (Rev. Proc. 2019-11) on the definition of W-2 wages, including amounts treated as elective deferrals. Also, the final regs provide clarifying language in response to criticism that relying on section 704(c) to allocate UBIA could lead to unintended shifts in that allocation. Moreover, the final regs provide generally that the UBIA of qualified like-kind property that a taxpayer receives in a section 1031 like-kind exchange is the UBIA of the relinquished property. Responding to comments on the treatment of real estate investment trust dividends, the final regs reference the concurrently issued proposed regs, which do not provide for the passthrough of qualified publicly traded partnership income by RICs. Treasury and the IRS, however, request comments on issues that would arise if such passthroughs were allowed. Treasury and the IRS further noted their agreement with commentators that aggregation should be allowed at the entity level. Accordingly, the final regs permit a relevant passthrough entity (RPE) to aggregate trades or businesses it operates directly or through lower-tier RPEs, and the regs clarify the rules on reporting and disclosure. The final regs also clarify that the antiabuse rule found in the proposed regs is designed to thwart the creation of even one single trust with a principal purpose of avoiding, or using more than one, threshold amount. If such trust creation violates the rule, the trust will be aggregated with the grantor or other trusts from which it was funded for purposes of determining the threshold amount for calculating the deduction under section 199A, the preamble to the regs states. Taxpayers may rely on the rules in reg. sections 1.199A-1 through 1.199A-6, in their entirety, or on the proposed regs issued in August for tax years ending in calendar year 2018.

Sec. 199A Qualified business income

Sec. 643 Definitions applicable to subparts A, B, C, and D

United States

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IRS Revises Final Regs on Section 199A Passthrough Deduction