Proposed Section 199A Regs Focus on Treatment of REIT Dividends

Proposed Section 199A Regs Focus on Treatment of REIT Dividends

Internal Revenue Service

The IRS has published proposed <a href="/research/federal/usc26/199A" resolve="/lr/resolve/section-199a/1xfpg" title="section 199A">section 199A</a> regulations (REG-134652-18) on the treatment of previously suspended losses that constitute qualified business income (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. Comments and public hearing requests are due by April 9. The proposed regs, which focus on issues not addressed in proposed regs (<a href="/lr/resolve//28b8d">REG-107892-18</a>) issued in August, are part of a concurrently released package of guidance (<a href="/lr/resolve//292dx">final regs</a>, <a href="/lr/resolve//292dy">Notice 2019-7</a>, <a href="/lr/resolve//292f0">Rev. Proc. 2019-11</a>) on the <a href="/research/federal/usc26/199A" resolve="/lr/resolve/section-199a/1xfpg" title="section 199A">section 199A</a> passthrough deduction. Specifically, the regs amend two substantive sections of <a href="/lr/resolve/reg-107892-18/28b8d" title="REG-107892-18">REG-107892-18</a> that relate to (1) the determination of QBI, qualified real estate investment trust dividends, and qualified publicly traded partnership (PTP) income, and (2) guidance that some specified entities may need to follow to compute the entities’ or their owners’ <a href="/research/federal/usc26/199A" resolve="/lr/resolve/section-199a/1xfpg" title="section 199A">section 199A</a> deductions. Responding to comments, the proposed regs amend <a href="/research/federal/cfr26/1.199A-3#292gl-0000008" resolve="/lr/resolve/1199a-3b1iv/292gl#292gl-0000008" title="1.199A-3(b)(1)(iv)">reg. section 1.199A-3(b)(1)(iv)</a> to provide that previously disallowed losses such as those described in the regs should be treated as losses from a separate trade or business. To the extent that losses relate to a PTP, they must be treated as losses from a separate PTP. Section 1.199A-3(b)(1)(iv)(B) provides that attributes of the disallowed loss are determined in the year the loss is incurred. Under the statute and the <a href="/research/federal/usc26/199A" resolve="/lr/resolve/section-199a/1xfpg" title="section 199A">section 199A</a> final regs, individuals who directly hold ownership interests in a REIT would generally qualify for the section 199A deduction on their qualified REIT dividends. However, shareholders of a RIC that has an ownership interest in a REIT would not receive any benefit from section 199A on REIT dividends received by the RIC, even if the RIC pays dividends to the individual. The proposed regs conclude that this would result in a market distortion in which direct ownership of REITs is tax advantaged relative to indirect ownership of REITs through RICs. The proposed amendments to <a href="/research/federal/cfr26/1.199A-3" resolve="/lr/resolve/1199a-3/292gl" title="1.199A-3">reg. section 1.199A-3</a> establish rules under which a RIC that earns qualified REIT dividends may pay <a href="/research/federal/usc26/199A" resolve="/lr/resolve/section-199a/1xfpg" title="section 199A">section 199A</a> dividends to its shareholders and establish that the effective tax treatment of qualified REIT dividends is similar under the proposed regs regardless of whether a taxpayer invests in a REIT directly or through a RIC. Treasury and the IRS request comments on whether it is appropriate to provide for this type of conduit treatment of qualified PTP income. Specifically, comments are requested on questions that include: (1) whether RICs have sufficient qualified items of PTP income, gain, deduction, or loss to warrant a conduit regime that would permit RICs to pay qualified PTP dividends to shareholders; (2) how to provide conduit treatment for qualified PTP income for taxpayers with income below the threshold amount or within the phase-out range, particularly when a RIC has qualified REIT dividends and a qualified PTP loss from a specified service trade or business (SSTB); and (3) how to treat losses of PTPs arising from SSTBs and non-SSTBs. <a href="/research/federal/cfr26/1.199A-6" resolve="/lr/resolve/1199a-6/ 292gq" title="1.199A-6">Reg. section 1.199A-6</a> provides guidance that specified entities such as trusts and estates may need for computing the <a href="/research/federal/usc26/199A" resolve="/lr/resolve/section-199a/1xfpg" title="section 199A">section 199A</a> deduction of the entity and each of its owners. The proposed regs describe rules that would apply to charitable remainder trusts and, in response to a comment, advise that special rules for some split-interest trusts, such as non-grantor charitable lead trusts or pooled income funds, are not necessary. The proposed regs further provide that, in the case of a trust described in <a href="/research/federal/usc26/663#cqbc-0000009" resolve="/lr/resolve/section-663c/cqbc#cqbc-0000009" title="section 663(c)">section 663(c)</a> with substantially separate and independent shares for multiple beneficiaries, those separate shares will not be treated as separate trusts for purposes of applying the threshold amount under section 199A.

The IRS has published proposed section 199A regulations (REG-134652-18) on the treatment of previously suspended losses that constitute qualified business income 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. Comments and public hearing requests are due by April 9.

The IRS has published proposed section 199A regulations (REG-134652-18) on the treatment of previously suspended losses that constitute qualified business income (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. Comments and public hearing requests are due by April 9. The proposed regs, which focus on issues not addressed in proposed regs (REG-107892-18) issued in August, are part of a concurrently released package of guidance (final regs, Notice 2019-7, Rev. Proc. 2019-11) on the section 199A passthrough deduction. Specifically, the regs amend two substantive sections of REG-107892-18 that relate to (1) the determination of QBI, qualified real estate investment trust dividends, and qualified publicly traded partnership (PTP) income, and (2) guidance that some specified entities may need to follow to compute the entities’ or their owners’ section 199A deductions. Responding to comments, the proposed regs amend reg. section 1.199A-3(b)(1)(iv) to provide that previously disallowed losses such as those described in the regs should be treated as losses from a separate trade or business. To the extent that losses relate to a PTP, they must be treated as losses from a separate PTP. Section 1.199A-3(b)(1)(iv)(B) provides that attributes of the disallowed loss are determined in the year the loss is incurred. Under the statute and the section 199A final regs, individuals who directly hold ownership interests in a REIT would generally qualify for the section 199A deduction on their qualified REIT dividends. However, shareholders of a RIC that has an ownership interest in a REIT would not receive any benefit from section 199A on REIT dividends received by the RIC, even if the RIC pays dividends to the individual. The proposed regs conclude that this would result in a market distortion in which direct ownership of REITs is tax advantaged relative to indirect ownership of REITs through RICs. The proposed amendments to reg. section 1.199A-3 establish rules under which a RIC that earns qualified REIT dividends may pay section 199A dividends to its shareholders and establish that the effective tax treatment of qualified REIT dividends is similar under the proposed regs regardless of whether a taxpayer invests in a REIT directly or through a RIC. Treasury and the IRS request comments on whether it is appropriate to provide for this type of conduit treatment of qualified PTP income. Specifically, comments are requested on questions that include: (1) whether RICs have sufficient qualified items of PTP income, gain, deduction, or loss to warrant a conduit regime that would permit RICs to pay qualified PTP dividends to shareholders; (2) how to provide conduit treatment for qualified PTP income for taxpayers with income below the threshold amount or within the phase-out range, particularly when a RIC has qualified REIT dividends and a qualified PTP loss from a specified service trade or business (SSTB); and (3) how to treat losses of PTPs arising from SSTBs and non-SSTBs. Reg. section 1.199A-6 provides guidance that specified entities such as trusts and estates may need for computing the section 199A deduction of the entity and each of its owners. The proposed regs describe rules that would apply to charitable remainder trusts and, in response to a comment, advise that special rules for some split-interest trusts, such as non-grantor charitable lead trusts or pooled income funds, are not necessary. The proposed regs further provide that, in the case of a trust described in section 663(c) with substantially separate and independent shares for multiple beneficiaries, those separate shares will not be treated as separate trusts for purposes of applying the threshold amount under section 199A.

Sec. 199A Qualified business income

United States

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Proposed Section 199A Regs Focus on Treatment of REIT Dividends