On January 18, 2019, Treasury and the IRS issued final regulations for the new Section 199A 20% profit deduction for pass-thru businesses adopted under the 2017 Tax Cuts and Jobs Acts. The new regulations are eagerly anticipated because filing season for the first year of the new tax law, 2018 generally, is now upon us. The final regulations were issued after public comments were received in response to proposed Section 199A regulations issued last August. The IRS, in IR-2019-04 (January 18, 2019), also released a new set of additional proposed resolutions under Section 199A, together with a revenue procedure and additional guidance concerning the new income tax deduction.
The IRS has released the new 199A regulations and additional and related guidance by posting it to the IRS website, www.irs.gov. The new regulations will not become effective until being officially published in the Federal Register. Due to the partial government shutdown, however, this date is presently unknown.
The regulations and additional guidance have been released as follows:
- Final Regulations under Section 199A, consisting of Regulation §§ 1.199A-1 through 199A-6;
- New Proposed Regulations under Section 199A, and specifically applicable to (1) treatment of previously suspended losses that constitute QBI; (2) regulated investment companies with interests in REITs and PTPs; and (3) special rules for trust and estates;
- Revenue Procedure 2019-11, which provides methods for calculating W-2 wages for purposes of Section 199(b)(4) (limits to a deduction based on W-2 wages) and Section 199(b)(7) (W-2-based deduction reduction for certain agricultural/horticultural cooperative patrons); and
- Notice 2019-17, which provides a new “Safe Harbor” for certain rental real estate activities.
The IRS in IR-2019-04 observes that “the new QBI deduction [20% profit deduction] created by the 2017 Tax Cuts and Jobs Act (TCJA) allows many owners of sole proprietorships, partnerships, S corporations, trusts, or estates to deduct up to 20 percent of their qualified business income. Eligible taxpayers can also deduct up to 20 percent of their qualified real estate investment trust (REIT) dividends and publicly traded partnership income. The QBI deduction is available in tax years beginning after Dec. 31, 2017, meaning eligible taxpayers will be able to claim it for the first time on their 2018 Form 1040.” The IRS also states that “the QBI deduction is generally available to eligible taxpayers with 2018 taxable income at or below $315,000 for joint returns and $157,500 for other filers. Those with incomes above these levels, are still eligible for the deduction but are subject to limitations, such as the type of trade or business, the amount of W-2 wages paid in the trade or business and the unadjusted basis immediately after acquisition of qualified property. These limitations are fully described in the final regulations. The QBI deduction is not available for wage income or for business income earned by a C corporation.”
Applicable to the new proposed revenue procedure, included in Notice 2019-07, the IRS states that the new “Safe Harbor” allows individuals and entities who own rental real estate directly or through a disregarded entity to treat a rental real estate enterprise as a trade or business for purposes of the QBI deduction if certain requirements are met.
The final regulations are 247 pages, the new proposed regulations are 38 pages, and Revenue Procedure 2019-11 and Notice 2019-07 add an additional 19 pages to the overall guidance released by the IRS. It will take some time for practitioners to digest this new information, but with tax filing season now in full swing, expect additional blogs and posts here soon!