199A Passthrough Regs Finalized

January 24, 2019

On Jan. 18, the U.S. Treasury Department and the Internal Revenue Service (IRS) released a version of the final regulations concerning section 199A—the provision enacted under the December 2017 tax law that allows certain owners of sole proprietorships, partnerships, trusts, and S corporations to deduct 20 percent of their qualified business income (QBI). The IRS also released related proposed regulations, a notice containing a proposed revenue procedure, and a revenue procedure, all of which are posted on the IRS website.

The eagerly awaited final regulations—came after the agency received more than 300 comments—finalized regulations that were proposed in August 2018. The final regulations were posted on the IRS website. Because of the partial shutdown of the federal government, it is uncertain when these final regulations will be published in the Federal Register.

The new deduction under section 199A was added to the Internal Revenue Code by the tax law enacted December 22, 2017. The 20 percent deduction generally is available for qualified business income of certain non-corporate taxpayers (including income from publicly traded partnerships and qualified REIT dividends) for tax years beginning after December 31, 2017. Eligible taxpayers can claim the 20 percent deduction for the first time on their 2018 federal income tax returns. Qualified business income is the term used to refer to the net amount of qualified items of income, gain, deduction and loss from any qualified trade or business. There are several exceptions to a qualified trade or business, as stipulated by Section 199A – chief among them is financial services.

Initially, insurance – as a financial service – was not counted as part of the qualified trades and/or businesses under the regulation. But the final regulation now recognizes insurance agencies and brokerages as pass-through entities. The final regulations confirm that owners and shareholders of insurance agencies and brokerages organized as pass-through entities can fully utilize the new tax deduction created by the 2017 tax reform law for their insurance producer income.

The agency made a number of changes in response to the feedback, including adding provisions intended to fix a glitch in the law dealing with people who own real estate investment trusts (REITs) through mutual funds. Treasury officials said they also eased rules regarding when companies may aggregate multiple lines of businesses for tax purposes and pared back some of the proposed anti-abuse rules.

Additionally, proposed regulations were released as guidance concerning the deduction for qualified business income under section 199A. The proposed regulations provide guidance on the determination of the section 199A deduction for taxpayers that hold interests in regulated investment companies (RICs), charitable remainder trusts, and split-interest trusts.

The IRS also released an advance version of Notice 2019-07 that contains a proposed revenue procedure providing a safe harbor under which a rental real estate enterprise will be treated as a trade or business solely for purposes of section 199A and Reg. sections 1.199A-1 through 1.199A-6.