New IRS Regulations & Guidance for the Section 199A Deduction

Well, for being shutdown and running on a skeleton crew, the IRS has been BUSY today and delivered the final tax regulations for the new Section 199A tax deduction for flow-through income on individual tax returns. This is the new Qualified Business Income Deduction for tax years beginning after December 31, 2017 that came into existance with the 2017 Tax Cuts and Jobs Act (TCJA). You know the simplification to the tax code known as Tax Reform. I know we’ve been waiting for these regulations for over a year but, of course, they released them on a Friday afternoon before a 3 day weekend. At least we have some time to dive into them.

Form 1040 for 2018
Form 1040 for 2018

So let’s take a look at what was released.

The guidance, released today includes:

  • A set of regulations, finalizing proposed regulations issued last summer, A new set of proposed regulations providing guidance on several aspects of the QBI deduction, including qualified REIT dividends received by regulated investment companies
  • revenue procedure providing guidance on determining W-2 wages for QBI deduction purposes,
  • notice on a proposed revenue procedure providing a safe harbor for certain real estate enterprises that may be treated as a trade or business for purposes of the QBI deduction

The first document is TD-Reg-107892-18

TD (REG-107892-18) contains final regulations concerning the deduction for qualified business income under section 199A of the Internal Revenue Code (Code). The regulations will affect individuals, partnerships, S corporations, trusts, and estates engaged in domestic trades or businesses. The regulations also contain an anti-avoidance rule under section 643 of the Code to treat multiple trusts as a single trust in certain cases, which will affect trusts, their grantors, and beneficiaries. This document also requests additional comments on certain aspects of the deduction.

The second document is Reg-134652-18

REG-134652-18 contains proposed regulations concerning the deduction for qualified business income under section 199A of the Internal Revenue Code (Code). The proposed regulations will affect certain individuals, partnerships, S corporations, trusts, and estates. The proposed regulations provide guidance on the treatment of previously suspended losses that constitute qualified business income. The proposed regulations also provide guidance on the determination of the section 199A deduction for taxpayers that hold interests in regulated investment companies, charitable remainder trusts, and split-interest trusts.

The third document is Revenue Procedure 2019-11

Rev. Proc. 2019-11 provides methods for calculating W-2 wages, as defined in section 199A(b)(4) and § 1.199A-2 of the Income Tax Regulations, (1) for purposes of section 199A(b)(2) of the Internal Revenue Code (Code) which, for certain taxpayers, provides a limitation based on W-2 wages to the amount of the deduction for qualified business income (QBI); and (2) for purposes of section 199A(b)(7), which, for certain specified agricultural and horticultural cooperative patrons, provides a reduction to the section 199A deduction based on W-2 wages.

The fourth document is Notice 2019-07

Notice 2019-07 contains a proposed revenue procedure that provides for a safe harbor under which a rental real estate enterprise will be treated as a trade or business solely for purposes of section 199A of the Internal Revenue Code (Code) and §§ 1.199A-1 through 1.199A-6 of the Income Tax Regulations (Regulations) (26 CFR Part 1), which are being published contemporaneously with this notice. To qualify for treatment as a trade or business under this safe harbor, the rental real estate enterprise must satisfy the requirements of the proposed revenue procedure. If an enterprise fails to satisfy these requirements, the rental real estate enterprise may still be treated as a trade or business for purposes of section 199A if the enterprise otherwise meets the definition of trade or business in § 1.199A-1(b)(14).

You can also read the IRS news release here.

As you can imagine, there is a lot of information to digest and start applying to individual taxpayer’s situations. We’ll all be scrambling to get our heads around the details before the really heavy rush of tax busy season starts.

As a final note, if you will be taking this tax deduction, I would highly recommend coming up with a reasonable estimate for your tax return by April 15, 2019, but go ahead and extend your tax return to give your tax preparer more time to fully apply this new guidance from the IRS.