IRS Issues Final Regulations For New Qualified Business Income (QBI) Deduction

On January 18, 2019, the Treasury Department issued final regulations under §199A for the 20% Qualified Business Income (QBI) and proposed regulations along with a revenue procedure. Here are some of the more pertinent rules that the final regulations provide:

  • A notice that offers safe harbor for rental real estate enterprise to be treated as trade or business and be eligible to claim section 199A deduction if certain conditions such as 250 or more hours of rental services being performed are met. Generally, triple net leases and rental of personal residence under §280A would not qualify.
  • An election that a pass-through entity can make to aggregate its own activities.
  • A modified rule whereby excess basis adjustments (step ups) on sale or exchange (but not redemptions) can be treated as qualified property.
  • Ordering rules for disallowed or suspended losses.
  • A 3 year look back rule for individuals previously treated as employees.
  • Taxable income threshold for trust would be computed after taking DNI distributions into account.
  • Clarification that:
    • Net capital gains, which are excluded from QBI, include 1231 gains and qualified dividend income.
    • S and non-S portions of an Electing Small Business Trust (ESBT) are treated as a single trust in determining the taxable income threshold of the trust.
    • QBI will be reduced by the deduction the taxpayer claims for self-employment tax, self-employed health insurance and certain retirement contributions.
    • Trades or businesses conducted by disregarded entities will be treated as conducted by the owner of the entity.
    • The aggregation election can be made in 2018 or any subsequent years.
  • Additional guidance on:
    • The manner in which the basis of qualified property is allocated to partners and shareholders.
    • Common control rules where self-rental would qualify for 199A deduction.
    • Basis of property to be used for 199A purposes in case of 1031 exchange or contribution of property to an entity.
    • QBI treatment to split interest and charitable remainder trusts.
  • Relief that:
    • For 2018 taxable year only, initial aggregation election can be made on amended returns.
    • If the taxpayer fails to report an item relating to §199A, only that item is presumed to be zero and the missing information may be reported on an amended return.

Sax will keep you advised of additional developments and/or clarifications to the new tax law as they happen. For any questions or further information, please contact a Sax advisor at (973) 472-6250.