IRS finalizes rules for impact of 199A deduction on REIT dividends

The Internal Revenue Service released final regulations Wednesday on how a regulated investment company that receives qualified real estate investment trust dividends should report the dividends paid by the company to its shareholders in accordance with section 199A of the Tax Code, which allows the investors to take a hefty deduction.

Section 199A was included in the Tax Cuts and Jobs Act and lets taxpayers deduct up to 20 percent of certain kinds of income. While accounting firms were expressly left out of the 199A deduction, real estate firms were included in the sweeping 2017 tax overhaul.

The section 199A deduction is available to eligible taxpayers with qualified business income (QBI) from qualified trades or businesses operated as sole proprietorships or through partnerships, S corporations, trusts, or estates, as well as for qualified REIT dividends and income from publicly traded partnerships.

The section 199A deduction is not available for C corporations. However, corporations received substantial benefits under the TCJA, which lowered the top tax rate from 35 to 21 percent. The section 199A deduction was included as a way to provide S corps and small businesses with tax cuts through the 20% deduction.

The regulations issued Wednesday say a shareholder in a regulated investment company, or RIC, subject to limitations, can treat a section 199A dividend received from a RIC as a qualified REIT dividend for purposes of determining the section 199A deduction.

The final regs also include guidance on the treatment of previously disallowed losses that are included in QBI in subsequent years and offer guidance for taxpayers who hold interests in split-interest trusts or charitable remainder trusts.