Tax Strategy

The 199A final regulations: A little more light shining in the darkness

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The final Code Sec. 199A regulations were issued in mid-January, in the midst of the government shutdown. The Treasury indicated that they received and reviewed 335 comments in response to the proposed regulations issued in August 2018. Many of those comments appear to be mentioned in the final regulations. In addition to the final regulations, there were some additional proposed regulations, a related revenue procedure, and a notice.

The final regulations on the whole adopt the proposed regulations, with the changes from the proposed regulations responding positively to concerns raised in the comments where the Treasury and IRS felt that they could do so. Still, the complexities and difficult distinctions inherent in the statute largely remain a problem even after this helpful guidance.


The statute was well intended. If corporations were getting a big rate cut, something should be done for the majority of businesses that operate as passthrough entities. So we got an individual deduction that requires information from the business to properly calculate the deduction, a need to determine if the activity is a trade or business for 199A purposes, a need to calculate qualified business income, a need to determine if the business is a specified service trade or business or not, and, if not, and over a taxable income threshold, a need to determine W-2 wages and unadjusted basis in qualified property.

The final regulations

The final regulations estimate that 10 million taxpayers will be affected by 199A. Government statistics also estimate that most of the income from passthrough entities passes through to the wealthiest taxpayers. Yet the provision potentially applies to nearly 20 million sole proprietors as well.

Definitions and rules. The final regulations include a definition of net capital gain that includes qualified dividends treated as investment income as net capital gain for 199A purposes.

The definition of a relevant passthrough entity includes common trust funds and Code Sec. 501(d) religious or apostolic organizations, but does not include regulated investment companies.

The definition of a trade or business is for the most part left to what is a trade or business under Code Sec. 162, but excludes the trade or business of performing services as an employee.

In general, a trade or business requires a profit motive and regular, considerable and continuous activity. With respect to rental real estate, new Notice 2019-07 creates a trade or business safe harbor if the taxpayer or agents of the taxpayer perform 250 hours of work for the business.

The notice discusses what types of work qualify and do not qualify. Triple net leases and personal residences are excluded. References to parking lots in examples in the proposed regulations were removed in the final regulations to avoid confusion.

A definition of W-2 wages is included in Revenue Procedure 2019-11, addressing such issues as elective deferrals to SEPs and SIMPLE plans and W-2 wages paid to S corporation shareholders. The definition of unadjusted basis at acquisition of property includes a discussion of basis on transfers of property and Code Sec. 743(b) excess basis adjustments. The definition of qualified business income addresses items arising in prior tax years, such as previously disallowed losses, and reasonable compensation, guaranteed payments, and payments for services.

A definition of qualified REIT dividends is also discussed, including reaffirming the required holding period from the proposed regulations.

Aggregation. The final regulations discuss aggregation procedures in extensive detail. The final regulations clarify that the 50 percent ownership test for aggregation must include not only the majority of the tax year but also the last day of the year. Every owner included in the aggregation test need not own an interest in each of the aggregated businesses.

The final regulations also do not impose a minimum ownership requirement to be included in the aggregation group. Attribution is permitted through Code Sections 267(b) or 707(b). A C corporation may also be part of the aggregation group. The same tax year is required for all aggregated businesses.

The final regulations also make some modifications to the three-factor test to determine if businesses are part of a larger, integrated trade or business, including with respect to real estate. A relevant passthrough entity may aggregate businesses it operates directly or through lower-tier RPEs. The Treasury is still looking at whether 199A aggregation can be applied under other code sections to avoid having to deal with multiple aggregation rules.

While aggregation is generally not permitted with the benefit of hindsight, an exception is provided to permit an aggregation election to be made on a 2018 amended return. The final regulations also include aggregation reporting rules.

SSTBs. The final regulations, like the proposed regulations, discuss specified service trades or businesses at length, justifying a number of distinctions by reference to the legislative history of 199A or other Tax Code sections. Responses are made to comments received in the areas of health, accounting, actuarial science, the performing arts, consulting, athletics, financial services, brokerage services, investing and investment management, several issues with respect to dealing (mortgage banking, credit sales, non-bank lending, banking, and commodities), and the reputation and skill of an owner or employee.

Also discussed is the de minimis rule, services or property provided to an SSTB, activities incidental to an SSTB, and the trade or business of performing services as an employee. One final regulations change permits minor non-SSTB activities within an SSTB to not be treated as an SSTB.

RPEs, trusts and estates. The final regulations include a discussion of the reporting rules for relevant pass­through entities.

With respect to estates and trusts, they include discussion of the eligibility of charitable remainder trust beneficiaries, tax-exempt trusts, electing small-business trusts, inclusions of trust distributions in taxable income, allocations between trusts/estates and beneficiaries, the 199A anti-abuse rule, and treatment of multiple trusts.


The final regulations on the whole bring some greater clarity to taxpayers but do not do too much to address the complexities inherent in the way the statute was written.

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