The IRS’s proposed regulations to explain and interpret Code Section 199A stemming from the Tax Cuts and Jobs Act were released on Wednesday, Aug. 8. Lynn Nichols, of the South Carolina Tax Team and host of SCACPA’s Federal Tax Update Podcast, has examined the extent to which the issues and concerns of tax practitioners are addressed.

The IRS released three components of Section 199A guidance. Here are the links to each:

The proposed regulations: (Proposed regulations concerning the deduction for qualified business income under section 199A)

A notice about W-2 wages: (Notice 2018-64: Methods for Calculating W-2 Wages for Purposes of Section 199A)

FAQs: (Section 199A – Deduction for Qualified Business Income FAQs)

The comment period is 45 days from the date of publication in the Federal Register, and a public hearing is scheduled for Oct. 16.

 Here is Lynn Nichols’ analysis of the proposed regulations. He examines how the regulations are organized with a brief comment on each classification as to whether it contains valuable guidance or answers an important question. If you have further questions, you can reach him at

NOTE: Lynn Nichols will be the featured speaker for SCACPA’s free 8-hour course, “Complete Coverage of 199A Regulations,” on Thursday, Sept. 20. Seating for SCACPA members only is limited at the event (SMTX59), but the livestream (LITX59) will be free and unlimited for members and non-members. Members who register will see zero charge to their CPE Bank.

By Lynn Nichols, CPA

Understanding Section 199A is important to every tax practitioner because it permits an owner of an interest in a business enterprise that meets certain conditions to exclude 20% of the income from that business.

This analysis of proposed regulations expects that you are familiar with the basics of Section 199A. Here is a link to the IRS’s proposed regulations and the preamble, some 184 pages in all.

The regulations themselves are not easy to read. However, I found the preamble and examples to be very helpful.

Be careful! In addition to six proposed regulations to help you comply with Section 199A, there is proposed regulation section 1.643(f)-1, Treatment of Multiple Trusts, to clarify application of the old rule (it has been 34 years since the statute was passed as part of the Tax Reform Act of 1986) limiting any federal tax benefit from multiple trusts.

Helping us understand and apply the rules are forty-eight examples appearing at critical points. My experience, particularly with regard to determination of unadjusted basis immediately after acquisition (UBIA), is that those examples are very useful.

In a welcome clarification of the effective date of these regulations, the proposed regulations allow an individual to take a deduction for all the income received from a fiscal-year filer, which could include money earned by the passthrough in 2017.

Those who hoped for guidance on when a rental activity would qualify as a trade or business for purposes of section 199A will be disappointed. No such guidance is offered beyond reference to rules developed over the years to define a trade or business under IRC sec. 162.

1.199A-0 Table of Contents
This is useful for navigating the content if you do not have some sort of electronic search capability.

1.199A-1 Operational Rules
a. Four examples illustrate basic calculation of Qualified Business Income (QBI).

b. The definition of “Trade or Business” will disappoint many because it refers to a “Section 162 trade or business” other than providing services as an employee. The definition seems to allow qualification of a rental activity to one where property is rented to a trade or business under common control, even though not otherwise eligible to be aggregated under Reg Seg, 1.469-4(d).

c. Twelve examples illustrate the calculation of QBI for individuals with taxable income above “threshold amount” ($157,500 individuals and trusts; $315,000 for joint filers).

d. W-2 wages paid by a “person” other than the common law employer are included in the W-2 wage limitation provided certain conditions are met. More details are in Section 1.199A-2.

1.199A-2 Determination of W-2 wages and unadjusted basis immediately after acquisition (UBIA) of qualified property
a. In determining W-2 wages, an individual or relevant passthrough entity (RPE) “may take into account any W-2 wages paid by another person and reported by the other person on Forms W-2 with the other person as the employer listed in Box C of the Forms W-2, provided that the W-2 wages were paid to common law employees or officers of the individual or RPE for employment by the individual or RPE.” This rule is substantially similar to the rule in reg. section 1.199-2(a)(2).

b. Focus is on wages reported for Social Security purposes. IRS released Notice 2018-64 to provide additional guidance on calculation of allowable W-2 wages. For many employers, the simplified option will be best. For others that have various employee benefit plans, the amount of “W-2 wages” will be greater if certain amounts from Box 12 are included.

c. Two examples illustrate calculation of UBIA.

d. Special basis adjustments, when property is contributed to or distributed from a partnership (Sections 734(b) or 743(b)) will not be treated as separate property for the passthrough deduction.

1.199A-3 Qualified business income, qualified REIT dividends and qualified PTP income
a. Provides comprehensive definition of QBI.

b. Lists items NOT taken into account for purposes of determining QBI, generally several types of investment and capital gains.

1.199A-4 Aggregation
a. Aggregation is permitted for individuals under the following general circumstances:
1. Each trade or business is itself a trade or business;
2. The same person or group of persons own a majority interest, directly or indirectly, in each of the businesses to be aggregated for most of the tax year, and all items attributable to the trade or business are reported on returns in the same tax year;
3. None of the aggregated trades or businesses is a prohibited business; and
4. The trades or businesses meet two of the following three factors:
o The business provides products and services that are the same;
o The businesses share facilities or significant centralized elements; or
o The businesses are operated in coordination with, or in reliance on, other businesses in the group.

b. Includes family attribution rule that is unique to IRC Sec. 199A.

c. Fourteen examples illustrate rules permitting aggregation and required disclosures.

1.199A-5 Specified service trades or businesses (SSTBs) and the trade or business of performing services as an employee
a. Includes definitions for the enumerated professions: health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services and brokerage services. The regulations also define investing and investment management; trading; or dealing in securities, partnership interests, or commodities.

b. Explains limitations based on an SSTB activity, even if within an otherwise qualified entity.

It generally follows Guidance issued under IRC Sections 448(d)(2) and 1202. Further, anti-abuse rules limit an owner’s ability to secure QBID by splitting an entity.

1. A specified service trade or business includes any business with 50% common ownership, directly or indirectly, that provides 80% or more of its property or services to an excluded trade or business. 2. If a trade or business shares 50% or more common ownership with an excluded service trade or business, income from that trade or business will be treated as income from a specified service trade or business, and thus ineligible for the 20% deduction.

a. Regarding the “reputation or skill of an owner” provision, it really only applies to people whose skill or reputation is such that it makes them famous and marketable. An S corporation whose only income is from product endorsements by its shareholder, a famous golfer, would be an SSTB under these rules.

b. Nine examples illustrate the rules excluding income from an SSTB or services as an employee from QBI.

c. Introduces de minimis rule (gross receipts of $25 million or less), a level at which a trade or business will NOT be an SSTB if less than 10% of the gross receipts of the trade or business are attributable to SSTB activities.

d. Provides aggregation rule and a “less than substantially all” exception allowing only a portion of a related SSTB to be aggregated.

e. Two examples illustrate required aggregation where there is 50% or more common ownership, whether direct or indirect, when one entity is engaged in qualified business activity and another is an SSTB.

f. Defines trade or business of performing services as an employee.

g. Three examples illustrate the rebuttable presumption that former employee is still an employee for purposes of Section 199A calculation.

1.199A-6 Relevant passthrough entities (RPEs), publicly traded partnerships (PTPs), trusts, and estates
a. Special rules necessary to calculate QBI of an individual partner, S shareholder, or trust beneficiary:
1. Identify and segregate QBI activities
2. Determine QBI for each business in which directly engaged
3. Determine W-2 wages and UBIA for each activity
4. Determine amount of investment type income

b. Special rules for reporting income from each separately determined activity.

c. Applies anti-abuse rule to creation of multiple trusts.

In the preamble to the proposed regulations, the IRS has this to say about “tax planning” (avoidance) with multiple non-grantor trusts:
“The use of multiple non-grantor trusts to circumvent the income threshold and claim multiple section 199A deductions by dividing up assets among the trusts is inappropriate and inconsistent with the purpose of section 199A and general trust principles.”

1.643(f)-1 Treatment of Multiple Trusts
a. Two examples illustrate how two or more trusts will be aggregated and treated as a single trust:
1. Same grantor
2. Same primary beneficiary
3. Principal purpose to avoid federal income tax

b. The principal purpose to avoid federal income tax is presumed unless a significant non-tax purpose is not achievable with multiple trusts.

More guidance will come, and we tax practitioners will share experience and theories. Some of the so-called “experts” will offer advice about the best way to take advantage of an ill-conceived loophole. Sometime in the spring of 2020, some returns claiming the QBID will be audited. Little by little, the “right answers” will develop. Like the passive loss rules, or AMT, the QBID will be a routine calculation.

Until then, remember – you are your client’s advocate in tax compliance matters. Where reasonable, exercise your professional judgement and claim the maximum allowable QBID.