1. NEW PROPOSED REGS
Issued August 2018

2. New Proposed Regs re: IRC §199A
184 pages of pure reading pleasure
Divided into 6 sections
Each section covers a separate topic, followed by several examples.
My recommendation? Print the regs out, label the 6 sections and then read those parts that are pertinent to your situation.

3. New Proposed Regs re: IRC §199A
The first 105 pages are an informal summary of the 6 sections.
Pages are an index of sorts.
Pages are the actual proposed regs.
Don’t forget….these are “proposed regs” and do NOT constitute “statutory authority” until issued as Final Regulations. Nevertheless, we would do well to heed these rules.

4. New Proposed Regs re: IRC §199A
The 6 sections of the new proposed regs
Section
Description
Page
1.199A-1
Operational rules
1.199A-2
Determination of W-2 wages and unadjusted basis immediately after acquisition of qualified property
1.199A-3
Qualified business income, qualified REIT dividends, and qualified PTP income
1.199A-4
Aggregation
1.199A-5
Specified service trades or businesses and the trade or business of performing services as an employee
1.199A-6
Relevant passthrough entities (RPEs), publicly traded partnerships (PTPs), trusts, and estates.

5. New Proposed Regs re: IRC §199A
Rather than go in any particular order, I will start with those areas that, in my opinion, are the most important.

6. Calculating QBI with an SSTB when taxable income falls in between.
New Proposed Regs re: IRC §199A
Calculating QBI with an SSTB when taxable income falls in between.
I will refer you back to the manual, page 461 Example 3. The calculation done there agrees with the law as we knew it before the publication of the new proposed regulations.
However, the new regs make it clear that an additional step is required.
This is clarified in Example 6 of the new regs…pages

7. Calculating QBI with an SSTB when taxable income falls in between.
New Proposed Regs re: IRC §199A
Calculating QBI with an SSTB when taxable income falls in between.
Example 3 (manual, page 461) under new regs:
Step 1
Applicable % 1-[(355, ,000)/100] = 60%
Step 2
Reduce QBI by app. % 75,000 x 60% = 45,000
Reduce wages by app. % 20,000 x 60%= 12,000
Step 3
Tentative QBID, using reduced $ ,000 x 20% = 9,000
W-2 limitation, using reduced $ ,000 x 50% = 6,000
Step 4
Excess amount 9,000 – 6,000 = 3,000
Step 5
Excess amount x app. % 3,000 x 60% = 1,800
Step 6
Total QBID , ,800 = 7,800

8. New Proposed Regs re: IRC §199A
Rental Real Estate
Prior to proposed regs:
QBI had to be “trade or business”.
Does rental real estate rise to the level of “trade or business”?
Under what set of rules do we make that determination?
IRS unclear, courts unclear, the whole world…..CLEAR as MUD!

9. New Proposed Regs re: IRC §199A
Rental Real Estate
Under the proposed regs:
1.199A-1(b)(13) gives the answer.
Page 113 of the regs.
The benchmark to use is IRC 162.
Clear as MUD
GOOD NEWS: See next slide

10. New Proposed Regs re: IRC §199A
Rental Real Estate
Under the proposed regs:
GOOD NEWS:
If a rental activity does NOT rise to the IRC 162 test, the proposed regs allow one exception which will really help our clients with rental real estate.

11. New Proposed Regs re: IRC §199A
Rental Real Estate
The GOOD exception:
Any rental activity (tangible or intangible) that does not rise to the IRC 162 level will, nonetheless, be treated as a “trade or business” if the property is rented/licensed to a “trade or business” commonly controlled (50% test).

12. New Proposed Regs re: IRC §199A
Rental Real Estate
The GOOD exception:
Q: Who will benefit from this?
A: Any of our clients who have self-rentals that are used in their trade or business.
Schedule E, page 1, rentals given the code 7 (for self-rental)
PTEs that lease real property to a trade or business that meets the 50% ownership test.

13. New Proposed Regs re: IRC §199A
Rental Real Estate
Remember, outside of this ONE exception, we must decide whether or not a rental activity is a “trade or business” solely based on IRC 162.
CLARITY STILL NEEDED!!

14. New Proposed Regs re: IRC §199A
Aggregation Rules
Reg A-4 covers the new rules relating to aggregation.
These rules are complex and not intuitive at all.
They are so convoluted that the regs have 14 examples on this!

15. New Proposed Regs re: IRC §199A
Aggregation Rules
MAIN PROBLEM:
Rules are NOT based on the grouping rules we already know (and love) pursuant to IRC 469.
Therefore, taxpayers and their advisors will have to understand and keep track of 2 sets of rules.
This will lead to 2 completely different groupings for tax returns that we will need to track! Ouch!!!

16. New Proposed Regs re: IRC §199A
Aggregation Rules
BUT WAIT, THERE’S MORE:
Aggregating is purely elective, but cannot be revoked once made.
EACH year we must attach a statement to the 1040 identifying each aggregated business and include other information required by the regs.

17. New Proposed Regs re: IRC §199A
Aggregation Rules
Mike’s wonderful, passionate, caring and professional advice……
Sometime between now and tax season, read the entire section 1.199A-4 (and especially the 14 examples). You WILL need to read it more than once. But do it!

18. New Proposed Regs re: IRC §199A
IRC §754 Step-Up
Reg. Section 1.199A-2(c)(1)(iii)
Page 137 of regs
Basis adjustments under 734(b) and 743(b) are NOT treated as qualifying property for applying the UBIA limits.

19. New Proposed Regs re: IRC §199A
1031 Transactions
Reg. Section 1.199A-2(c)(2)(iii)
Page 137 of regs
Main issue: When “placed in service”. This impacts the 10 year rule for UBIA limits. General rule is…..
“Exchanged basis”….use date placed in service for the relinquished property.
“Excess basis”….use date placed in service for the replacement property.

20. Allocating UBIA of Qualifying Property Held by an RPE
New Proposed Regs re: IRC §199A
Allocating UBIA of Qualifying Property Held by an RPE
SURPRISE!!
Reg. Section 1.199A-2(a)(3)
Pages of regs
Each partner/shareholder share of UBIA is allocated pro-rata based on tax depreciation.

21. Allocating UBIA of Qualifying Property Held by an RPE
New Proposed Regs re: IRC §199A
Allocating UBIA of Qualifying Property Held by an RPE
This will impact the allocation of UBIA (for those of us preparing K-1s and needing to disclose UBIA information).

22. Allocating UBIA of Qualifying Property Held by an RPE
New Proposed Regs re: IRC §199A
Allocating UBIA of Qualifying Property Held by an RPE
WARNING:
This could hit partnerships very differently than S corporations because partnerships have the IRC 704(c) rules (the PCBIG rules) that allocate tax depreciation differently!

23. Allocating UBIA of Qualifying Property Held by an RPE
New Proposed Regs re: IRC §199A
Allocating UBIA of Qualifying Property Held by an RPE
Example 1
Mike and Gary start ABC Partnership. Mike and Gary each put in $100,000 cash. They are 50/50 partners. They buy a piece of machinery (5 year life) for $100,000 and elect to write it off under IRC 179.
Tax depreciation is, obviously, the full $100,000 and gets allocated 50/50.

24. Allocating UBIA of Qualifying Property Held by an RPE
New Proposed Regs re: IRC §199A
Allocating UBIA of Qualifying Property Held by an RPE
Example 1…continued
Since the “tax” depreciation is allocated 50/50, the UBIA (the $100,000) also gets allocated 50/50. This will be disclosed on the K-1 in a manner yet to be determined by Treasury!
Note: in this example, it makes no difference if the entity is a partnership or an S corporation since there is no PCBIG.

25. Allocating UBIA of Qualifying Property Held by an RPE
New Proposed Regs re: IRC §199A
Allocating UBIA of Qualifying Property Held by an RPE
Example 2
Same as Example 1 except Gary puts in a piece of machinery worth $100,000 but his basis, at date of contribution, is $80,000. Therefore, right at the outset, there is a PCBIG of $20,000 which, under IRC 704(c), would be specially allocated to Gary in the future.

26. Allocating UBIA of Qualifying Property Held by an RPE
New Proposed Regs re: IRC §199A
Allocating UBIA of Qualifying Property Held by an RPE
Example 2….continued
Tax depreciation this year (again assuming IRC 179 elected) will be $100,000 ($80,000 basis plus the special $20,000 allocation).
Pursuant to IRC 704(c), Mike will get allocated the first $20,000 of depreciation. The next $80,000 will get allocated 50/50.

27. Allocating UBIA of Qualifying Property Held by an RPE
New Proposed Regs re: IRC §199A
Allocating UBIA of Qualifying Property Held by an RPE
Example 2….continued
Thus, Mike will get a total of $60,000 tax depreciation and Gary will get $40,000.
Now, for purposes of allocating the UBIA on the K-1, it appears that Mike gets 60% of it and Gary gets 40% of it.

28. Allocating UBIA of Qualifying Property Held by an RPE
New Proposed Regs re: IRC §199A
Allocating UBIA of Qualifying Property Held by an RPE
Example 2….continued
Since the UBIA is $80,000 in total, Mike’s K-1 will disclose a UBIA allocation of $48,000…..60% of the UBIA.
Gary’s K-1 will disclose a UBIA allocation of $32,000….40% of the UBIA.

29. Allocating UBIA of Qualifying Property Held by an RPE
New Proposed Regs re: IRC §199A
Allocating UBIA of Qualifying Property Held by an RPE
ARE WE HAVING FUN YET?!!

30. The “Cutesy-Putesy” Rule or….
New Proposed Regs re: IRC §199A
The “Cutesy-Putesy” Rule or….
The Anit-Abuse Rule
Reg. Section 1.199A-2(c)(1)(iv)
Page 137 of regs
Treasury is concerned that certain taxpayers might try to get cute and so something “dastardly…..oh, my!

31. The “Cutesy-Putesy” Rule or….
New Proposed Regs re: IRC §199A
The “Cutesy-Putesy” Rule or….
The Anit-Abuse Rule
Here’s an example of what Treasury is concerned about…
Mike’s tax situation is such that, in calculating his QBID, he WILL be subject to the wage limitation. Wages are low, so he realizes that he had better increase his UBIA property. To that end, he purchases qualifying property on December 1, 2018, and then sells it on March 1, 2019.

32. The “Cutesy-Putesy” Rule or….
New Proposed Regs re: IRC §199A
The “Cutesy-Putesy” Rule or….
The Anit-Abuse Rule
This proposed reg section says that such property will NOT count for UBIA purposes if acquired within 60 days of yearend and disposed of within 120 days without having been used in a trade or business for at least 45 days prior to disposition. This is a rebuttable presumption.
Sounds like a modified “wash sale” rule, doesn’t it?

33. The De Minimis Rule for SSTB Status
New Proposed Regs re: IRC §199A
The De Minimis Rule for SSTB Status
Reg. Section 1.199A-5(c)(1)
Page 168 of regs
A trade or business with gross receipts of $25 million or less for the taxable year, EVEN IF it really is a SSTB, will NOT be considered a SSTB if less than 10% of the gross receipts are attributable to that SSTB activity.

34. The De Minimis Rule for SSTB Status
New Proposed Regs re: IRC §199A
The De Minimis Rule for SSTB Status
Example
Partnership A has $800,000 gross receipts for It sells products and also offers accounting services (definitely a SSTB activity!). The $800,000 is broken out as follows:
Product sales $725,000 (90.625%)
Acctng sales 75,000 (9.375%)
Accordingly, no SSTB issues here!

35. The “reputation” standard!!!!
New Proposed Regs re: IRC §199A
What is a SSTB?
The “reputation” standard!!!!
Reg. Section 1.199A-5
Page 166 of regs
Believe it or not….Treasury actually gave us some GREAT CLARITY here.
Best way to understand this is to read examples 8 and 9 on page 168 of the proposed regs.

36. Say “goodbye” to CRACKING.
New Proposed Regs re: IRC §199A
Say “goodbye” to CRACKING.
Reg. Section 1.199A-5(c)(2)
Page 169 of regs
So…..just what is “cracking”? Essentially it is the removing of a qualified business from an SSTB and having it charge a fee to the SSTB.
Obviously, the assumption is that the SSTB would not qualify for any QBI (maybe, because of t.i. the limitation would be too severe).

37. Say “goodbye” to CRACKING.
New Proposed Regs re: IRC §199A
Say “goodbye” to CRACKING.
“Cracking” example
The owners of an accounting practice purchase a building (that they rent to themselves) and put it in a separate LLC. This lowers the income to the acctg firm (which is an SSTB) and moves that income to a rental activity which, we assume, will be eligible for a nice QBID.

38. Say “goodbye” to CRACKING.
New Proposed Regs re: IRC §199A
Say “goodbye” to CRACKING.
Cracking down on “cracking”
The proposed regs thwart this by providing that an SSTB includes any trade or business that provides 80% or more of its property or services to an SSTB, as long as the 2 businesses share 50% or more common ownership.

39. Say “goodbye” to CRACKING.
New Proposed Regs re: IRC §199A
Say “goodbye” to CRACKING.
Example
A dentist owns a dental practice and an office building. He rents ½ of the building to his practice and the other ½ to an unrelated business.
Under this section of the proposed regs, the rental of the ½ to his dental practice is treated as an SSTB.
Can you imagine keeping track of all this? What if there is a K-1 involved? How would you disclose this?

40. The “Former Employee” Rule
New Proposed Regs re: IRC §199A
The “Former Employee” Rule
Reg. Section 1.199A-5(d)(3)
Page 171 of regs
I will read the actual language to you
WARNING/HELP WANTED: I have an actual client situation that is critical and I am completely unsure as to how to resolve it based on these new proposed regs!

41. New Proposed Regs re: IRC §199A
Fiscal Year RPE
Reg. Section 1.199A-4(a)(2)
Page 157 of regs
For computing QBI, all of the “stuff” on the K-1 (W-2 wages, UBIA, etc.) will be counted in full for the individual’s taxable year in which or with which such RPE taxable year ends.

42. New Proposed Regs re: IRC §199A
Fiscal Year RPE
Example
Mike is a partner in a fiscal year partnership with a June 30 yearend. For filing Mike’s 2018 tax return and computing the QBID, Mike will use ALL of the information on the K-1 for the FYE 6/30/18.
NOTE: You do NOT allocate based on # months in 2017 vs 2018.

43. New Proposed Regs re: IRC §199A
Fiscal Year RPE
Example…..continued
WARNING #1: If you prepare a fiscal year RPE, you had better be aware of this rule! If you miss it, it’s trouble for you (regs say it is $0 if not reported).
WARNING #2: If you do NOT prepare the fiscal year RPE tax return, but have a client that gets a K-1 from such an entity, you had better make sure the K-1 is ok!

44. Treatment of QBI losses
New Proposed Regs re: IRC §199A
Treatment of QBI losses
Reg. Section 1.199A-1 (several parts)
Prior to the proposed regs, we knew how to handle a net QBI loss. Basically, it gets carried forward as a loss from a qualified trade or business in the next taxable year.

45. Treatment of QBI losses
New Proposed Regs re: IRC §199A
Treatment of QBI losses
Those rules left us very unclear about how to handle the calculation if a taxpayer had one business generating QBI and another one generating a loss.
Let’s look at an example…..

46. Treatment of QBI losses
New Proposed Regs re: IRC §199A
Treatment of QBI losses
Example
A married couple gets QBI from business A of $400,000 and a loss of $300,000 from business B. Business 1 also pays wages of $100,000. No wages for business 2. Taxable income is above the $415,000 threshold…so the wage limitation fully applies.

47. Treatment of QBI losses
New Proposed Regs re: IRC §199A
Treatment of QBI losses
Example….continued
Tentative QBI for business 1 is $80,000 (20% of $400,000) but is limited to $50,000 (50% of wages). Do we then compute a negative deduction of $60,000 (20% of $300,000) for business 2? And if so, then what do we do?

48. Treatment of QBI losses
New Proposed Regs re: IRC §199A
Treatment of QBI losses
So, let’s clearly define the problem.
If the net amount of all positive and negative QBI produces a loss, we are clear what to do….no deduction allowed in current year and the net loss is carried forward to the next year. NO PROBLEM!

49. Treatment of QBI losses
New Proposed Regs re: IRC §199A
Treatment of QBI losses
But, if the netting of all the positive and negative QBI ends up being positive, but at least one business produces a loss, we are provided with a set of rules dictating how to proceed.

50. Treatment of QBI losses
New Proposed Regs re: IRC §199A
Treatment of QBI losses
Basically, in this situation, the loss must be allocated among all of the businesses that generate QBI” in proportion to their respective amounts of QBI.
It is only AFTER this allocation process that the W-2 and basis limitations are applied and NO PART of the W-2 amounts or UBIA attributable to the loss business are taken into account by the income producing businesses.

51. Treatment of QBI losses
New Proposed Regs re: IRC §199A
Treatment of QBI losses
Without this special rule, here’s what could happen….
Mike (a married taxpayer) is subject to the W-2 limitations. He gets QBI from 3 businesses. The next slide shows the details for each business.

52. Treatment of QBI losses
New Proposed Regs re: IRC §199A
Treatment of QBI losses
QBI
Wages
Business 1
100,000
50,000
Business 2
Business 3
(100,000)
70,000
Easy to see that it would be advantageous to want to net Business 3 with Business 2 (since Business 2 gets no QBID as it has no wages). That would leave Business 1 free to get a full QBIDof $20,000.
But we can’t do that! Rats…

53. Treatment of QBI losses
New Proposed Regs re: IRC §199A
Treatment of QBI losses
Here’s how it would work under the proposed regs….
QBI
Wages
Prop. Regs Alloc.
Net
Tentative
(A)
Wage Limit
(B)
QBI=
Lower (A) or (B)
B 1
100k
50k
(50k)
10k
25k B2 0k B3
(100k)
70k
Grand total QBI for taxpayer under proposed regs

54. Treatment of QBI losses
New Proposed Regs re: IRC §199A
Treatment of QBI losses
BOTTOM LINE:
Note that the first calculation got us a QBID of $20,000. The second calculation, based on the new proposed regs, got us a QBID of only $10,000. So, merely by choosing which businesses to net we were able to get an extra $10,000 of QBI.
Apparently, it was this exact situation that Treasury foresaw and so it made sure we would NOT be able to get away with it.