IRS Issues Final Sec. 199A Regulations

Tax Law and News IRS and tax professionals

The IRS has issued final regulations and three related pieces of guidance, implementing the new qualified business income (QBI) deduction (sec. 199A deduction).

The new QBI deduction, created by the 2017 Tax Cuts and Jobs Act (TCJA) allows many owners of sole proprietorships, partnerships, S corporations, trusts, or estates to deduct up to 20 percent of their qualified business income. Eligible taxpayers can also deduct up to 20 percent of their qualified real estate investment trust (REIT) dividends and publicly traded partnership income.

The QBI deduction is available in tax years beginning after Dec. 31, 2017, meaning eligible taxpayers will be able to claim it for the first time on their 2018 Form 1040.

The guidance includes:

  • A set of regulations, finalizing proposed regulations issued last summer; a new set of proposed regulations providing guidance on several aspects of the QBI deduction, including qualified REIT dividends received by regulated investment companies.
  • A revenue procedure providing guidance on determining W-2 wages for QBI deduction purposes.
  • A notice on a proposed revenue procedure providing a safe harbor for certain real estate enterprises that may be treated as a trade or business for purposes of the QBI deduction.

The proposed revenue procedure, included in Notice 2019-07, allows individuals and entities who own rental real estate directly or through a disregarded entity to treat a rental real estate enterprise as a trade or business for purposes of the QBI deduction if certain requirements are met. Taxpayers can rely on this safe harbor until a final revenue procedure is issued.

The QBI deduction is generally available to eligible taxpayers with 2018 taxable income at or below $315,000 for joint returns and $157,500 for other filers. Those with incomes above these levels, are still eligible for the deduction but are subject to limitations, such as the type of trade or business, the amount of W-2 wages paid in the trade or business, and the unadjusted basis immediately after acquisition of qualified property. These limitations are fully described in the final regulations.

The QBI deduction is not available for wage income or for business income earned by a C corporation.

For details on this deduction, including answers to frequently-asked questions, as well as information on other TCJA provisions, visit IRS.gov/taxreform or the Intuit® ProConnect™ Tax Reform Resource Center.

Comments (27) Leave your comment

  1. Mike – I’m the sole owner/employee of an S Corp. Business is consulting so generally not eligible for QBID because it’s an “SSBT.” So, in accordance with 1120S instructions, I entered no amount on K1 line 17. However, I qualify for the QBID deduction on my 1040 because I’m under the income threshold where you qualify for QBID even if it’s an SSBT. I’m using TurboTax and they tell me that only way TurboTax will calculate the deduction is if I enter an amount for the K1 line 17 info. But then my return info wouldn’t match the K1, possibly exposing me to audit. I’m also told that the shareholder can make an “election” to include an amount on the SCorps 1120S K1 line 17 even if it is SSBT. Is this true? If so, is there a specific way or form I need to make that election?

    1. Ray, we at Intuit ProConnect are not allowed to give tax advice and recommend you seek out the advice of a tax professional. All the best this tax season!

  2. I havent’ seen anything regarding 1099 requirements if the rental enterprise either meets the trade or business “Safe Harbor” or activity is considered a trade or business only for Section 199A purposes. Self-employment tax is not required, since the net income from rentals is a “trade or business” ONLY under this code section. Does that mean no 1099-misc filing requirements, and the box can be checked, no, not required?

    1. I haven’t read anything connecting the Form 1099-MISC requirements with the Qualified Business Income requirements. I would look to Notice 2019-07 to see if the rental qualifies for the QBI deduction. The box checks at the top of Schedule E refer to the following: Generally, you must file Form 1099-MISC if you paid at least $600 in rents, services, prizes, medical and health care payments, and other income payments.

  3. I’m having trouble determining if my client qualifies as a trade or business for the QBI deduction. The client leases commercial property for a salon, and is then is leasing out chairs/space within the salon to others. I’ve read everything about the rental real estate, but they don’t own the real estate. Any ideas on where this falls in the QBI guidelines.

    1. Please refer to Notice 2019-07 for guidelines around the safe harbor. I don’t think it matters if you own the property or not. Rental real estate that does not meet the requirements of the safe harbor may still be treated as a trade or business for purposes of the QBI deduction if it is a section 162 trade or business.

  4. Hi Mike, a partnership owns land that produces timber and hunting lease income. Since the timber is Sec 1231 LTCG and the hunting lease rents are excluded from QBI, am I correct in assuming that none of this pass-through income is subject to the Sec 199A 20% deduction? Or is there a special exemption for this?

    Thank you.

    1. I’m not aware of any special exemption. However, I’m not fully versed in this industry.

  5. Who makes the determination of qualifying, the K-1 recipient or the entity filing the partnerhsip/s S corporation tax return? I am seeing shareholders/partners disagree over whether the entity qualifies or not.

    1. The determination is made at the entity level, and the partners and shareholders should approach the entity if they disagree about the QBI treatment.

      Here is an excerpt from IRS Publication 535:

      S corporations and partnerships. S corporations and partnerships are not eligible for the deduction. Instead, S corporations and partnerships must pass through the necessary information to their shareholders or partners so they may figure their deduction. S corporations and partnerships must report each shareholder’s or partner’s share of the following items for each qualified trade or business (or aggregated trade or business) on Schedule K-1, so the shareholder or partner may figure their deduction.

      1. “Q3. How do S corporations and partnerships handle the deduction?
        A3. S corporations and partnerships are generally not taxpayers and cannot take the deduction themselves. However, all S corporations and partnerships report each shareholder’s or partner’s
        share of QBI, W-2 wages, UBIA of qualified property, qualified REIT dividends and qualified PTP income on Schedule K-1 so the shareholders or partners may determine their deduction.”

        Be careful that Intuit’s ProSeries will automatically calculate QBID on the 1065-1120-S. It’s the K-1 recipients (partners or shareholders) who needs to determine whether or not the QBID is allowable at their level.

  6. If you are a sole proprietor who receives all income through one or more 1099 misc do you qualify to take the deduction

    1. To qualify for the QBI deduction, you need to be involved in a trade or business. Here is an excerpt from Chapter 12 of IRS Publication 535:

      Your qualified trades and businesses include your section 162 trades or businesses, other than trades or businesses conducted through a C corporation, W-2 wages earned as an employee, and specified service trades or businesses. In general, to be engaged in a trade or business, you must be involved in the activity with continuity and regularity, and your primary purpose for engaging in the activity must be for income or profit. If you own an interest in a pass-through entity, the trade or business determination is made at that entity’s level.

  7. So, does a retired 74 year old owner of multiple Commercial Shopping centers that each center leases out stores to multiple tenants under triple net leases.
    and,
    That are managed by a Sub (s) corp that is owned by the the real property owner, and is paid market rate management fees (5%), to the management firm that is operated by non related employees,
    and,
    that there are insufficient funds after paying ordinary and necessary expenses to pay the Property owner, who therefore receives NO payroll from the management company. The Owner works 40+ hours per week doing other tasks such as all lease negotiations, credit reports qualifying tenants, collections, supervising tenants build-outs, letting, supervising and calculating and preparing CAM reconcilliations billings, supervising Common Area Maintenance sub-contractors, dealing with local government entities etc.

    Further, I just read that property subject to Commercial triple net leases, cannot avail themselves of the provided safe harbor rules in 199A.

    I assume that the owner should be able to avail himself of the QBI 20% deduction, and that there would not be any self employment tax in regards to the net income from the operation of each of these Commercial properties, but I realize that even if he has QBI, he may be limited out, but are any of the unusable QBI allowed to be carried forward?

    1. We’re not allowed to give tax advice, but here are some key excerpts from government guidance:

      A notice on a proposed revenue procedure providing a safe harbor for certain real estate enterprises that may be treated as a trade or business for purposes of the QBI deduction
      .01 In general. This safe harbor is available to taxpayers who seek to claim the deduction under section 199A with respect to a rental real estate enterprise. If the safe harbor requirements are met, the real estate enterprise will be treated as a trade or business as defined in section 199A(d) for purposes of applying the regulations under section 199A. Relevant passthrough entities (RPEs) as defined in § 1.199A-1(b)(10) may also use this safe harbor in order to determine whether a rental real estate enterprise is a trade or business as defined in section 199A(d). Failure to satisfy the requirements of this safe harbor does not preclude a taxpayer from otherwise establishing that a rental real estate enterprise is a trade or business for purposes of section 199A.

      .05 Certain rental real estate arrangements excluded. Real estate used by the taxpayer (including an owner or beneficiary of an RPE relying on this safe harbor) as a residence for any part of the year under section 280A is not eligible for this safe harbor. Real estate rented or leased under a triple net lease is also not eligible for this safe harbor. For purposes of this revenue procedure, a triple net lease includes a lease agreement that requires the tenant or lessee to pay taxes, fees, and insurance, and to be responsible for maintenance activities for a property in addition to rent and utilities. This includes a lease agreement that requires the tenant or lessee to pay a portion of the taxes, fees, and insurance, and to be responsible for maintenance activities allocable to the portion of the property rented by the tenant.

      IRS Publication 535 (Chapter 12): https://www.irs.gov/pub/irs-pdf/p535.pdf
      In addition, the rental or licensing of property to a commonly controlled trade or business operated by an individual or a pass-through entity is considered a trade or business under section 199A.

  8. So, the SSTB exclusion applies ALL tax payers regardless of income? Or only when your income reaches those limitations, like $315k for joint filers?

    1. The Section 199A deduction does not apply to specified service trades or businesses (SSTB) when taxable income is above $415,000 for joint filers and $207,500 for other filers and is partially allowed when taxable income is between $315,000-415,000 for joint filers and between $157,500-207,500 for other filers. Individuals with taxable income below these threshold levels are not subject to the limitations. You can find more about the SSTB exclusion here: https://proconnect.intuit.com/taxprocenter/tax-law-and-news/professional-services-guidance-for-the-qbi-deduction-helps-define-specified-services/

  9. NOTICE 2019-7 States rental R.E enterprise qualifies for safe harbor QBID
    if the following are met:
    Separate books maintained for each rental property, 250 hours of rental services and keeping records of time reports and logs for hours of services with dates when performed.
    So how can Rental activity qualify for QBID if T/P has one rental property and unlikely spends 250 hours of rental services!

    1. In order to be eligible for the QBI deduction and you don’t meet the safe harbor, the activity must be considered a trade or business. Here is a blub from IRS Publication 535 (https://www.irs.gov/pub/irs-dft/p535–dft.pdf):

      Determining your qualified trades or businesses.
      Your qualified trades and businesses include your section 162 trades or businesses, other than trades or businesses conducted through a C corporation, W-2 wages earned as an employee, and specified service trades or businesses.
      In general, to be engaged in a trade or business, you must be involved in the activity with continuity and regularity and your primary purpose for engaging in the activity must be for income or profit. If you own an interest in a pass-through entity, the trade or business determination is made at that entity’s level.
      The ownership and rental of real property doesn’t, as a matter of law, constitute a trade or business, and the issue is ultimately one of fact in which the scope of your activities in connection with the property must be so extensive as to give rise to the stature of a trade or business. However, the rental or licensing of property to a commonly controlled trade or business is considered a trade or business under section 199A.

  10. Would a Financial Advisor qualify under these rules and interpret 199a(d)(2)(B) please? All 1099 income, joint income under the $315k limit.

    1. Here is a blurb from IRS Publication 535 (https://www.irs.gov/pub/irs-dft/p535–dft.pdf) indicating which financial services are considered a Specified Service Trade or Business:

      Financial services, including managing respect to finances, developing retirement plans, developing wealth transition plans, the provision of advisory and other similar services regarding valuations, mergers, acquisitions, dispositions, restructuring (including in title 11 or similar cases), and raising financial capital by underwriting, or acting as a client’s agent in the issuance of securities, and similar services
      The QBI deduction begins to phase-out when Taxable Income (without QBI deduction) exceeds $315,000 for joint filers.
      Determining your qualified trades or businesses. Your qualified trades and businesses include your section 162 trades or businesses, other than trades or businesses conducted through a C corporation, W-2 wages earned as an employee, and specified service trades or businesses. In general, to be engaged in a trade or business, you must be involved in the activity with continuity and regularity and your primary purpose for engaging in the activity must be for in-come or profit.

  11. Five LLCs involved in rental/apartments formed a 6th entity to handle payroll for all 5 entities. Like an employee leasing situation. Can each separate LLC use the payments made to payroll entity as wages for calculating the W/2 Wage limitation for purposes of the QBI calculations ?

  12. What would be the rule if a partner dies and a 754 election is made. Assume original UBIA was $1 million for partners share. Value of property (an apartment building) at death is $ 2 million. Partnership’s basis in property is $40000 at partner’s death. Assume 743 adjustment for the partner was $1.8 million at date of death.

    How is partner’s share of UBIA calculated? Is it $2 million his share of the property’s value at death. Is it $1Million (2 Million new value – 1 Million original cost ) plus his 50% of original UBIA or $500,000 for a total of $1.5 million UBIA. Or is it just $1 Million ? (2 Million new value – 1 Million original cost ) Are there two assets (original UBIA and new UBIA represented by the 754/743 election and step up? If so are there two holding periods or one holding period?

    1. Pages 35 and 36 of the preamble to the final regs address basis adjustments. However, I would think that this statement on page 37 might preclude giving out any advice in this area:

      “The Treasury Department and the IRS continue to study this issue and request additional comments on the interaction of the special basis adjustments under sections 734(b) and 743(b) with section 199A and whether a new regime for calculating adjustments with respect to UBIA is necessary.”

      1. Have a strip mall shopping center client with one triple net lease and 6 other regular leases (not triple net leases). All are in an LLP Partnership. They meet the safe harbor rules for recordkeeping and time. However, does the fact that one of the tenants is a triple net lease disqualify me from using the 199A totally? Or can I make an allocation for the percentage of the net profit related to the income from the non triple net lease portion?

      2. Annmarie, we cannot give out tax advice, but here are some relevant portions of Notice 2019-07:
        • Failure to satisfy the requirements of this safe harbor does not preclude a taxpayer from otherwise establishing that a rental real estate enterprise is a trade or business for purposes of section 199A.
        • .02 Rental real estate enterprise. Solely for purposes of this safe harbor, a rental real estate enterprise is defined as an interest in real property held for the production of rents and may consist of an interest in multiple properties. The individual or RPE relying on this revenue procedure must hold the interest directly or through an entity disregarded as an entity separate from its owner under § 301.7701-3. Taxpayers must either treat each property held for the production of rents as a separate enterprise or treat all similar properties held for the production of rents (with the exception of those described in paragraph .05 of this section) as a single enterprise. Commercial and 7 residential real estate may not be part of the same enterprise. Taxpayers may not vary this treatment from year-to-year unless there has been a significant change in facts and circumstances.
        • .05 Certain rental real estate arrangements excluded. Real estate used by the taxpayer (including an owner or beneficiary of an RPE relying on this safe harbor) as a residence for any part of the year under section 280A is not eligible for this safe harbor. Real estate rented or leased under a triple net lease is also not eligible for this safe harbor. For purposes of this revenue procedure, a triple net lease includes a lease agreement that requires the tenant or lessee to pay taxes, fees, and insurance, and to be responsible for maintenance activities for a property in addition to rent and utilities. This includes a lease agreement that requires the tenant or lessee to pay a portion of the taxes, fees, and insurance, and to be responsible for maintenance activities allocable to the portion of the property rented by the tenant.

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