IRS and Treasury Release Final Section 199A Regulations
The Treasury and IRS recently issued a joint release, IR-2019-04, containing the eagerly-anticipated final regulations for Section 199A. In the wake of the passage of the Tax Cuts and Jobs Act (TCJA), the IRS released proposed regulations in regard to the new 20% pass-through deduction. They received hundreds of comments in response to their proposal, which they took under advisement in producing the final Section 199A regulations.
Here’s a quick summary of the items included in the recent IRS release:
- Section 199A regulations, which are the final update to the proposed regulations issued last year. These provide helpful guidance in a number of areas pertaining to the Qualified Business Income (QBI) deduction, including REIT dividends received by regulated investment companies. Some items of note include:
- When calculating QBI, individuals must now take into account items such as the deductible portion of self-employment tax, self-employed health insurance, and certain retirement contributions.
- Rent paid by a commonly controlled C-Corporation does not qualify for special rules that allow for the renting of property to a related person to be classified as a trade or business.
- Revenue Procedure 2019-11, which provides guidance on determining W-2 wages for QBI deduction purposes.
- A Notice about a new proposed Section 199A regulation which pertains to treating a safe harbor for certain real estate enterprises as a trade or business for the purposes of the QBI deduction. This safe harbor will allow a rental activity to be treated as a trade or business should it meet the following criteria:
- Separable books and records are maintained for each rental activity
- 250 hours or more are spent performing the following services
- advertising to rent or lease the real estate; negotiating and executing leases; the collection of rent
- verifying information contained in prospective tenant applications
- daily operation, maintenance, and repair of the property; purchase of materials
- management of the real estate
- supervision of employees & independent contractors
- Attaching the following statement to your 2018 tax return (required by the IRS)
- “Under penalties of perjury, I (we) declare that I (we) have examined the statement, and, to the best of my (our) knowledge and belief, the statement contains all the relevant facts relating to the revenue procedure, and such facts are true, correct, and complete.”