The Association for Main Street
Accountants and Tax Professionals.

Passthrough Entities Reporting Under TCJA of 2017
IRS Releases Proposed Regulations
for 20 Percent QBI Deduction

Proposed Regulations Completely Covered at Our
GEAR UP Business Entities Seminar on September 25-26

The IRS has released the long-awaited 184-page §199A proposed regulations on August 8 containing guidance regarding the new Qualified Business Income (QBI) 20% deduction. The QBI deduction allows taxpayers to exclude up to 20% of their pass-through business income from federal tax.

In addition, the IRS also released Notice 2018-64, providing methods for calculating Form W-2 wages for purposes of the limitations on this deduction. Taxpayers may rely on the rules in these proposed regulations until final regulations are published in the Federal Register.

These sweeping regulations and the options/decisions they will influence for your business clients will be covered at our GEAR UP Business Entities Seminar on September 25-26 in Bath/East Lansing. Seating is limited to 200 participants, and half those seats are already reserved at this writing. To reserve your seat, click here or call MTAP at 517-641-7505 to reserve with a credit card payment.

In the meantime, here is a thumbnail breakdown of the proposed 184 page regulations:

REIT Dividends & PTP Income
  • Not limited by wage/capital rules when above threshold
  • Calculate separately from QBI and unaffected by separate QBI losses
  • Combine REIT & PTP together for net activity, if loss carryover separately
  • If combined REIT/PTP is loss, it does not affect normal QBI
Use of Multiple Entities to Avoid Limits
  • Anti-abuse rules aggregate them all to main controlling or originating entity-specifically written to disallow multiple trust setups to avoid threshold limits
  • Anti-abuse rules also apply to trusts established to avoid the $10,000 tax deduction on Form 1040
Self Rental
  • Includes tangible and intangible property rents to related parties
  • Considered trade or business only if common control and other entity is trade/business and not specified service activity (where above threshold)
Multiple Trades or Businesses
  • Aggregate (Net) all profits (if desired) and losses, net losses carry over against future QBI as a separate trade or business loss
    • Each business must be separate trade or business & true trade/business
    • Majority ownership interest in each, with same year end
    • Attribution allowed but not required
    • No aggregation of specified service businesses
    • Compute QBI & wage limit separately before applying aggregation, but then all wages are used in aggregated election
      • If an individual chooses to aggregate trades or businesses under the rules of §1.199A-4, the individual must combine the QBI, W-2 wages, and UBIA of qualified property of each trade or business within an aggregated trade or business prior to applying the W-2 wages and UBIA of qualified property limitations described in paragraph (d)(2)(iv) of this section (1.199A-1(d)(2)(ii))
    • Must consistently aggregate same group in later years once chosen with strict annual disclosure rules of specific information (1.199A-4(c)(2)
Flow Through Activities
  • QBI deduction does not affect basis in partnership or S corp
  • QBI deduction does not reduce SE income
  • Allocate QBI income and wages in same manner as depreciation
  • Flow through items for 2018 are reported on 1040 in the year the flow through entities year ends without regard to a year that began in 2017.
  • VERY IMPORTANT: QBI items not reported on K-1 are deemed to be zero
  • If company A uses PEO as agent, wages paid by PEO are qualified Company A wages, but not qualified PEO wages
  • Wage limit applies separately to each trade or business
  • Improper 1099-s to W-2 equivalents do not make the 1099 recipients qualify for QBI deduction, considered to still be W-2 employee
  • Reasonable comp rules apply only to S corporations, but QBI must be reduced by reasonable comp in S corp, even if not paid
  • LKE use cost basis on date of trade of latest property for unadjusted cost and start date (adjusted basis of old traded property + additional boot paid)
  • 351 property uses same cost basis at time of contribution (a real negative)
  • Inherited property uses FMV at date of death
  • 754 step-up basis does not increase basis of assets for QBI
  • Property bought within 60 days of year end and sold within 120 days not qualified
QBI Income
  • Vague Section 162 rules determine QBI and whether trade or business income
  • Include 481 adjustments except if from year before 2018
  • Previously suspended  losses (passive/basis, et) before 2018 not included in QBI
  • NOL from trade or business reduce QBI with strict limitations
  • 1231 gains are QBI if ordinary income, but if capital are not QBI
  • Interest received on AR and NR is QBI
  • Substantial underpayment penalty for miscalculation is 5% rather than 10%
Specified Services
  • Consulting does not include embedded services such as the sale of a network system that includes support
  • Specified services now include companies with at least 50% common ownership that provide 80% or more of their services to a specified service business and income earned from the specified service if 50% ownership is also specified service income
    • Dr. Jones rents ½ of his building to his dental practice and ½ to 3rd party tenants. His 50% rental share is considered specified service income
  • Material participation tests do not apply, even to flow through income
  • Phase ins apply at 1040/1041 level, thus each entity (1065/1120S/1041) must provide info to partners about whether income is from a specified service!
  • Not a specified service if revenues < 25 million and <10% of them are specified
  • Licensing requirements are not a determinative factor in specified trades
  • Securities management includes investments, advising clients, developing retirement plans, business valuations and advisory services, trading, dealing in securities but does not include real estate agents or brokers or insurance agents or brokers (specifically listed!) also S corp banks were exempted from this test!
  • Reputation or skill clause modified to include owners and limit its application to :
    • Endorsement income
    • Licensing income (images, names, voice, signature, etc.)
    • Appearance fees
No Clarification Provided
  • Statutory employees-recipient qualifies for deduction, but payor may not consider them wages paid per Rev. Proc. 2018-46
  • Rental income
    • It appears self-rents are okunless specified services over threshold
    • It appears real estate professionals are ok because trade/business
    • No clarity provided on casual rental-deduct if you feel like it, but issue 1099’s
  • Clergy/ministers-specifically excluded from trade or business income in 1402(c)(8) so not qualified
  • Charitable remainder trusts have not received an answer as to qualification

Remember, these are PROPOSED regulations. Final regulations will be issued some time this fall. 
MTAP P.O. Box 398 Bath, MI 48808-0398