The Internal Revenue Service issued final regulations permitting a regulated investment company (RIC) that receives qualified real estate investment trust (REIT) dividends to report dividends the RIC pays to its shareholders as section 199A dividends.
Section 199A, enacted as part the Tax Cuts and Jobs Act (TCJA), allows individual taxpayers and certain trusts and estates to deduct up to 20 percent of certain income (section 199A deduction).
The section 199A deduction is available to eligible taxpayers with qualified business income (QBI) from qualified trades or businesses operated as sole proprietorships or through partnerships, S corporations, trusts, or estates, as well as for qualified REIT dividends and income from publicly traded partnerships. The section 199A deduction is not available for C corporations.
The regulations issued today provide that a shareholder in a RIC may, subject to limitations, treat a section 199A dividend received from a RIC as a qualified REIT dividend for purposes of determining the section 199A deduction.
The biggest change that came out with the Tax Cuts and Jobs Act of 2017: Section 199A. This section allows owners of flow through entities such as Sole Proprietorships, S Corporations or Partnerships a deduction of 20% of the income earned by the flow-through. The Internal Revenue Service dropped the proposed Regs on Section 199A on August 8th, 2018, all of its 184 pages can be accessed here.
Caveat: Today’s post is a small introduction to this new section. There is a LOT more information to be culled from the 184 pages. Let us get some basics out of the way first:
- What is a pass through business? A pass through is a business where taxes are not levied at the entity level but rather at the owner level where the income and expenses have been passed through. The owners’ tax rates apply to this pass through income. Pass through entities are typically sole proprietorships, partnerships, LLC’s, trusts and S corporations. Only pass through entities are eligible for the Section 199A deduction.II. Do all pass-through businesses qualify for the deduction? YES, any trade or business qualifies UNLESSOne: The pass-through is a “Specified service trade or business” or SSTB.
TD (REG-107892-18) contains final regulations concerning the deduction for qualified business income under section 199A of the Internal Revenue Code (Code). The regulations will affect individuals, partnerships, S corporations, trusts, and estates engaged in domestic trades or businesses. The regulations also contain an anti-avoidance rule under section 643 of the Code to treat multiple trusts as a single trust in certain cases, which will affect trusts, their grantors, and beneficiaries. This document also requests additional comments on certain aspects of the deduction.
Notice 2019-07 SECTION 1. PURPOSE
This notice contains a proposed revenue procedure that provides for a safe harbor under which a rental real estate enterprise will be treated as a trade or business solely for purposes of section 199A of the Internal Revenue Code (Code) and §§ 1.199A-1 through 1.199A-6 of the Income Tax Regulations (Regulations) (26 CFR Part 1), which are being published contemporaneously with this notice. To qualify for treatment as a trade or business under this safe harbor, the rental real estate enterprise must satisfy the requirements of the proposed revenue procedure. If an enterprise fails to satisfy these requirements, the rental real estate enterprise may still be treated as a trade or business for purposes of section 199A if the enterprise otherwise meets the definition of trade or business in § 1.199A-1(b)(14).
2018 has been all about Tax Reform, you would probably have to be living in a cave in the United States if you did not hear about this. In this post we will talk about the biggest change that came out with the Tax Cuts and Jobs Act: Section 199A. This section allows owners of flow through entities such as Sole Proprietorships, S Corporations or Partnerships a deduction of 20% of the income earned by the flow-through.
The Internal Revenue Service dropped the proposed Regulations on Section 199A on August 8th, 2018, all of its 184 pages can be accessed here. A lot of different interpretations have been tossed around; everyone was hoping that the guidance would clear up the ambiguity. There is still much that needs to be addressed but unlike the story of the four blind men and the elephant, a solid shape is emerging out of the mist!
Caveat: Today’s post is a small introduction to this new section. There is much more information to be culled from the 184 pages. My goal in this post is helping you glean some knowledge about Section 199A and will talk to experts about the mechanics of qualifying for the deduction.
A key portion of the new Tax Cuts and Jobs Act (TCJA) is Section 199A and its deduction of qualified business income. Section 199A allows taxpayers other than corporations a deduction of 20 percent of qualified business income that is earned in a qualified trade or business, though this has some limitations. There are both positive and negative aspects to the changes depending on your situation.
Tax Adviser outlines the following crucial points about Section 199A:
- The deduction is limited to the greater of
(1) 50% of the W-2 wages with respect to the trade or business or
(2) the sum of 25% of the W-2 wages, plus 2.5% of the unadjusted basis immediately after acquisition of all qualified property (generally, tangible property subject to depreciation under Sec. 167). In addition, the deduction also may not exceed (1) taxable income for the year over (2) net capital gain plus aggregate qualified cooperative dividends.