Section 199A: Detailed New Proposed Regulations

August 31, 2018

The Treasury Department and the Internal Revenue Service recently issued proposed regulations on the new Section 199A pass-through deduction created by the Tax Cuts and Jobs Act, available for tax years beginning after December 31, 2017, and before January 1, 2026. Section 199A permits a deduction of up to 20% of qualified business income (“QBI”) from a domestic pass-through business, plus 20% of qualified REIT dividends and 20% of qualified PTP income, if applicable. These highly anticipated and robust proposed regulations define and provide guidance on a number of items identified within Section 199A, including the items noted below.

W-2 Wages and Qualified Property

The Section 199A deduction is calculated based on 20% of the lower of the QBI or the W-2 wages/qualified property limitation. The proposed regulations expanded upon these items and clarified a number of questions that emerged from the initial Section 199A language.

W-2 wages attributed to QBI are identified by calculating all W-2 wages for the taxable year, allocating between each of your trades or businesses, and then analyzing to determine if they are allocable to QBI within each trade or business. One key item clarified in the proposed regulations was that wages paid by third parties on your behalf (e.g., by professional employer organizations) qualify for purposes of calculating W-2 wages attributable to QBI. Specifically, Prop. Treas. Reg. §1.199A-2(b)(2)(ii) states that W-2 wages paid and reported by third parties on W-2s with the third party listed as the employer in the W-2 may be taken into account, so long as the W-2 wages were actually paid to common law employees or officers of the taxpayer by the taxpayer.

The proposed regulations also provide guidance on the definition of the unadjusted basis immediately after acquisition (“UBIA”). Prop. Treas. Reg. §1.199A-2(c)(3) defines UBIA as the basis on the placed-in-service date of the property as determined under Section 1012 or other applicable sections. Essentially, the UBIA equals the cost of the property without regard to any adjustments (such as Section 179) with the exception of a reduction for the percentage of time the qualifying property is used outside the qualifying trade or business (if not used 100% in the business).

Specified Service Trade or Business (“SSTB”)

If QBI exceeds the threshold amounts, income from SSTBs would not be treated as income from a qualified trade or business. The proposed regulations further define what constitutes an SSTB, and provide specific guidance on the 13 listed SSTBs, including definitions and examples of what is and is not included in such definitions. One notable clarification in the proposed regulations that can work in your favor came within the final listed SSTB – “trade or business where the principal asset of such trade or business is the reputation or skill of one or more employees or owners.” The proposed regulations clarify that this is specifically limited to situations where employees or owners receive compensation for product endorsements, licensure associated with an individual’s image, likeness, name, signature, voice, trademark, or any other symbols associated with the individual’s identity, or appearance fees.


The proposed regulations permit but do not require you to aggregate if you have multiple qualified trades or businesses. Aggregation requires, among other things, that your businesses must be under common ownership, have relatedness between the businesses, and not include any SSTBs. Once aggregated, QBI, W-2 wages and UBIA of qualified property are also aggregated for purposes of the formula to calculate the Section 199A deduction, which can be favorable to you, as some standalone deductions may be significantly limited by W-2 or UBIA limitations. The aggregation must be consistent from year-to-year (i.e., you cannot evaluate annually whether aggregation or disaggregation would be more favorable).

These multifaceted proposed regulations provide guidance on a number of items within Section 199A including clarifying or expanding upon certain definitions, assisting with the rules in determining what income may qualify, and analyzing how to treat each aspect of the calculation. Additional guidance will continue to be released as further implications of the new Section 199A and proposed regulations are analyzed and considered.

Your business will need guidance and a practical approach to navigate these new proposed regulations. Our dedicated team of tax experts at Cherry Bekaert can explain the details of these changes specific to your situation and help you determine which actions are best for your business.