Treasury and IRS Issue Final Section 199A Regulations and Additional Guidance, Including a Real Estate Safe Harbor

January 22, 2019

On Friday, January 18, 2019, the Treasury Department and the Internal Revenue Service issued final regulations and three related pieces of guidance regarding the new qualified business income (“QBI”) deduction, also known as the Section 199A deduction.

The guidance included:

  • 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 real estate investment trust (“REIT”) dividends received by regulated investment companies.
  • A revenue procedure providing guidance on determining W-2 wages for QBI deduction purposes.
  • notice of 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, if certain requirements are met.

The new QBI deduction, created by the 2017 Tax Cuts and Jobs Act, 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 REIT dividends and publicly traded partnership income. 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 may still be eligible for the deduction but are subject to limitations, such as those receiving income from a specified service trade or business (which would be ineligible for the deduction), and comparing the QBI versus 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 available for tax years beginning after December 31, 2017, meaning eligible taxpayers will be able to claim it for the first time on their 2018 Form 1040.

More clarification and information will come, as this new guidance was just released. Stayed tuned for additional insight from the Cherry Bekaert 199A team.