Sec. 199A

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Understanding Sec. 199A

EDWARD L. PERKINS, JD, LLM TAX), CPA GIBSON&PERKINS, PC YouronLineprofessor.net

UNDERSTANDING § 199A By EDWARD L. PERKINS, BA, JD, LLM (TAX), CPA Table of Contents Unit One – Introduction....................................................................................2 I.

Background....................................................................................................... 2

II.

The Deduction................................................................................................... 3

Unit Two - The Basics.......................................................................................5 I.

Overview........................................................................................................... 5

II.

The Deduction Formula..................................................................................... 6

III.

“Combined Qualified Business Income Amount”............................................6

IV.

Relevant Passthrough Entities......................................................................12

Unit Three – The Limitations..........................................................................16 I.

Overview......................................................................................................... 16

II.

The W-2 Wage/Basis Limitation.......................................................................16

III.

The Taxable Income Limitation......................................................................21

Unit Four - Computing the § 199A Deduction.................................................23 I.

Computing the § 199A Deduction...................................................................23

II.

Taxpayers with Taxable Income Below the Threshold Amount........................24

III.

Taxpayers with Taxable Income within the “Phase In Range”........................26

Unit Five - Specified Service Trade or Business.............................................34 I.

Overview......................................................................................................... 34

II.

SSTB Exclusion................................................................................................ 39

Unit Six - Special Rules..................................................................................42 I.

Overview......................................................................................................... 42

II.

Aggregation.................................................................................................... 42

EXAM.............................................................................................................49 GLOSSARY OF TERMS.....................................................................................53

1

Unit One – Introduction Learning Objectives After completing this Unit, you will be able to: ›

Understand why Congress adopted new §199A of the Internal Revenue Code. ›

I.

Gain an overview the how the §199A deduction is calculated.

Background.

A. The Act. On December 20, 2017, Congress passed Public Law No. 115-97 (the “Act”), titled “An act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018,” but colloquially known as the “Tax Cuts and Jobs Act.” 1.

In the legislative history of the Act, Congress noted that the reduction in the corporate tax rate did not mitigate the high rates of tax imposed on businesses conducted by noncorporate taxpayers in passthrough form or through sole proprietorships.

2.

In order to lower rates, Congress introduced new §199A of the Internal Revenue Code, which provides an income tax benefit to investors in non-corporate businesses, i.e., sole proprietorships, partnerships, and S corporations 3.

The deduction under § 199A is generally available to individual taxpayers, trusts, and estates that have income from what is termed a “qualified businesses”.

4.

The deduction under § 199A is not available to C corporations.

B. Proposed Regulations. On August 8, 2018, the IRS issued proposed regulations and a Notice providing guidance on §199A. C. Final Regulations, etc. On January 18, 2019, the IRS issued final regulations (the “Regulations”), a Revenue Procedure, and a Notice providing additional guidance.

1.

The final regulations generally apply to taxable years ending after February 8, 2019, the date on which they were published in the Federal Register, but taxpayers may rely on either the proposed regulations in their entirety or the final regulations in their entirety for taxable years ending in 2018.

2

2.

The IRS also published answers to frequently asked questions on its website.

II.

The Deduction.

A. § 199A provides a deduction equal to the lesser of (i) the taxpayer's “combined qualified business income amount”, and (ii) 20% of the taxpayer's taxable income, calculated without regard to net capital gain and to the §199A deduction.

1.

Qualified business income may result from operating a qualified business as a sole proprietorship, but also can result from ownership of an interest in a pass-through entity such as a partnership, S corporation, or limited liability company (referred to as “Relevant Pass Through Entities” or “RPE”) which generates such income.

2.

The §199A deduction is only available to owners of service type businesses on a limited basis.

B. § 199A contains a labyrinth of additional limitations and operating rules which make the final determination of the deduction a tax professional’s nightmare. In this program will discuss and hope to make sense out of that labyrinth.

3

Interactive Exercise 1 Before limitations are applied section 199A provides a deduction equal to: A.

The sum of (i) the taxpayer's “combined qualified business income amount”, and (ii) 20% of the taxpayer's taxable income, calculated without regard to net capital gain and to the §199A deduction.

B.

The taxpayer's “combined qualified business income amount”,

C.

20% of the taxpayer's taxable income, calculated without regard to net capital gain and to the §199A deduction.

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A is Correct – Sec. 199A provides a deduction equal to the lesser of (i) the taxpayer's “combined qualified business income amount”, and (ii) 20% of the taxpayer's taxable income, calculated without regard to net capital gain and to the §199A deduction.

B is Incorrect – The Sec. 199A Deduction is equal to the lesser of (i) the taxpayer's “combined qualified business income amount”, and (ii) 20% of the taxpayer's taxable income, calculated without regard to net capital gain and to the §199A deduction.

C is Incorrect - The Sec. 199A Deduction is equal to the lesser of (i) the taxpayer's “combined qualified business income amount”, and (ii) 20% of the taxpayer's taxable income, calculated without regard to net capital gain and to the §199A deduction.

5

Interactive Exercise 2 Which of the following entities does not qualify to take the Sec. 199A deduction: A.

C Corporations

B.

Estates

C.

Individuals

6

A is Correct - The ยง 199A deduction is not allowed to C corporations.

B is Incorrect - The ยง 199A deduction is allowed to estates.

C is Incorrect - The ยง 199A deduction is allowed to individuals.

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Unit Two - The Basics.

Learning Objectives After completing this Unit, you will be able to: › ›

Gain an understanding of the basic concepts in determining the §199A deduction.

Define and understand the relevance of the components of the §199A deduction formula including: The “QBI Component” “Combined Qualified Business Income Amount” “Qualified Items” “Qualified REIT dividends” and Qualified Publicly Traded Partnership income ›

I.

You will also learn what constitutes a “Qualified Trade or Business”

Overview

A. The § 199A deduction is allowed to individuals and some trusts and estates (but not corporations).

B. The calculation of the § 199A deduction begins with a determination of the taxpayer’s “combined qualified business income”.

C. The deduction is limited to 20% of that income but may also limited by the taxpayer’s share of the W-2 wages paid by that business, and the level of qualified property owned by that business.

D. Finally, there is an overall limitation based on 20% of the taxpayer’s taxable income in excess of the net capital gain of the taxpayer.

E. The §199A deduction is not allowed in calculating adjusted gross income (“AGI”), which means that the deduction will not affect calculations tied to AGI. F. A taxpayer who is subject to the alternative minimum tax (“AMT”) under §55 may take the §199A deduction in computing alternative minimum taxable income.

1.

The statute provides that a taxpayer's QBI for AMT purposes equals the taxpayer's QBI for regular tax purposes,

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notwithstanding any adjustments otherwise applicable in the computation of alternative minimum taxable income.

2.

The regulations expand this rule and provide that a taxpayer's §199A deduction for AMT purposes equals the taxpayer's §199A deduction for regular tax purposes.

II.

The Deduction Formula.

The following formula represents the basic calculation of the § 199A The § 199A deduction equal the lesser of: [A] 20 percent of the Qualified Business Income for each of “Qualified Trade or Business” of the Taxpayer plus 20 percent of the sum of Qualified REIT dividends and Qualified Publicly Traded Partnership income for the taxable year; or [B]

The greater of:

(i) 50 percent of W-2 wages with respect to that trade or business, or (ii) the sum of 25 percent of W-2 wages with respect to that trade or business plus 2.5 percent of the Unadjusted Basis of Qualified Property with respect to that trade or business.

But not greater than 20% of the excess of the taxable income of the taxpayer over the taxpayer’s net capital gain for the taxable year.

deduction:

III.

“Combined Qualified Business Income Amount” A.

Overview

1.

An eligible taxpayer is able to deduct the “combined qualified business income amount” subject to an overall taxable income limitation.

2.

The “combined qualified business income amount” is the sum of three separate amounts: -

20% of the taxpayer's “qualified business income” (QBI) from each “qualified trade or business (QTB) (as limited by the “wage-basis limit,” defined below),

-

20% of the taxpayer's aggregate “qualified REIT dividends,” and

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-

20% of the taxpayer's aggregate “qualified publicly traded partnership income.”

3.

In order to better understand the term “combined qualified business income” we have to define the following terms:

B.

a.

“Qualified business income”,

b.

“Qualified Items”

c.

“Qualified trade or business”

d.

“Qualified REIT dividend”

e.

“Qualified publicly traded partnership”

“Qualified Business Income” 1.

Definition.

a.

The definition of the term “qualified business income” (“QBI”) is for any taxable year, the net amount of “qualified items” of income, gain, deduction, and loss with respect to any qualified trade or business of the taxpayer. b.

QBI does not include any qualified REIT dividends or qualified publicly traded partnership income.

2.

Carryover of Losses — If the net amount of qualified income, gain, deduction, and loss with respect to qualified trades or businesses of the taxpayer for any taxable year is less than zero, such amount shall be treated as a loss from a qualified trade or business in the succeeding taxable year.

C.

A “Qualified Trade or Business”.

1.

Definition. Under the Regulations a “qualified trade or business” is defined as any trade or business other than (i) a “specified service trade or business” or “SSTB”, or (ii) the trade or business of performing services as an employee.

2.

SSTB. For detailed discussion of the effect of being a “specified service trade or business”, and a definition of the term see Unit Five, below.

3.

Trade or Business of Performing Services as an Employee.

a.

The trade or business of performing services as an employee is not a trade or business for purposes of § 199A.

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b.

Therefore, no items of income, gain, loss, or deduction from the trade or business of performing services as an employee constitute QBI. c.

No taxpayer may claim a § 199A deduction for wage income, regardless of the amount of taxable income. d.

The Regulations also provide that an individual whose employer formerly characterized the individual as an employee for Federal employment tax purposes is presumed, for three years after the employer ceases to treat the individual as an employee for Federal employment tax purposes, to be in the trade or business of performing services as an employee with respect to the provision of substantially the same services directly or indirectly to the employer or a related person Note: A taxpayer can have a “combined qualified business income amount” even if the taxpayer has no QBI. This is because the combined qualified business income amount includes not only 20% of QBI, but also 20% of qualified REIT dividends and 20% of qualified publicly traded partnership income 5.

Notice 2019-07 - Rental Real Estate Safe Harbor.

a.

Overview - Notice 2019-07, released concurrently with the regulations, provides notice of a revenue procedure which, if issued, would create a safe harbor under which a “rental real estate enterprise” may be treated as a trade or business solely for purposes of §199A. An enterprise that fails the safe harbor may still be treated as a trade or business for purposes of §199A if the enterprise rises to the level of a trade or business under §162. b.

Definition.

(1) The proposed revenue procedure defines rental real estate enterprise as “an interest in real property [or multiple properties] held for the production of rents.”

(2) An individual or RPE relying on the proposed revenue procedure must hold the interest in real property directly or through a disregarded entity.

(3) Although the proposed revenue procedure generally permits taxpayers to treat each rental property as either a separate enterprise or as part of a single 11

enterprise, commercial and residential properties may not be part of the same enterprise.

(4) Therefore, there is no safe harbor for mixeduse buildings.

(5) Additionally, taxpayers may not change the treatment of a property (i.e., as a separate enterprise or part of a single larger enterprise) unless there has been a significant change in facts and circumstances. c.

Requirements for Eligibility. To be eligible for the safe harbor, the following requirements must be satisfied during the taxable year with respect to the rental real estate enterprise: (1) Books and Records. Separate books and records must be maintained for each rental real estate enterprise reflecting income and expenses of the enterprise.

(2) Hours of “Rental Services. For taxable years beginning prior to January 1, 2023, at least 250 hours of “rental services� must be performed each year with respect to the enterprise. For taxable years beginning after December 31, 2022, at least 250 hours of rental services must be performed with respect to the enterprise in three of five consecutive taxable years that end with the taxable year. (a) For purposes of the proposed revenue procedure, rental services may be performed by owners, employees, agents, independent contractors and include the following activities: (i) advertising to rent or lease the real estate; (ii) negotiating and executing leases; (iii) verifying information contained in prospective tenant applications; (iv) collecting rent; (v) daily operation, maintenance, and repair of the property; (vi) management of the real estate; (vii) purchase of materials; and (viii) supervision of employees and independent contractors. (b) However, rental services do not include financial or investment management activities, such as arranging financing; procuring property; studying 12

and reviewing financial statements or reports on operations; planning, managing, or constructing long-term capital improvements; or hours spent traveling to and from the real estate.

(3) Contemporaneous Records. Taxpayers must keep contemporaneous records (i.e., time reports, logs, or similar documents) regarding the number of hours of all services performed for the enterprise, as well as a description of such services, including who the service was performed by and on what date such service was performed. The records must be made available for inspection at the request of the IRS. (4) Attached Statement. Taxpayers must include a statement attached to the return on which they claim the §199A deduction that the requirements in (a) – (c) have been satisfied. An RPE must include such statement on the return on which they pass through the §199A deduction.

(5) Real Estate Not Eligible. Certain rental real estate arrangements are not eligible for the safe harbor, including: (a) real estate that is used by a taxpayer (or an owner or beneficiary of an RPE) as a residence for any part of the year under §280A; and (b) real estate rented under a triple net lease (i.e., a lease agreement that requires the tenant or lessee to pay all or a portion of taxes, fees, and insurance, and to be responsible for maintenance activities for all or a portion of property in addition to rent and utilities).

D.

“Qualified Items”

1.

In General — The term “qualified items of income, gain, deduction, and loss” means items of income, gain, deduction, and loss to the extent such items are: (1) effectively connected with the conduct of a trade or business within the United States; and (2) included or allowed in determining taxable income for the taxable year.

2.

Exclusions - The following items shall not be taken into account as a qualified item of income, gain, deduction, or loss: a.

Any item of short-term capital gain, short-term capital loss, long-term capital gain, or long-term capital loss.

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b.

Any dividend, income equivalent to a dividend, or payment in lieu of dividends. Any amount described in section 1385(a)(1) shall not be treated as described in this clause. c.

Any interest income other than interest income which is properly allocable to a trade or business. d.

Any item of gain or loss described in subparagraph (C) or (D) of section 954(c)(1) (applied by substituting “qualified trade or business” for “controlled foreign corporation”). e.

Any item of income, gain, deduction, or loss taken into account under section 954(c)(1)(F) (determined without regard to clause (ii) thereof and other than items attributable to notional principal contracts entered into in transactions qualifying under section 1221(a)(7)). f.

Any amount received from an annuity which is not received in connection with the trade or business. g.

Any item of deduction or loss properly allocable to an amount described in any of the preceding clauses.

E.

Losses

1.

Taxpayers who have losses with respect to at least one QTB will necessarily fall into one of three categories: a.

First, those with one or more QTBs who have net losses with respect to all QTBs. b.

Second, those with net losses with respect to some QTBs, net income with respect to other QTBs, and net loss overall. c.

Third, those with net losses with respect to some QTBs, net income with respect to other QTBs, and net income overall.

2.

For taxpayers in the first category, the resulting negative total QBI amount is carried over and treated as a QBI loss from a QTB in the succeeding taxable year.

3.

For taxpayers in the second category, the net negative QBI amount is carried over and treated as a QBI loss from a QTB in the succeeding taxable year,

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4.

For taxpayers in the third category, with net losses with respect to some QTBs, net income with respect to other QTBs, and net income overall, the regulations require taxpayers to net QBI income against QBI loss.

F. Treatment of Reasonable Compensation and Guaranteed Payments. – Qualified business income does not include— 1.

Reasonable compensation paid to the taxpayer by any qualified trade or business of the taxpayer for services rendered with respect to the trade or business1, 2.

Any guaranteed payment described in section 707(c) paid to a partner for services rendered with respect to the trade or business, and 3.

To the extent provided in regulations, any payment described in section 707(a) to a partner for services rendered with respect to the trade or business G. Qualified REIT Dividends. - The term “qualified REIT dividend” means any dividend from a REIT received during the taxable year which: (1) is not a capital gain dividend, and (2) is not qualified dividend income. A REIT dividend is not a qualified REIT dividend if the stock with respect to which it is received is held for fewer than 45 days.

H. Qualified PTP Income - The term “qualified publicly traded partnership income” means the sum of (1) the net amount of such taxpayer's allocable share of income, gain, deduction, and loss from a publicly traded partnership plus (2) any gain or loss attributable to assets of the publicly traded partnership giving rise to ordinary income that is considered attributable to the trades or businesses conducted by the partnership.

IV.

Relevant Passthrough Entities A.

Overview

1.

The regulations create the term “relevant passthrough entity” (“RPE”) to include partnerships (except for PTPs which are treated separately) and S corporations that are directly or indirectly owned by at least one individual, trust, or estate.

1 In the preamble to the proposed regulations, Treasury and the IRS stated that “[t]he rule for reasonable compensation is merely a clarification that, even if an S corporation fails to pay a reasonable wage to its shareholder-employees, the shareholder-employees are nonetheless prevented from including an amount equal to reasonable compensation in QBI.

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2.

A trust or estate is also an RPE to the extent that it passes through QBI, W-2 wages, UBIA of qualified property, qualified REIT dividends, or qualified PTP income to a beneficiary or beneficiaries.

3.

A taxpayer calculates the ยง199A deduction with regard to relevant items that the taxpayer receives directly and the taxpayer's allocable share of items from RPEs. 4.

In the case of a partnership or S corporation, the ยง199A deduction is determined at the partner or shareholder level.

B.

Partners in Partnerships

1.

Each partner takes into account the partner's allocable share of each of the partnership's qualified items of income, gain, deduction, and loss; is treated as having W-2 wages and UBIA of qualified property equal to the partner's allocable share of the partnership's W-2 wages and UBIA of qualified property.

2.

Each partner takes into account the partner's allocable share of the partnership's qualified REIT dividends and qualified PTP income.

C.

Shareholders of S Corporations

1.

Similarly, each S corporation shareholder takes into account the shareholder's pro rata share of each of the S corporation's qualified items of income, gain, deduction, and loss; is treated as having W-2 wages and UBIA of qualified property equal to the shareholder's pro rata share of the S corporation's W-2 wages and UBIA of qualified property; 2.

Each shareholder takes into account the shareholder's pro rata share of the S corporation's qualified REIT dividends and qualified PTP income.

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Interactive Exercise 3 Which of the following is a “qualified trade of business� for purposes of Sec. 199A: A.

A specified service trade or business

B.

A trade or business of performing services as an employee

C. A trade or business under section 162 trade or business other than the trade or business of performing services as an employee

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A is Incorrect – Under the Regulations a “qualified trade or business” is defined as any trade or business other than (i) a “specified service trade or business” or “SSTB”, or (ii) the trade or business of performing services as an employee.

B is Incorrect - The trade or business of performing services as an employee is not a trade or business for purposes of § 199A. C is Correct - Under the Regulations a “qualified trade or business” is defined as any trade or business other than (i) a “specified service trade or business” or “SSTB”, or (ii) the trade or business of performing services as an employee.

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Interactive Exercise 4 Which of the following is a “qualified item� of purposes of the Sec. 199A. A. Income, gain, deduction, and loss to the extent effectively connected with the conduct of a trade or business within the United States.

B. Any item of short-term capital gain, short-term capital loss, long-term capital gain, or long-term capital loss.

C. Any dividend, income equivalent to a dividend, or payment in lieu of dividends.

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A is Correct - The term “qualified items of income, gain, deduction, and loss” means items of income, gain, deduction, and loss to the extent such items are: (1) effectively connected with the conduct of a trade or business within the United States; and (2) included or allowed in determining taxable income for the taxable year.

B is Incorrect - Any item of short-term capital gain, short-term capital loss, long-term capital gain, or long-term capital loss is not be taken into account as a qualified item of income, gain, deduction, or loss C is Incorrect - Dividends, income equivalent to a dividends, or payment in lieu of dividends are excluded from the definition of “qualified items”, except any amount described in section 1385(a)(1).

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Unit Three – The Limitations Learning Objectives After completing this Unit, you will be able to: › ›

Learn how to calculate the W-2 Wage/Basis Limitation ›

I.

Understand the limitations on the §199A deduction.

Understand the application of Taxable Income limitation

Overview – A taxpayer's §199A deduction may be limited by two

limitations: A. W-2 Wage/Basis Limitation – The §199A deduction may be limited by the taxpayer’s share of the greater of the “W-2 Wage/Basis Limitation” which is the greater of (i) the amount determined under the “wages test” or (ii) the amount determined under the “wages plus basis test”.

B. The Taxable Income Limitation – The §199A deduction of a taxpayer cannot exceed an amount equal to 20 percent of the excess (if any) of the taxable income of the taxpayer for the taxable year, over the net capital gain of the taxpayer for such taxable year.

II.

The W-2 Wage/Basis Limitation.

A.

Overview.

1.

Above certain threshold amounts2, the § 199A deduction is limited by the “W-2 Wage/Basis Limitation” which is equal to the taxpayer’s share of the greater of: (I) 50 percent of the W-2 wages with respect to that trade or business (the “wages test”), or (II) 25 percent of the W-2 wages with respect to that trade or business plus 2.5 percent of the Unadjusted Basis of Qualified Property with respect to that trade or business (the “W2 Wage/Basis Limitation”).

2.

Within the so-called “phase in range”3 the W-2 Wage/Basis Limitation phased in as the level of that taxpayer’s income increases 2The term “threshold amount” means, for any taxable year beginning before 2019, taxable income of $157,500 (or $315,000 in the case of a taxpayer filing a joint return). This figure will be adjusted by a cost-of-living adjustment on an annual basis.

3 The “phase-in range” means a range of taxable income, the lower limit of which is the threshold amount, and the upper limit of which is the threshold amount plus $50,000 (i.e., taxable income of between $157,500 and $207,500)or $100,000 in the case of a joint return(i.e., between taxable income between $315,000 and $415,000).

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3.

Below threshold amounts, the W-2 Wage/Basis Limitation does not apply.

B.

The W-2 Wage Component

1.

Overview – In order to determine the W-2 wage component of the § 199A deduction calculation the taxpayer must determine the W-2 wages that are properly allocable to QBI. The proposed regulations provide the following three-step process for determining this amount: Step One – Determine the total amount of W-2 wages treated as paid by the taxpayer for the taxable year; Step Second - Allocate the W-2 wages between or among one or more trades or businesses; Step Three – Determine the amount of such wages with respect to each trade or business, which are allocable to the QBI of the trade or business (or aggregated trade or business).

2.

Step One – Wages Paid

a.

An individual or RPE must first determine its W-2 wages “paid” for the taxable year.269 For these purposes, “paid” includes amounts of deferred compensation. b.

Rev. Proc. 2019-11 provides three alternative methods for computing an individual's or RPE's W-2 wages paid in a taxable year:271 (1) the “unmodified Box method,” (2) the “modified Box 1 method,” and (3) the “tracking wages method.”

These are described below: (1) W-2 wages paid under the unmodified Box method equal the lesser of the total of the amounts reported in Box 1 (Wages, tips, and other compensation) and the total of the amounts reported in Box 5 (Medicare wages and tips) with respect to Forms W-2 of that individual's or RPE's employees.

(2) W-2 wages paid under the modified Box 1 method equal the total of the amounts reported in Box 1, minus the total of the amounts reported in Box 1 that are “not wages for Federal income tax withholding purposes,"

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plus the total of certain elective deferral amounts reported in Box 12.

(3) W-2 wages paid under the tracking wages method equal the total of the “amounts of wages subject to Federal income tax withholding that are paid to employees of the taxpayer for employment by the taxpayer and that are reported on Forms W-2 filed with [the Social Security Administration] by the taxpayer for the calendar year” plus the total of certain elective deferral amounts and employee salary reductions under a §408(p) SIMPLE plan reported in Box 12. c.

For a partner who is allocated QBI by a partnership or a shareholder who has a share of an S corporation's QBI, the partner's or shareholder's allocable share of W-2 wages is determined in the same manner as the partner's or shareholder's allocable share of W-2 wage expense for the taxable year.

3.

Step Two – Allocation of Wages

a.

After calculating total W-2 wages for a taxable year, each individual or RPE that directly conducts more than one trade or business must allocate those wages among its various trades or businesses. W-2 wages must be allocated to the trade or business that generated those wages. b.

In the case of W-2 wages that are allocable to more than one trade or business, the portion of the W-2 wages allocable to each trade or business is determined in the same manner as the expenses associated with those wages are allocated among the trades or businesses under §1.199A-3(b)(5). c.

Amounts that are treated as W-2 wages for a taxable year under any method cannot be treated as W-2 wages of any other taxable year. Also, an amount cannot be treated as W-2 wages by more than one trade or business (or aggregated trade or business).

4.

Step Three – Wages Allocable to QBI

a.

Once W-2 wages for each trade or business have been determined, each individual or relevant pass through entity must identify the amount of W-2 wages properly allocable to QBI for each trade or business (or aggregated trade or business).

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b.

W-2 wages are properly allocable to QBI if the associated wage expense is taken into account in computing QBI. c.

In the case of a RPE, the wage expense must be allocated and reported to the partners or shareholders of the relevant pass through entity as required by the Code, including subchapters K and S of chapter 1 of subtitle A of the Code. The relevant pass through entity must also identify and report the associated W-2 wages to its partners or shareholders.

5.

Partners of Partnerships and Shareholders of S Corporation.

For a partner who is allocated QBI by a partnership or a shareholder who has a share of an S corporation's QBI, the partner's or shareholder's allocable share of W-2 wages is determined in the same manner as the partner's or shareholder's allocable share of W-2 wage expense for the taxable year.

6.

Trusts and Estates. In the case of trusts and estates that incur W-2 wages, the statute provides that rules similar to those in former §199 will apply for the apportionment of W-2 wages between the trust or estate and its beneficiaries.

C.

The UBIA of Qualified Property Component

1.

Overview – The basis component of the W-2 Wage/Basis Limitation is an amount equal to 2.5% of the “unadjusted basis immediately after acquisition of qualified property”.

2.

“Unadjusted basis immediately after acquisition” - The term unadjusted basis immediately after acquisition (UBIA) means the basis on the placed in-service date 3.

Definition of “Qualified Property”- The term qualified property means, with respect to any trade or business (or aggregated trade or business) of an individual or RPE for a taxable year, tangible property of a character subject to the allowance for depreciation under section 167(a)-a.

Which is held by, and available for use in, the trade or business (or aggregated trade or business) at the close of the taxable year; b.

Which is used at any point during the taxable year in the trade or business's (or aggregated trade or business's) production of QBI; and 24

c.

The depreciable period for which has not ended before the close of the individual's or RPE's taxable year.

4.

Improvements to Qualified Property. — In the case of any addition to, or improvement of, qualified property that has already been placed in service by the individual or RPE, such addition or improvement is treated as separate qualified property first placed in service on the date such addition or improvement is placed in service.4 5.

Adjustments Under Sections 734(b) and 743(b). — Excess section 743(b) basis adjustments as defined in that section are treated as qualified property. That excess is the excess of the transferee partner's proportionate share of the adjusted basis of the partnership property over the basis of his interest in the partnership. Otherwise, basis adjustments under sections 734(b) and 743(b) are not treated as qualified property.5 6.

Property Acquired at End of Year. — Property is not qualified property if the property is acquired within 60 days of the end of the taxable year and disposed of within 120 days of acquisition without having been used in a trade or business for at least 45 days prior to disposition, unless the taxpayer demonstrates that the principal purpose of the acquisition and disposition was a purpose other than increasing the § 199A deduction 7.

Depreciable Period-- The term “depreciable period” means, with respect to qualified property of a trade or business, the period beginning on the date the property was first placed in service by the individual or RPE and ending on the later of (a) the date that is 10 years after such date; or (b) the last day of the last full year in the applicable recovery period that would apply to the property under section 168(c), regardless of any application of section 168(g)(the “alternative depreciation system” (ADS), which generally causes the recovery period of depreciable property to be longer than it would otherwise be under §168.6 4 A literal reading of the regulations may result in improvements not being qualified property if the underlying property's depreciable period has ended prior to the time when the improvement was placed in service, because the underlying property must be qualified property when the improvement is placed in service 5 Under IRC. Sec. 743 the basis of partnership property is adjusted as the result of a transfer of an interest in a partnership by sale or exchange or on the death of a partner provided an election under section IRC Sec. 754 (relating to optional adjustment to basis of partnership property) is made with respect to the partnership.

6This means that taxpayers that are required to use ADS will not receive any offsetting benefit under §199A by virtue of the extended recovery period of their depreciable property.

25

8.

Partners of Partnerships and Shareholders of S Corporation.

A partner's allocable share of UBIA is determined in accordance with how the partnership would allocate depreciation for book purposes under Reg. §1.704-1(b)(2)(iv)(g) on the last day of the taxable year. In the case of qualified property held by an S corporation, each shareholder's share of UBIA is equal to its pro rata share of the S corporation's UBIA. 9.

Trusts and Estates. In the case of trusts and estates that own qualified property, the statute provides that rules similar to those in former §199 will apply for the apportionment of UBIA of qualified property between the trust or estate and its beneficiaries. However, there are no express rules in former §199 (or the regulations thereunder) regarding the allocation of basis

III.

The Taxable Income Limitation.

A. Under §199A(a)(2) the §199A deduction is limited to an amount equal to 20% of the taxpayer's taxable income, calculated without regard to net capital gain or the §199A deduction.

B. “Net capital gain” means net capital gain (excess of net longterm capital gain for the taxable year over the net short-term capital loss) plus any qualified dividend income for the taxable year.

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Interactive Exercise 5 Which of the following is not a possible limitation to the Sec. 199A Deduction: A.

The taxpayer’s taxable income

B. The taxpayer’s share of W-2 wages paid by the taxpayer’s trade or business C.

The limitation on itemized deductions.

27

A is Incorrect - Under §199A(a)(2) the §199A deduction is limited to an amount equal to 20% of the taxpayer's taxable income, calculated without regard to net capital gain or the §199A deduction.

B is Incorrect - The § 199A deduction is limited by the “W-2 Wage/Basis Limitation” which is equal to the taxpayer’s share of the greater of: (I) 50 percent of the W-2 wages with respect to that trade or business (the “wages test”), or (II) 25 percent of the W-2 wages with respect to that trade or business plus 2.5 percent of the Unadjusted Basis of Qualified Property with respect to that trade or business (the “W-2 Wage/Basis Limitation”).

C is Correct – This is not a limitation to the Sec, 199 A Deduction. A taxpayer's §199A deduction may be limited by two limitations: (1) the W-2 Wage/Basis Limitation, and (2) the Taxable Income Limitation –

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Unit Four - Computing the § 199A Deduction Learning Objectives After completing this Unit, you will learn: ›

The definition and relevance of: The “threshold amount”

− − − −

The “applicable percentage”

The “excess amount”, and more specifically ›

I.

The “phase in range”

How the § 199A deduction is calculated

Computing the § 199A Deduction A.

Overview.

1.

In order to compute § 199A deduction it is first necessary to determine where the taxpayer stand in relation to the “threshold amount”, and the “phase in range”.

2.

The term “threshold amount” means, for any taxable year beginning before 2019, $157,500 (or $315,000 in the case of a taxpayer filing a joint return). This figure will be adjusted by a cost-ofliving adjustment on an annual basis.

3.

The “phase-in range” means a range of taxable income, the lower limit of which is the threshold amount, and the upper limit of which is the threshold amount plus $50,000 (or $100,000 in the case of a joint return).

4.

If the taxpayer’s taxable income is below the threshold amount, in excess of the threshold amount but within the “phase-in range”, or in excess of the threshold amount plus the “phase in range” will determine how the § 199A deduction is calculated.

B. Other Key Definitions. The following are some addition key definitions: 1.

Applicable Percentage – “Applicable Percentage” means, with respect to any taxable year, 100 percent reduced (not below zero) by the percentage equal to the ratio that the taxable income of the 29

individual for the taxable year in excess of the threshold amount, bears to $50,000 (or $100,000 in the case of a joint return).

2.

Excess Amount - The “Excess Amount” is equal to 20% QBI over the W-2 Wage/Basis Limitation as otherwise calculated.

3.

QBI Component (“QBIC”)

a.

Taxpayers with taxable incomes above the “threshold amount” must calculate a “QBI component” for each QTB. b.

The QBI Component (“QBIC”) for each trade or business (including trades or businesses operated through RPEs) the individual must determine the lesser of (1) 20 percent of the QBI for that trade or business (“20% of QBI”); or (2) the greater of (the “W-2 Wage/Basis Limitation”):(i) 50 percent of W-2 wages with respect to that trade or business, or (ii) the sum of 25 percent of W-2 wages with respect to that trade or business plus 2.5 percent of the UBIA of qualified property with respect to that trade or business. c.

When the taxpayer’s taxable income exceeds the Threshold Amount, but is still within the Phase-In Range: (1) the W-2 Wage/Basis Limitation is phased in for both non-SSTBs and SSTBs, and (2) for SSTBs only the Applicable Percentage of QBI, W-2 wages, and UBIA of qualified property for each SSTBs is taken into account for purposes of determining the individual's § 199A deduction.

4.

Reduction Amount –

a.

The “Reduction Amount” means, with respect to any taxable year, the excess amount multiplied by the ratio that the taxable income of the individual for the taxable year in excess of the threshold amount, bears to $50,000 (or $100,000 in the case of a joint return). b.

For purposes of this paragraph (b)(9), the excess amount is the amount by which 20 percent of QBI exceeds the greater of 50 percent of W-2 wages or the sum of 25 percent of W-2 wages plus 2.5 percent of the UBIA of qualified property.

5.

Specified service trade or business – See Section II.B., above for the definition of “specified service trade or business”.

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II. Taxpayers with Taxable Income Below the Threshold Amount A.

Overview.

1.

Beginning before 2019, the Threshold Amount is $157,500 (or $315,000 in the case of a taxpayer filing a joint return).

2.

Taxpayers with taxable incomes at or below a “threshold amount” multiply the “total QBI amount” by 20% in order to determine their § 199A deduction.

3.

For taxpayers with taxable income at or below the Threshold Amount: (1) the W-2 Wage/Basis Limitation does not apply, and (2) the SSTB Limitation does not apply.7 B.

The Calculation.

1.

The § 199A deduction is calculated for individuals with taxable income for the taxable year that is below the Threshold Amount by adding the QBI component (“QBIC”) to an amount equal to 20 percent of the combined amount of qualified REIT dividends and qualified PTP income (including the individual's share of qualified REIT dividends and qualified PTP income from RPEs).

2.

That sum is then compared to 20 percent of the amount by which the individual's taxable income calculated without net capital gain and the Sec, 199A deduction.

3.

The lesser of these two amounts is the individual's § 199A deduction.

C.

The Formula.

[.20 x QBIC] + [.20 x [QREITd + PTPi]] not to exceed [.20 x [TI – NCG]] D.

Example 1

1.

Facts. A, an unmarried individual, owns and operates a computer repair shop as a sole proprietorship. The business generated $100,000 in net taxable income from operations in 2018. A has no capital gains or losses. After allowable deductions not relating to the business, A's total taxable income for 2018 is $81,000. The business's 7 If a trade or business is an SSTB, generally no QBI, W-2 wages, or UBIA of qualified property from the SSTB may be taken into account by any individual whose taxable income exceeds the phase-in range, even if the item is derived from an activity that is not itself a specified service activity (the “SSTB Limitation”). If a trade or business conducted by a relevant passthrough entity (RPE) is an SSTB, this limitation applies to any direct or indirect individual owners of the business, regardless of whether the owner is passive or participated in any specified service activity.

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QBI is $100,000, the net amount of its qualified items of income, gain, deduction, and loss.

2.

199A Deduction. A's § 199A deduction for 2018 is equal to $16,200, the lesser of 20% of A's QBI from the business ($100,000 x 20% = $20,000) and 20% of A's total taxable income for the taxable year ($81,000 x 20% = $16,200).

E.

Example 2

1.

Assume the same facts as in Example 1 except that A also earns $1,000 in qualified REIT dividends and $500 in qualified PTP income in 2018. A also had net capital gain of $5,000, increasing taxable income to $87,500.

2.

A’s 199A deduction is equal to $16,500, the lesser of (i) 20% of A's QBI from the business ($100,000 x 20% = $20,000) plus 20% of A's combined qualified REIT dividends and qualified PTP income ($1500 x 20% = $300) and (ii) 20% of A and C's total taxable less NCG of $5,000 for the taxable year [($87,500 - $82,500)] x 20% = $16,500).

III. Taxpayers with Taxable Income within the “Phase In Range” A.

General Rule.

1.

The Phase in Range is $50,000 ($100,000 for married taxpayers filing jointly), taxpayers with taxable income above the Threshold Amount, 2.

Therefore, the Phase in Range will have taxable income between $157,500 and $207,500 and for married taxpayers filing jointly ($315,000, and $415,000).

3.

When the taxpayer’s taxable income exceeds the Threshold Amount, but is still within the Phase-In Range: (1) the W-2 Wage/Basis Limitation is phased in for both non-SSTBs and SSTBs, and (2) for SSTBs only the Applicable Percentage of QBI, W-2 wages, and UBIA of qualified property for each SSTBs is taken into account for purposes of determining the individual's § 199A deduction.

B.

Phase in of the W-2 Wage/Basis Limitation.

1.

In General.

a.

The “W-2 Wage/Basis Limitation” is generally the greater of: (1) 50 percent of the W-2 wages with respect to that 32

trade or business, or (2) 25 percent of the W-2 wages with respect to that trade or business plus 2.5 percent of the Unadjusted Basis of Qualified Property with respect to that trade or business (the “W-2 Wage/Basis Limitation”). b.

For taxpayers with taxable income with in the Phase Range the W-2 Wage/Basis Limitation is actually phased in. c.

The phase in will depend upon whether the W-2 Wage/Basis Limitation as otherwise calculated is greater or less than 20% of the taxpayer’s QBI, and the level at which the taxpayer’s taxable income exceeds the Threshold Amount.

2.

The Calculation

a.

Determine if W-2 Wage/Basis Limitation Greater or Less Than 20% of QBI (1)

Determine 20% of QBI.

First, calculate the amount equal to .20 x QBI for that trade of business.

(2)

Determine the W-2 Wage/Basis Limitation

Next, determine the “W-2 Wage/Basis Limitation, by calculating the amount equal to the greater of: (i) 50 percent of the W-2 wages with respect to that trade or business, or (ii) 25 percent of the W-2 wages with respect to that trade or business plus 2.5 percent of the Unadjusted Basis of Qualified Property with respect to that trade or business. b.

If the Amount of the W-2 Wage/Basis Limitation is Less than 20% of QBI. (1) General Rule- If the amount of the W-2 Wage/Basis Limitation is less 20% of QBI, the QBI component (i.e., 20% of QBI) is reduced by the “Reduction Amount” (2) Determine the Reduction Amount - Determine the Reduction Amount by the following steps: (a)

Determine the “Excess Amount”

33

First determine the Excess Amount. The “Excess Amount” is equal to 20% QBI over the W-2 Wage/Basis Limitation as otherwise calculated. (b)

Determine the “Reduction Amount”

The “Reduction Amount” is equal to Excess Amount x [Taxable Income -Threshold Amount]/ $50,000 (or $100,000 for married filing jointly). In order to calculate the Reduction Amount: (i) First, calculate the excess of Taxable Income over the Threshold Amount. (ii) Then determine the Ratio of the Amount determined in (1) over $50,000 (or $100,000 for married filing jointly). (iii) Next multiply the Ratio determined in (b), times the Excess Amount, that equals the Reduction Amount.

(3)

Calculate the QBI Component.

In order to calculate the QBI Component take 20% of the QBI for the trade or business and subtract the Reduction Amount.

(4)

Determine the § 199A Deduction

The § 199A Deduction is equal to the lesser (i) the QBI Component or (ii) 20% of the taxpayer’s taxable income, calculated without net capital gain and the Sec, 199A deduction.

(5)

Example 1

(i) Facts - B and C are married and file a joint individual income tax return. B is a shareholder in M, an entity taxed as an S corporation for Federal income tax purposes that conducts a single trade or business. M holds no qualified property. B's share of the M's QBI is $300,000 in 2018. B's share of the W-2 wages from M in 2018 is $40,000. C earns wage income from employment by an unrelated company. After allowable deductions unrelated to M, B and C's taxable income for 2018 is $375,000. B and C are within the phase-in range because their taxable income 34

exceeds the applicable threshold amount, $315,000, but does not exceed the threshold amount plus $100,000, or $415,000. Consequently, the QBI component of B and C's ยง 199A deduction may be limited by the W-2 wage and UBIA of qualified property limitations but the limitations will be phased in. (ii) W-2 Wage/Basis Limitation. The UBIA of qualified property limitation amount is zero because M does not hold qualified property. B and C must apply the W2 Wage/Basis Limitation by first determining 20% of B's share of M's QBI. Twenty percent of B's share of M's QBI of $300,000 is $60,000. Next, B and C must determine 50% of B's share of M's W-2 wages. Fifty percent of B's share of M's W-2 wages of $40,000 is $20,000. Because 50% of B's share of M's W-2 wages ($20,000) is less than 20% of B's share of M's QBI ($60,000), B and C must determine the QBI component of their ยง 199A deduction by reducing 20% of B's share of M's QBI by the reduction amount. (iii) Reduction Amount. B and C are 60% through the phase-in range (that is, their taxable income exceeds the threshold amount by $60,000 and their phase-in range is $100,000). B and C must determine the Excess Amount, which is the excess of 20% of B's share of M's QBI, or $60,000, over 50% of B's share of M's W-2 wages, or $20,000. Thus, the Excess Amount is $40,000. The Reduction Amount is equal to 60% of the Excess Amount, or $24,000. (iv) QBI Component. Thus, the QBI component of B and C's ยง 199A deduction is equal to $36,000, 20% of B's $300,000 share M's QBI (that is, $60,000), reduced by $24,000. B and C's ยง 199A deduction is equal to the lesser of (i) 20% of the QBI from the business as limited ($36,000) or (ii) 20% of B and C's taxable income ($375,000 x 20% = $75,000). (v) Sec. 199 Deduction. B and C's ยง 199A deduction is equal to the lesser of (i) 20% of the QBI from the business as limited ($36,000) or (ii) 20% of B and C's

35

taxable income ($375,000 x 20% = $75,000). B and C's § 199A deduction is $36,000 for 2018.

(7)

Example 2

Assume the same facts as in Example 1 except that B also earns $1,000 in qualified REIT dividends and $500 in qualified PTP income in 2018, increasing taxable income to $271,500. B and C's § 199A deduction is equal to $20,300, the lesser of (i) 20% of C's QBI from the business ($100,000 x 20% = $20,000) plus 20% of B's combined qualified REIT dividends and qualified PTP income ($1500 x 20% = $300) and (ii) 20% of B and C's total taxable for the taxable year ($271,500 x 20% = $54,300). c.

If the Amount of the W-2 Wage/Basis Limitation is Greater than 20% of QBI. (1) General Rule. If the amount of the W-2 Wage/Basis Limitation is greater than 20% of QBI the Reduction Amount does not apply. In this case the QBI Component for the trade or business is not reduced as provided in subparagraph b, above, as a result the QBI component = .20 x QBI for that trade or business.

(2)

Example 3

(i) Facts – Same facts as Example 1, B's share of the W-2 wages from M in 2018 is $140,000. (ii) W-2 Wage/Basis Limitation. Twenty percent of B's share of M's QBI of $300,000 is $60,000. Next, B and C must determine 50% of B's share of M's W-2 wages. Fifty percent of B's share of M's W-2 wages of $140,000 is $70,000. Because 50% of B's share of M's W-2 wages ($70,000) is greater than 20% of B's share of M's QBI ($60,000), the QBI Component for the trade or business is not reduced as provided in subparagraph b, above. (iii) QBI Component. The QBI Component = .20 x QBI for that trade or business. Thus, the QBI Component of B and C's § 199A deduction is equal to $60,000. QBI the Reduction Amount does not apply. In this case the QBI Component for the trade or business is not reduced as provided in subparagraph b, above.

36

(v) Sec. 199 Deduction. B and C's § 199A deduction is equal to the lesser of (i) the QBI Component ($60,000) or (ii) 20% of B and C's taxable income ($375,000 x 20% = $75,000). B and C's § 199A deduction is $60,000 for 2018.

IV.

Above the Phase in Range –

A. General Rule. If the taxable income of the taxpayer is above the Threshold Amount plus the Phase in Range, the “QBI component” is the sum of the amounts determined under the following formula for each trade or business. For each trade or business (including trades or businesses operated through RPEs) the individual must determine the lesser of— (1)

20 percent of the QBI for that trade or business (“20% of QBI”);

(2)

The greater of (the “W-2 Wage/Basis Limitation”):

or

(i) business, or

50 percent of W-2 wages with respect to that trade or

(ii) The sum of 25 percent of W-2 wages with respect to that trade or business plus 2.5 percent of the UBIA of qualified property with respect to that trade or business.

Note: If the individual's taxable income exceeds the Threshold Amount plus the Phase-in Range, then none of the individual's share of QBI, W-2 wages, or UBIA of qualified property attributable to an SSTB may be taken into account for purposes of determining the individual's § 199A deduction.

In other words the individual will not be able to take a § 199A deduction B.

Examples

1.

Overview. — The following examples illustrate the provisions of this Section VI. For purposes of these examples, unless indicated otherwise, assume none of the trades or businesses are SSTBs; and all of the tax items associated with the trades or businesses are effectively connected to a trade or business. Also assume that the taxpayers report no capital gains or losses or other tax items not specified in the examples. Total taxable income does not include the § 199A deduction.

2.

Example 1— D, an unmarried individual, operates a business as a sole proprietorship. The business generates $1,000,000 of QBI in 2018. Solely for purposes of this example, assume that the 37

business paid no wages and holds no qualified property for use in the business. After allowable deductions unrelated to the business, D's total taxable income for 2018 is $980,000. Because D's taxable income exceeds the applicable threshold amount, D's § 199A deduction is subject to the W-2 wage and UBIA of qualified property limitations. D's § 199A deduction is limited to zero because the business paid no wages and held no qualified property.

3.

Example 2 — Assume the same facts as in Example 1, except that D holds qualified property with a UBIA of $10,000,000 for use in the trade or business. D reports $4,000,000 of QBI for 2020.

After allowable deductions unrelated to the business, D's total taxable income for 2020 is $3,980,000. Because D's taxable income is above the threshold amount, the QBI component of D's § 199A deduction is subject to the W-2 wage and UBIA of qualified property limitations.

Because the business has no W-2 wages, the QBI component of D's § 199A deduction is limited to the lesser of 20% of the business's QBI or 2.5% of its UBIA of qualified property. Twenty percent of the $4,000,000 of QBI is $800,000. Two and one-half percent of the $10,000,000 UBIA of qualified property is $250,000. The QBI component of D's § 199A deduction is thus limited to $250,000. D's § 199A deduction is equal to the lesser of (i) 20% of the QBI from the business as limited ($250,000) or (ii) 20% of D's taxable income ($3,980,000 x 20% = $796,000).

Therefore, D's § 199A deduction for 2020 is $250,000.

4.

Example 3 — E, an unmarried individual, is a 30% owner of LLC, which is classified as a partnership for Federal income tax purposes. In 2018, the LLC has a single trade or business and reports QBI of $3,000,000. The LLC pays total W-2 wages of $1,000,000, and its total UBIA of qualified property is $100,000. E is allocated 30% of all items of the partnership. For the 2018 taxable year, E reports $900,000 of QBI from the LLC. After allowable deductions unrelated to LLC, E's taxable income is $880,000. Because E's taxable income is above the threshold amount, the QBI component of E's § 199A deduction will be limited to the lesser of 20% of E's share of LLC's QBI or the greater of the W-2 wage or UBIA of qualified property limitations. Twenty percent of E's share of QBI of $900,000 is $180,000. The W-2 Wage/Basis Limitation equals 50% of E's share of the LLC's wages ($300,000) or $150,000. The UBIA of qualified property limitation equals $75,750, the sum of 25% of E's share of LLC's wages ($300,000) or $75,000 plus 2.5% of E's share of UBIA of qualified property ($30,000) or $750. The 38

greater of the limitation amounts ($150,000 and $75,750) is $150,000.

The QBI component of E's ยง 199A deduction is thus limited to $150,000, the lesser of 20% of QBI ($180,000) and the greater of the limitations amounts ($150,000). E's ยง 199A deduction is equal to the lesser of 20% of the QBI from the business as limited ($150,000) or 20% of E's taxable income ($880,000 x 20% = $176,000). Therefore, E's ยง 199A deduction is $150,000 for 2018.

39

Interactive Exercise 6 The threshold amount for single taxpayers in 2019 is: A.

$157,500

B.

$315,000

C.

$207,500

40

A is Correct – The Threshold Amount for a single taxpayer in 2019 is $157,500 B Is Incorrect – This figure represents the Threshold Amount for married taxpayers filing jointly.

C is Incorrect – The Threshold Amount for a single taxpayer in 2019 is $157,500; this figure represents the high end of the Phase in Range for single taxpayers.

41

Unit Five - Specified Service Trade or Business Learning Objectives After completing this Unit, you will be able to: ›

Define what constitutes a “specified service trade or business” for purposes of §199A

›

Understand the tax effect of being a “specified service trade or business” for purposes of §199A

› Learn how the calculate the of §199A when the SSTB is below and above the threshold amount

I.

Overview A.

Effect of Being an SSTB.

1.

If a trade or business is an SSTB, no QBI, W-2 wages, or UBIA of qualified property from the SSTB may be taken into account by any individual whose taxable income exceeds the phase-in range, even if the item is derived from an activity that is not itself a specified service activity (the “SSTB Limitation”).

2.

If a trade or business conducted by a relevant passthrough entity (RPE) is an SSTB, the SSTB Limitation applies to any direct or indirect individual owners of the business, regardless of whether the owner is passive or participated in any specified service activity.

3.

However, the SSTB Limitation does not apply to individuals with taxable income below the threshold amount.

4.

A phase-in rule applies to individuals with taxable income within the phase-in range, allowing them to take into account a certain “Applicable Percentage” of QBI, W-2 wages, and UBIA of qualified property from an SSTB. B.

Definition

1.

The term “specified service trade or business” is defined as any trade or business which is any of the following fields: (i) health; (ii) law;(iii) Accounting;(iv) actuarial science; (v) performing arts; (vi) consulting; (vii) athletics; (viii) financial services; (ix) brokerage 42

services; (x) investing and investment management; (xi) trading; (xii) dealing in securities; or (xiii) any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees or owners. See paragraph III.C., for further explanation of these terms.

2.

A direct or indirect owner of a trade or business engaged in the performance of a specified service is engaged in the performance of the specified service for purposes of ยง 199A, regardless of whether the owner is passive or participated in the specified service activity.

C.

Additional Rules for Defining SSTBs-

1.

Meaning of services performed in the field of health. The performance of services in the field of health means the provision of medical services by individuals such as physicians, pharmacists, nurses, dentists, veterinarians, physical therapists, psychologists and other similar healthcare professionals performing services in their capacity as such who provide medical services directly to a patient (service recipient). The performance of services in the field of health does not include the provision of services not directly related to a medical services field, even though the services provided may purportedly relate to the health of the service recipient. For example, the performance of services in the field of health does not include the operation of health clubs or health spas that provide physical exercise or conditioning to their customers, payment processing, or the research, testing, and manufacture and/or sales of pharmaceuticals or medical devices.

2.

Meaning of services performed in the field of law. The performance of services in the field of law means the performance of services by individuals such as lawyers, paralegals, legal arbitrators, mediators, and similar professionals performing services in their capacity as such. The performance of services in the field of law does not include the provision of services that do not require skills unique to the field of law, for example, the provision of services in the field of law does not include the provision of services by printers, delivery services, or stenography services.

3.

Meaning of services performed in the field of accounting.

The performance of services in the field of accounting means the provision of services by individuals such as accountants, enrolled

43

agents, return preparers, financial auditors, and similar professionals performing services in their capacity as such.

4.

Meaning of services performed in the field of actuarial science. The performance of services in the field of actuarial science means the provision of services by individuals such as actuaries and similar professionals performing services in their capacity as such.

5.

Meaning of services performed in the field of performing arts. The performance of services in the field of the performing arts means the performance of services by individuals who participate in the creation of performing arts, such as actors, singers, musicians, entertainers, directors, and similar professionals performing services in their capacity as such. The performance of services in the field of performing arts does not include the provision of services that do not require skills unique to the creation of performing arts, such as the maintenance and operation of equipment or facilities for use in the performing arts. Similarly, the performance of services in the field of the performing arts does not include the provision of services by persons who broadcast or otherwise disseminate video or audio of performing arts to the public.

6.

Meaning of services performed in the field of consulting.

The performance of services in the field of consulting means the provision of professional advice and counsel to clients to assist the client in achieving goals and solving problems. Consulting includes providing advice and counsel regarding advocacy with the intention of influencing decisions made by a government or governmental agency and all attempts to influence legislators and other government officials on behalf of a client by lobbyists and other similar professionals performing services in their capacity as such. The performance of services in the field of consulting does not include the performance of services other than advice and counsel, such as sales or economically similar services or the provision of training and educational courses.

For purposes of the preceding sentence, the determination of whether a person's services are sales or economically similar services will be based on all the facts and circumstances of that person's business.

Such facts and circumstances include, for example, the manner in which the taxpayer is compensated for the services provided.

Performance of services in the field of consulting does not include the performance of consulting services embedded in, or ancillary to, the sale of goods or performance of services on behalf of a trade or 44

business that is otherwise not an SSTB (such as typical services provided by a building contractor) if there is no separate payment for the consulting services.

7.

Meaning of services performed in the field of athletics. The performance of services in the field of athletics means the performance of services by individuals who participate in athletic competition such as athletes, coaches, and team managers in sports such as baseball, basketball, football, soccer, hockey, martial arts, boxing, bowling, tennis, golf, skiing, snowboarding, track and field, billiards, and racing. The performance of services in the field of athletics does not include the provision of services that do not require skills unique to athletic competition, such as the maintenance and operation of equipment or facilities for use in athletic events. Similarly, the performance of services in the field of athletics does not include the provision of services by persons who broadcast or otherwise disseminate video or audio of athletic events to the public.

8.

Meaning of services performed in the field of financial services. The performance of services in the field of financial services means the provision of financial services to clients including managing wealth, advising clients with respect to finances, developing retirement plans, developing wealth transition plans, the provision of advisory and other similar services regarding valuations, mergers, acquisitions, dispositions, restructurings, and raising financial capital by underwriting, or acting as a client's agent in the issuance of securities and similar services. This includes services provided by financial advisors, investment bankers, wealth planners, and retirement advisors and other similar professionals performing services in their capacity as such.

9.

Meaning of services performed in the field of brokerage services. The performance of services in the field of brokerage services includes services in which a person arranges transactions between a buyer and a seller with respect to securities for a commission or fee.

This includes services provided by stock brokers and other similar professionals but does not include services provided by real estate agents and brokers, or insurance agents and brokers.

10. Meaning of the provision of services in investing and investment management. The performance of services that consist of investing and investment management refers to a trade or business 45

involving the receipt of fees for providing investing, asset management, or investment management services, including providing advice with respect to buying and selling investments. The performance of services of investing and investment management does not include directly managing real property.

11. Meaning of the provision of services in trading. The performance of services that consist of trading means a trade or business of trading in securities, or partnership interests. Whether a person is a trader in securities, commodities, or partnership interests is determined by taking into account all relevant facts and circumstances, including the source and type of profit that is associated with engaging in the activity regardless of whether that person trades for the person's own account, for the account of others, or any combination thereof. A taxpayer, such as a manufacturer or a farmer, who engages in hedging transactions as part of their trade or business of manufacturing or farming is not considered to be engaged in the trade or business of trading commodities.

12.

Meaning of the provision of services in dealing—

a.

Dealing in securities. The performance of services that consist of dealing in securities means regularly purchasing securities from and selling securities to customers in the ordinary course of a trade or business or regularly offering to enter into, assume, offset, assign, or otherwise terminate positions in securities with customers in the ordinary course of a trade or business. For purposes of the preceding sentence, however, a taxpayer that regularly originates loans in the ordinary course of a trade or business of making loans but engages in no more than negligible sales of the loans is not dealing in securities for purposes of § 199A(d)(2) and this section. b.

Dealing in commodities. The performance of services that consist of dealing in commodities means regularly purchasing commodities from and selling commodities to customers in the ordinary course of a trade or business or regularly offering to enter into, assume, offset, assign, or otherwise terminate positions in commodities with customers in the ordinary course of a trade or business. c.

Dealing in partnership interests. The performance of services that consist of dealing in partnership interests means 46

regularly purchasing partnership interests from and selling partnership interests to customers in the ordinary course of a trade or business or regularly offering to enter into, assume, offset, assign, or otherwise terminate positions in partnership interests with customers in the ordinary course of a trade or business.

13. Meaning of 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 term any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees or owners means any trade or business that consists of any of the following (or any combination thereof): a.

A trade or business in which a person receives fees, compensation, or other income for endorsing products or services, b.

A trade or business in which a person licenses or receives fees, compensation or other income for the use of an individual's image, likeness, name, signature, voice, trademark, or any other symbols associated with the individual's identity, c.

Receiving fees, compensation, or other income for appearing at an event or on radio, television, or another media format. d.

For purposes of paragraph a through c of this section, the term fees, compensation, or other income includes the receipt of a partnership interest and the corresponding distributive share of income, deduction, gain or loss from the partnership, or the receipt of stock of an S corporation and the corresponding income, deduction, gain or loss from the S corporation stock.

D.

Services or Property Provided to an SSTB—

1.

In General. An SSTB includes any trade or business that provides 80 percent or more of its property or services to an SSTB if there is 50 percent or more common ownership of the trades or businesses.

2.

Less than substantially all of property or services provided.

If a trade or business provides less than 80 percent of its property or services to an SSTB within the meaning of this section and there is 50 47

percent or more common ownership of the trades or businesses, that portion of the trade or business of providing property or services to the 50 percent or more commonly-owned SSTB is treated as a part of the SSTB. 3.

50 percent or more common ownership. For purposes of paragraphs 1., and 2 of this section, 50 percent or more common ownership includes direct or indirect ownership by related parties.

II.

SSTB Exclusion.

A.

Overview –

1.

If the individual's taxable income is within the phase-in range, then only th1 Applicable Percentage of QBI, W-2 wages, and UBIA of qualified property for each SSTB is taken into account for purposes of determining the individual's § 199A deduction.

2.

If the individual's taxable income exceeds the phase-in range, then none of the individual's share of QBI, W-2 wages, or UBIA of qualified property attributable to an SSTB may be taken into account for purposes of determining the individual's § 199A deduction.

B.

Calculation – Taxpayer Within the Phase-in-Range 1.

Step One – Determine the Applicable Percentage

Applicable Percentage = 100% less [the percentage = TI – TH/100,000] 2.

Step Two

QBI x Applicable Percentage = [A] W-2 Wages x Applicable Percentage = [B] UBIA x Applicable Percentage = [C] 3.

Step Three – Proceed as described in B, with the reduced QBI, W-2 Wages and UBIA amounts as determined under Step Two, above.

C.

Example 4

1.

Facts. Assume the same facts as in Example 1, except that M is engaged in an SSTB. B and C are married and file a joint individual income tax return. B is a shareholder in M, an entity taxed as an S corporation for Federal income tax purposes that conducts a single trade or business. M holds no qualified property. B's share of the M's 48

QBI is $300,000 in 2018. B's share of the W-2 wages from M in 2018 is $40,000. C earns wage income from employment by an unrelated company. After allowable deductions unrelated to M, B and C's taxable income for 2018 is $375,000. B and C are within the phase-in range because their taxable income exceeds the applicable threshold amount, $315,000, but does not exceed the threshold amount plus $100,000, or $415,000.

2.

Application of the Applicable Percentage. Because B and C are within the phase-in range, B must reduce the QBI and W-2 wages allocable to B from M to the Applicable Percentage of those items. B and C's Applicable Percentage is 100% reduced by the percentage equal to the ratio that their taxable income for the taxable year ($375,000) exceeds their threshold amount ($315,000), or $60,000, bears to $100,000. Their Applicable Percentage is 40%. The Applicable Percentage of B's QBI is ($300,000 x 40% =) $120,000, and the Applicable Percentage of B's share of W-2 wages is ($40,000 x 40% =) $16,000. These reduced numbers must then be used to determine how B's ยง 199A deduction is limited.

3.

W-2 Wage/Basis Limitation. B and C must apply the W-2 Wage/Basis Limitation by first determining 20% of B's share of M's QBI as limited by subparagraph (b) of this example. Twenty percent of B's share of M's QBI of $120,000 is $24,000. Next, B and C must determine 50% of B's share of M's W-2 wages. Fifty percent of B's share of M's W2 wages of $16,000 is $8,000. Because 50% of B's share of M's W-2 wages ($8,000) is less than 20% of B's share of M's QBI ($24,000), B and C's must determine the QBI component of their ยง 199A deduction by reducing 20% of B's share of M's QBI by the reduction amount.

4.

Reduction Amount. B and C are 60% through the phase-in range (that is, their taxable income exceeds the threshold amount by $60,000 and their phase-in range is $100,000). B and C must determine the Excess Amount, which is the excess of 20% of B's share of M's QBI, as adjusted in subparagraph (b) of this example or $24,000, over 50% of B's share of M's W-2 wages, as adjusted in subparagraph (b) of this example, or $8,000. Thus, the Excess Amount is $16,000.

The Reduction Amount is equal to 60% of the excess amount or $9,600.

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5.

QBI Component. Thus, the QBI component of B and C's ยง 199A deduction is equal to $14,400, 20% of B's share M's QBI of $24,000, reduced by $9,600.

6. ยง 199A Deduction. B and C's ยง 199A deduction is equal to the lesser of 20% of the QBI from the business as limited ($14,400) or 20% of B's and C's taxable income ($375,000 x 20% = $75,000).

Therefore, B and C's ยง 199A deduction is $14,400 for 2018.

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Unit Six - Special Rules Learning Objectives After completing this Unit, you will be able to: › ›

Understand when trades or businesses can be aggregated in determining a taxpayer’s §199A deduction

Learn the tax effect of a net QBI loss in terms of netting and carryovers ›

I.

Understand how trusts and estates calculate a pass through the §199A deduction

Overview.

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.

II.

Aggregation.

A.

Scope and Purpose.

1.

An individual or “Relevant Passthrough Entity” (RPE) may be engaged in more than one trade or business. Except as provided in this section, each trade or business is a separate trade or business for purposes of applying the § 199A limitations.

2.

This section sets forth rules to allow individuals to aggregate trades or businesses, treating the aggregate as a single trade or business for purposes of applying the Sec. 199 A limitations.

3.

Trades or businesses may be aggregated only to the extent provided in this section, but aggregation by taxpayers is not required.

B.

Aggregation Rules—

1.

General rule. Trades or businesses may be aggregated only if an individual can demonstrate that-a.

The same person or group of persons, directly or indirectly, owns 50 percent or more of each trade or business to be aggregated, meaning in the case of such trades or businesses owned by an S corporation, 50 percent or more of the issued and outstanding shares of the corporation, or, in the case of such 51

trades or businesses owned by a partnership, 50 percent or more of the capital or profits in the partnership; b.

The ownership described in paragraph b(1)(a) of this section exists for a majority of the taxable year in which the items attributable to each trade or business to be aggregated are included in income. c.

All of the items attributable to each trade or business to be aggregated are reported on returns with the same taxable year, not taking into account short taxable years. d.

None of the trades or businesses to be aggregated is a SSTB; and e.

The trades or businesses to be aggregated satisfy at least two of the following factors (based on all of the facts and circumstances): (1) The trades or businesses provide products and services that are the same or customarily offered together.

(2) The trades or businesses share facilities or share significant centralized business elements, such as personnel, accounting, legal, manufacturing, purchasing, human resources, or information technology resources.

(3) The trades or businesses are operated in coordination with, or reliance upon, one or more of the businesses in the aggregated group (for example, supply chain interdependencies).

2.

Operating rules. a.

Individuals.

(1) An individual may aggregate trades or businesses operated directly and the individual's share of QBI, W-2 wages, and UBIA of qualified property from trades or businesses operated through RPEs. (2) Multiple owners of an RPE need not aggregate in the same manner. For those trades or businesses directly operated by the individual, the individual computes QBI, W-2 wages, and UBIA of qualified property for each trade or business before applying these aggregation rules.

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(3) If an individual aggregates multiple trades or businesses, the individual must combine the QBI, W-2 wages, and UBIA of qualified property for all aggregated trades or businesses for purposes of applying the W-2 wage and UBIA of qualified property limitations. b.

RPEs.

(1) An RPE may aggregate trades or businesses operated directly or through a lower-tier RPE to the extent an aggregation is not inconsistent with the aggregation of a lower-tier RPE. (2) If an RPE itself does not aggregate, multiple owners of an RPE need not aggregate in the same manner.

(3) If an RPE aggregates multiple trades or businesses, the RPE must compute and report QBI, W-2 wages, and UBIA of qualified property for the aggregated trade or business.

(4) An RPE may not subtract from the trades or businesses aggregated by a lower-tier RPE but may aggregate additional trades or businesses with a lower-tier RPE's aggregation if the rules of this section are otherwise satisfied.

C.

Netting and Carryover-1.

Netting.

a.

If an individual's QBI from at least one trade or business is less than zero, the individual must offset the QBI attributable to each trade or business that produced net positive QBI with the QBI from each trade or business that produced net negative QBI in proportion to the relative amounts of net QBI in the trades or businesses with positive QBI. b.

The adjusted QBI is then used in paragraph (d)(2)(iv) of this section. The W-2 wages and UBIA of qualified property from the trades or businesses which produced net negative QBI are not taken into account for purposes of this paragraph (d) and are not carried over to the subsequent year.

2.

Carry Over Rules a.

Carryover of negative total QBI amount.

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(1) If an individual's QBI from all trades or businesses combined is less than zero, the QBI component is zero for the taxable year.

(2) This negative amount is treated as negative QBI from a separate trade or business in the succeeding taxable year of the individual for purposes of ยง 199A and this section.

(3) This carryover rule does not affect the deductibility of the loss for purposes of other provisions of the Code. The W-2 wages and UBIA of qualified property from the trades or businesses which produced net negative QBI are not taken into account for purposes of this paragraph (d) and are not carried over to the subsequent year. b.

Negative combined qualified REIT dividends/qualified PTP income.

(1) If the combined amount of REIT dividends and qualified PTP income is less than zero, the portion of the individual's ยง 199A deduction related to qualified REIT dividends and qualified PTP income is zero for the taxable year.

(2) The negative combined amount must be carried forward and used to offset the combined amount of REIT dividends and qualified PTP income in the succeeding taxable years of the individual for purposes of ยง 199A and this section.

(3) This carryover rule does not affect the deductibility of the loss for purposes of other provisions of the Code.

D.

Multiple Businesses

1.

If an individual or an RPE directly conducts multiple trades or businesses and has items of QBI that are properly attributable to more than one trade or business, the individual or RPE must allocate those items among the several trades or businesses to which they are attributable using a reasonable method based on all the facts and circumstances.

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2.

The individual or RPE may use a different reasonable method with respect to different items of income, gain, deduction, and loss.

3.

The chosen reasonable method for each item must be consistently applied from one taxable year to another and must clearly reflect the income and expenses of each trade or business.

4.

The overall combination of methods must also be reasonable based on all facts and circumstances. The books and records maintained for a trade or business must be consistent with any allocations under this paragraph.

E.

Application to Trusts, Estates, And Beneficiaries-1.

In General.

a.

Although trusts and estates may themselves take the §199A deduction, it is the beneficiary of a trust or estate that instead may claim the §199A deduction to the extent that the trust or estate passes through relevant items to the beneficia b.

A trust or estate computes its § 199A deduction based on the QBI, W-2 wages, UBIA of qualified property, qualified REIT dividends, and qualified PTP income that are allocated to the trust or estate. c.

An individual beneficiary of a trust or estate takes into account any QBI, W-2 wages, UBIA of qualified property, qualified REIT dividends, and qualified PTP income allocated from a trust or estate in calculating the beneficiary's § 199A deduction, in the same manner as though the items had been allocated from an RPE. d.

A trust or estate is treated as an RPE to the extent it allocates QBI and other items to its beneficiaries and is treated as an individual to the extent it retains the QBI and other items.

2.

Grantor Trusts. — To the extent that the grantor or another person is treated as owning all or part of a trust under sections 671 through 679, such person computes its § 199A deduction as if that person directly conducted the activities of the trust with respect to the portion of the trust treated as owned by the grantor or other person.

3.

Non-grantor Trusts and Estates-a.

Calculation at Entity Level. — 55

(1) A trust or estate must calculate its QBI, W-2 wages, UBIA of qualified property, qualified REIT dividends, and qualified PTP income.

(2) The QBI of a trust or estate must be computed by allocating qualified items of deduction described in § 199A(c)(3) in accordance with the classification of those deductions which are directly attributable to one class of income under §1.652(b)-3(a), and deductions not directly attributable within the meaning of §1.652(b)-3(b) (other deductions) are allocated in a manner consistent with the rules in §1.652(b)-3(b).8 (3) Any depletion and depreciation deductions and any amortization deductions that otherwise are properly included in the computation of QBI are included in the computation of QBI of the trust or estate, regardless of how those deductions may otherwise be allocated between the trust or estate and its beneficiaries for other purposes of the Code.9 b.

Allocation Among Trust or Estate and Beneficiaries. —

(1) The QBI (including any amounts that may be less than zero as calculated at the trust or estate level), W2 wages, UBIA of qualified property, qualified REIT dividends, and qualified PTP income of a trust or estate are allocated to each beneficiary and to the trust or estate based on the relative proportion of the trust's or estate's distributable net income (DNI), as defined by section 643(a), for the taxable year that is distributed or required

8 Items of deduction of a trust that enter into the computation of distributable net income are allocated among the items of income according to the following principles. All deductible items directly attributable to one class of income are allocated to that class of income. To the extent that any items of deduction which are directly attributable to a class of income exceed that class of income, they may be allocated to any other class of income, (including capital gains), included in distributable net income in the same manner provided for deductions which are not directly attributable to specific class of income. The deductions which are not directly attributable to a specific class of income may be allocated to any item of income, including capital gains, included in computing distributable net income, but a portion must be allocated to tax-exempt income. See Treas. Reg. § 1.652(b)-3(d).

Treas. Reg. § 1.652(b)-3(b).

9 For property held in a trust, the allowable depletion and depreciation deductions are apportioned between the income beneficiaries and the trustee on the basis of the trust income allocable to each, unless the governing instrument (or local law) requires or permits the trustee to maintain a reserve for depletion depreciation in any amount. See Treas. Reg. § 1.167(a) -1(a); Treas. Reg. § 1.611-1(c)(4).

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to be distributed to the beneficiary or is retained by the trust or estate.

(2) For this purpose, the trust's or estate's DNI is determined with regard to the separate share rule of section 663(c), but without regard to § 199A. If the trust or estate has no DNI for the taxable year, any QBI, W-2 wages, UBIA of qualified property, qualified REIT dividends, and qualified PTP income are allocated entirely to the trust or estate. c.

Threshold Amount. — The Threshold Amount applicable to a trust or estate is $157,500 for any taxable year beginning before 2019. For taxable years beginning after 2018, the threshold amount shall be $157,500 increased by a cost-ofliving adjustment. For purposes of determining whether a trust or estate has taxable income in excess of the threshold amount, the taxable income of the trust or estate is determined after taking into account any distribution deduction. d.

Electing Small Business Trusts. —

(1) An electing small business trust (ESBT) is entitled to the deduction under § 199A. Any § 199A deduction attributable to the assets in the S portion of the ESBT is to be taken into account by the S portion.

(2) The S portion of the ESBT must take into account the QBI and other items from any S corporation owned by the ESBT, the grantor portion of the ESBT must take into account the QBI and other items from any assets treated as owned by a grantor or another person (owned portion) of a trust under sections 671 through 679, and the non S portion of the ESBT must take into account any QBI and other items from any other entities or assets owned by the ESBT. (3) For purposes of determining whether the taxable income of an ESBT exceeds the threshold amount, the S portion and the non-S portion of an ESBT are treated as a single trust. e.

Anti-abuse Rule for Creation of a Trust to Avoid Exceeding the Threshold Amount. — A trust formed or funded 57

with a principal purpose of avoiding, or of using more than one, threshold amount for purposes of calculating the deduction under ยง 199A will not be respected as a separate trust entity for purposes of determining the threshold amount for purposes of ยง 199A.

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Exam 1.

What is the definition of “qualified business income?”

a.

The net amount of “qualified items” of income, gain, or deduction, and loss with respect to any qualified trade or business of the taxpayer. b.

To the extent provided in regulations, any payment described in section 707(a) to a partner for services rendered with respect to the trade or business. c.

Reasonable compensation paid to the taxpayer by any qualified trade or business of the taxpayer for services rendered with respect to the trade or business. d.

Any guaranteed payment described in section 707(c) paid to a partner for services rendered with respect to the trade or business.

2.

Under the Regulations a “qualified trade or business” is defined as:

a.

Any trade or business other than (i) a “specified service trade or business” or “SSTB”, or (ii) the trade or business of performing services as an employee. b.

A “specified service trade or business”.

c.

A trade or business of performing services as an employee.

d.

A trade or business of performing services as an engineer.

3.

Which of the following is not an exclusion as a qualified item of income, gain, deduction, or loss: a.

Any item of short-term capital gain, short-term capital loss, long-term capital gain, or long-term capital loss. b.

Any real property acquired for the purpose of acquiring rent.

c.

Any interest income other than interest income which is properly allocable to a trade or business. d.

Any item of gain or loss described in subparagraph (C) or (D) of Section 954(c)(1) (applied by substituting “qualified trade or business” for “controlled foreign corporation”).

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4.

What is the definition of “rental real estate enterprises”?

a.

An interest in real property or multiple properties held for the production of rents. b.

A residential real estate property

c.

A commercial real estate property

d.

A mixed-use real estate property

5.

Which of the following is not a requirement needing to be satisfied during the taxable year with respect to the rental real estate enterprise? a.

At least 250 hours of “rental services” must be performed each year with respect to the enterprise, beginning prior to January 1, 2023. b.

Separate books and records must be maintained for each real estate enterprise reflecting income and expenses of the enterprise. c.

Taxpayers must keep contemporaneous records (i.e., time reports, logs, or similar documents) regarding the number of hours of all services performed for the enterprise, as well as a description of such services, including who the service was performed by and on what date such service was performed. d.

The value of the real estate property must be less than $10,000,000.

6.

The §199A deduction of a taxpayer cannot exceed

a.

An amount equal to 20 percent of the excess (if any) of the taxable income of the taxpayer for the taxable year, over the net capital gain of the taxpayer for such taxable year. b.

An amount equal to 40 percent of the excess (if any) of the taxable income of the taxpayer for the taxable year, over the net capital gain of the taxpayer for such taxable year. c.

An amount equal to 20 percent of the excess (if any) of the net capital gain of the taxpayer for such taxable year. a.

An amount equal to 40 percent of the excess (if any) of the taxable income of the taxpayer for the taxable year.

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7.

What is the definition of “unadjusted basis immediately after acquisition?” a.

The adjusted tax basis of the property

b.

The net book value of the property

c.

110% of the cost of the property

d.

The basis of qualified property on the date the property is placed in-service date.

8.

When computing the Sec. 199A deduction, what is considered to be the “excess amount?” a.

30% QBI over the W-2 Wage/Basis Limitation as otherwise calculated.

b.

10% QBI over the W-2 Wage/Basis Limitation as otherwise calculated.

c.

20% QBI over the W-2 Wage/Basis Limitation as otherwise calculated. d.

27% QBI over the W-2 Wage/Basis Limitation as otherwise calculated.

9.

Which of the following is not part of the three-step process to determine the W-2 wage component of the Sec. 199A deduction calculation the taxpayer must properly allocate to QBI? a.

Determine the total amount of W-2 wages treated as paid by the taxpayer for the taxable year. b.

Allocate the W-2 wages between or among one or more trades or businesses. c.

Determine the amount of such wages with respect to each trade or business, which are allocable to the QBI of the trade or business (or aggregate trade or business). d.

Determine the “QBI” of the taxpayer.

10. In order to compute the QBI Component (“QBIC”) for each trade or business the individual must determine all but one of the following a.

20 percent of the Qualified Business Income for that trade or business.

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b.

50 percent of W-2 wages with respect to that trade or business.

c.

The sum of 25 percent of W-2 wages with respect to that trade or business plus 2.5 percent of the UBIA of qualified property with respect to that trade or business. d.

The number of hours the taxpayer works in that trade or business.

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GLOSSARY OF TERMS The “Act” – Tax Cut and Jobs Act (Public Law No. 115-97).

“Applicable Percentage” – with respect to any taxable year, 100 percent reduced (not below zero) by the percentage equal to the ratio that the taxable income of the individual for the taxable year in excess of the threshold amount, bears to $50,000 (or $100,000 in the case of a joint return).

“Combined Qualified Business Income Amount” – the sum of three separate amounts: (1) 20% of the taxpayer’s “qualified business income” (QBI) from each “qualified trade or business” (QTB) (as limited by the “wage-basis limit,”); (2) 20% of the taxpayer’s aggregate “qualified REIT dividends,”; and (3) 20% of the taxpayer’s aggregate “qualified publicly traded partnership income.”

“Depreciable Period” – with respect to qualified property of a trade or business, the period beginning on the date the property was first placed in service by the individual or RPE and ending on the later of (a) the date that is 10 years after such date; or (b) the last day of the last full year in the applicable recovery period that would apply to the property under section 168(c), regardless of any application of section 168(g) (the “alternative depreciation system” (ADS), which generally causes the recovery period of depreciable property to be longer than it would otherwise be under ¬§ 168.

“Excess Amount” – equal to 20% QBI over the W-2 Wage/Basis Limitation as otherwise calculated.

“Net Capital Gain” – net capital gain (excess of net long-term capital gain for the taxable year over the net short-term capital loss) plus any qualified dividend income for the taxable year.

“Phase-In Range” – a range of taxable income, the lower limit of which is the threshold amount, and the upper limit of which is the threshold amount plus $50,000 (or $100,000 in the case of a joint return).

“QBI Component (QBIC)” – for each trade or business (including trades or businesses operated through RPEs) the individual must determine the lesser of (1) 20 percent of the QBI for that trade or business (“20% of QBI”); or (2) the greater 63

of (the “W-2 Wage/Basis Limitation”): (i) 50 percent of W-2 wages with respect to that trade or business, or (ii) the sum of 25 percent of W02 wages with respect to that trade or business plus 2.5 percent of the UBIA of qualified property with respect to that trade or business.

“Qualified Business Income (QBI)” – for any taxable year, the net amount of “qualified items” of income, gain, deduction, and loss with respect to any qualified trade or business of the taxpayer. QBI does not include any qualified REIT dividends or qualified publicly traded partnership income.

“Qualified Business or Trade” – any trade or business other than (i) a “specified service trade or business” or “SSTB”, or (ii) the trade or business of performing services as an employee.

“Qualified Items of Income, Gain, Deduction, and Loss” – items of income, gain, deduction, and loss to the extent such items are: (1) effectively connected with the conduct of a trade or business within the United States; and (2) included or allowed in determining taxable income for the taxable year.

“Qualified Property” – with respect to any trade or business (or aggregated trade or business) of an individual or RPE for a taxable year, tangible property of a character subject to the allowance for depreciation under section 167(a): (a) which is held by, and available for use in, the trade or business (or aggregate trade or business) at the close of the taxable year; (b) which is used at any point during the taxable year in the trade or business’s (or aggregate trade or business’s) production of QBI; and (c) the depreciable period for which has not ended before the close of the individual’s or RPE’s taxable year.

“Qualified PTP Income” – the sum of (1) the net amount of such taxpayer’s allocable share of income, gain, deduction, and loss from a publicly traded partnership, plus (2) any gain or loss attributable to assets of the publicly traded partnership giving rise to ordinary income that is considered attributable to the trades or businesses conducted by the partnership.

“Qualified REIT Dividends” – any dividend from a REIT received during the taxable year which: (1) is not a capital gain dividend, and (2) is not qualified dividend income. A REIT dividend is not a qualified REIT dividend if the stock with respect to which it is received is held for fewer than 45 days.

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“Reduction Amount” – With respect to any taxable year, the excess amount multiplied by the ratio that the taxable income of the individual for the taxable year in excess of the threshold amount, bears to $50,000 (or $100,000 in the case of a joint return).

“Relevant Passthrough Entity” – include partnerships (except for PTPs which are treated separately) and S corporations that are directly or indirectly owned by at least one individual, trust, or estate. A trust is also an RPE to the extent it passes through QBI, W-2 wages, UBIA of qualified property, qualified REIT dividends, or qualified PTP income to a beneficiary or beneficiaries.

“Rental Real Estate Enterprise” – an interest in real property [or multiple properties] held for the production of rents.

“Rental Services” – may be performed by owners, employees, agents, and independent contractors. They include the following: (i) advertising to rent or lease the real estate; (ii) negotiating and executing leases; (iii) verifying information contained in prospective tenant applications; (iv) collecting rent; (v) daily operation, maintenance, and repair of property; (vi) management of the real estate; (vii) purchase of materials; and (viii) supervision of employees and independent contractors. They do not include financial or investment management activities, such as: arranging financing; procuring property; studying and reviewing financial statements or reports on operations; planning, managing, or constructing long-term capital improvements; or hours spent traveling to and from the real estate.

“Specified Service Trade or Business” – any trade or business which is any of the following fields: (i) health; (ii) law; (iii) accounting; (iv) actuarial science; (v) performing arts; (vi) consulting; (vii) athletics; (viii) financial services; (ix) brokerage services; (x) investing and investment management; (xi) trading; (xii) dealing in securities; or (xiii) any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees or owners.

“Threshold Amount” – for any taxable year beginning before 2019, $157,500, (or $315,000 in the case of a taxpayer filing a joint return). This figure will be adjusted by a cost-of-living adjustment on an annual basis.

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“Unadjusted Basis Immediately After Acquisition” – the basis on the placed inservice date.

“W-2 Wage/Basis Limitation” – the greater of (i) the amount determined under the “wages test” or (ii) the amount determined under the “wages plus basis test.”

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