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NEW PROPOSED REGS Issued August 2018

Dive into the 184 informative pages of the new proposed regulations issued in August 2018 concerning IRC §199A. Learn about the implications for rental real estate businesses and explore key exceptions that could benefit property owners. Understand the netting rules and computational examples provided in the document.

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NEW PROPOSED REGS Issued August 2018

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  1. NEW PROPOSED REGS Issued August 2018

  2. New Proposed Regs re: IRC §199A • 184 pages of pure reading pleasure • Divided into 6 sections • Each section covers a separate topic, followed by several examples. • My recommendation? Print the regs out, label the 6 sections and then read those parts that are pertinent to your situation.

  3. New Proposed Regs re: IRC §199A • The first 105 pages are an informal summary of the 6 sections. • Pages 105-110 are an index of sorts. • Pages 110-184 are the actual proposed regs. Don’t forget….these are “proposed regs” and do NOT constitute “statutory authority” until issued as Final Regulations. Nevertheless, we would do well to heed these rules.

  4. New Proposed Regs re: IRC §199A The 6 sections of the new proposed regs

  5. New Proposed Regs re: IRC §199A Rather than go in any particular order, I will start with those areas that, in my opinion, are the most important.

  6. New Proposed Regs re: IRC §199A Rental Real Estate • Prior to proposed regs: • QBI had to be “trade or business”. • Does rental real estate rise to the level of “trade or business”? • Under what set of rules do we make that determination? • IRS unclear, courts unclear, the whole world…..CLEAR as MUD!

  7. New Proposed Regs re: IRC §199A Rental Real Estate • Under the proposed regs: • 1.199A-1(b)(13) gives the answer. • Page 113 of the regs. • The benchmark to use is IRC 162. • Clear as MUD • GOOD NEWS: See next slide

  8. New Proposed Regs re: IRC §199A Rental Real Estate • Under the proposed regs: • GOOD NEWS: • If a rental activity does NOT rise to the IRC 162 test, the proposed regs allow one exception which will really help our clients with rental real estate.

  9. New Proposed Regs re: IRC §199A Rental Real Estate The GOOD exception: Any rental activity (tangible or intangible) that does not rise to the IRC 162 level will, nonetheless, be treated as a “trade or business” if the property is rented/licensed to a “trade or business” commonly controlled (50% test).

  10. New Proposed Regs re: IRC §199A Rental Real Estate • The GOOD exception: • Q: Who will benefit from this? • A: Any of our clients who have self-rentals that are used in their trade or business. • Schedule E, page 1, rentals given the code 7 (for self-rental) • PTEs that lease real property to a trade or business that meets the 50% ownership test.

  11. New Proposed Regs re: IRC §199A Rental Real Estate Remember, outside of this ONE exception, we must decide whether or not a rental activity is a “trade or business” solely based on IRC 162. CLARITY STILL NEEDED!!

  12. New Proposed Regs re: IRC §199A Prop. Reg. 1.199A-1 • Reg. 1.199A-1 covers “Operational Rules”….the most important of which concern netting rules. • These netting rules are complex and warrant careful review. • The pertinent discussion starts on page 116 and goes to page 119. • Then, there are 12 examples on pages 119-126.

  13. New Proposed Regs re: IRC §199A Prop. Reg. 1.199A-1 • Of the 12 examples, the first 6 are strictly showing how to compute the QBID. The next 6 go over the netting rules in detail. • EXAMPLE 6 IS NOTEWORTHY. • EXAMPLE 6 is a game changer! It changes the way we all have been calculating QBID when dealing with a SSTB in the “Twilight Zone”.

  14. New Proposed Regs re: IRC §199A Prop. Reg. 1.199A-1 • In the Business Entities manual we showed an example of the QBID calculation for a SSTB in the “Twilight Zone”. It was done using the old method in place before the issuance of the proposed regs. • In the 1040 manual we left out such an example.

  15. New Proposed Regs re: IRC §199A Prop. Reg. 1.199A-1 • I will now show you the example we used in the Business Entities manual and do it using the old method and then the new method as prescribed by Example 6 in the proposed regs.

  16. New Proposed Regs re: IRC §199A Prop. Reg. 1.199A-1 • Example from Business Entities • Tony and Toni file MFJ and have taxable income of $355,000. No net capital gain. No UBIA. Schedule C net income is $75,000. Wages on the Schedule C are $20,000.

  17. New Proposed Regs re: IRC §199A Prop. Reg. 1.199A-1 QBID calculation using “old” method: NOTE: taxable income limitation ok. Wage limitation $10,000 ok.

  18. New Proposed Regs re: IRC §199A Prop. Reg. 1.199A-1 QBID calculation using “new” method:

  19. New Proposed Regs re: IRC §199A Prop. Reg. 1.199A-1 Actual EXAMPLE 6 in proposed regs, pages 121-122 NOTE: taxable income limitation ok…$375k x 20% = $75k.

  20. The new way (based on example 6 in the proposed regs) of calculating the QBI when dealing with a SSTB in the “twilight zone” is: • Awesome beyond belief • Terrifying • Going to yield different results • Something to be ignored at any cost

  21. New Proposed Regs re: IRC §199A Netting Rules – Prop. Reg. 1.199A-1 • Mike’s wonderful, passionate, caring and professional advice…… • Sometime between now and tax season, read the entire section 1.199A-4 (and especially the 12 examples). You WILL need to read it more than once. But do it!

  22. New Proposed Regs re: IRC §199A Netting Rules – Prop. Reg. 1.199A-1 BONUS MATERIAL In between seminars I poured over the 12 examples on pages 119-126. I had to read them 2-3 times. Not for the faint of heart!

  23. New Proposed Regs re: IRC §199A Netting Rules – Prop. Reg. 1.199A-1 BONUS MATERIAL I knew I would need to develop an Excel template I could use to teach my staff this stuff. So I did. And then I input Examples 7-12.

  24. New Proposed Regs re: IRC §199A Netting Rules – Prop. Reg. 1.199A-1 BONUS MATERIAL The next several slides show you what I did. We will go over them if time. If not, they are there for you when you study this later on your own time.

  25. New Proposed Regs re: IRC §199A Netting Rules – Prop. Reg. 1.199A-1 Info needed: F, single filer. T.I.=2,722,000 3 Sch C’s Assumption: the 3 businesses meet the “aggregation tests” in Reg. Sec. 1.199A-4

  26. New Proposed Regs re: IRC §199A Netting Rules – Prop. Reg. 1.199A-1 Same info as prior slide, except for Bus. Z

  27. New Proposed Regs re: IRC §199A Netting Rules – Prop. Reg. 1.199A-1 Example 11 spans 2018 and 2019 to show the carryover rules. This slide shows 2018. The next slide shows 2019.

  28. New Proposed Regs re: IRC §199A Netting Rules – Prop. Reg. 1.199A-1

  29. New Proposed Regs re: IRC §199A Netting Rules – Prop. Reg. 1.199A-1 Ex. 11 showed the combination of the netting and carryover rules with no aggregation. Ex. 12 here shows the same thing but WITH aggregation. See the next slide for the 2019 QBID.

  30. New Proposed Regs re: IRC §199A Netting Rules – Prop. Reg. 1.199A-1 NOTE: Ex. 12 is exactly like Ex. 11 but with aggregation. So, compare the 2 figures for the QBID. $16,000 versus $9,144.

  31. New Proposed Regs re: IRC §199A Aggregation Rules – Prop. Reg. 1.199A-4 • We just went over examples 7-12 on pages 122-126 of the regs. • Note that Examples 8, 10 and 12 involved aggregation. • Those examples ASSUMED that the taxpayer passed all of the aggregation tests listed here under Reg. Sec. 1.199A-4. • Now we will look at those rules.

  32. New Proposed Regs re: IRC §199A Aggregation Rules – Prop. Reg. 1.199A-4 • Reg. 1.199A-4 covers the new rules relating to aggregation. • These rules are complex and not intuitive at all. • The discussion in the regs starts on page 148 and goes to page 152. • Then, there are 14 examples on pages 152-156.

  33. New Proposed Regs re: IRC §199A Aggregation Rules – Prop. Reg. 1.199A-4 • MAIN PROBLEM: • These rules are NOT based on the passive activity grouping rules that we already know (and love) pursuant to IRC 469. • Therefore, we will have to understand and keep track of 2 different sets of grouping rules. That’s NOT funny!!!

  34. New Proposed Regs re: IRC §199A Aggregation Rules – Prop. Reg. 1.199A-4 • BUT WAIT, THERE’S MORE: • While aggregating is purely elective, it cannot be revoked once made. • EACH year we must attach a statement to the 1040 identifying each aggregated business and include a lot of other information as required by the regs (see pg. 151 in the regs).

  35. New Proposed Regs re: IRC §199A Aggregation Rules – Prop. Reg. 1.199A-4 • There are, basically, 5 tests one has to meet in order to aggregate 2 or more trades or businesses for QBID purposes. • The 5 tests are found on pages 149-150. • Remember, these tests DIFFER from the “grouping” rules in the passive activity arena (oh, groan!).

  36. New Proposed Regs re: IRC §199A Aggregation Rules – Prop. Reg. 1.199A-4 Here are the 5 tests (I am paraphrasing): Same person, or group of persons, owns 50% or more of each trade or business to be aggregated. NOTE: Special “family attribution rules” apply.

  37. New Proposed Regs re: IRC §199A Aggregation Rules – Prop. Reg. 1.199A-4 Here are the 5 tests….continued: The ownership referred to in #1 above exists for a majority of the taxable year. What on earth does THAT mean?

  38. New Proposed Regs re: IRC §199A Aggregation Rules – Prop. Reg. 1.199A-4 Here are the 5 tests….continued: Each aggregated trade or business must use the same taxable year.

  39. New Proposed Regs re: IRC §199A Aggregation Rules – Prop. Reg. 1.199A-4 Here are the 5 tests….continued None of them can be a SSTB.

  40. New Proposed Regs re: IRC §199A Aggregation Rules – Prop. Reg. 1.199A-4 Here are the 5 tests….continued The trades or businesses must satisfy at least 2 of the 3 following factors (based on all the facts and circumstances)…..

  41. New Proposed Regs re: IRC §199A Aggregation Rules – Prop. Reg. 1.199A-4 Here are the 5 tests….continued Test # 5…the 3 factors (gotta meet 2): They provide products and services that are the same or customarily offered together. They share facilities or share significant centralized business elements (personnel, accounting, legal, manufacturing, purchasing, human resources or information technology resources.

  42. New Proposed Regs re: IRC §199A Aggregation Rules – Prop. Reg. 1.199A-4 Here are the 5 tests….continued Test # 5…the 3 factors (gotta meet 2): They are operated in coordination with, or reliance upon, one of more of the businesses in the aggregated group.

  43. New Proposed Regs re: IRC §199A Aggregation Rules – Prop. Reg. 1.199A-4 IN ALL HONESTY The 14 examples do a very good job at illustrating those 5 tests. They give you facts and, then, discuss the 5 tests and see if that set of facts comply, thus allowing the taxpayer to aggregate.

  44. New Proposed Regs re: IRC §199A Aggregation Rules – Prop. Reg. 1.199A-4 • SERIOUS HARD WORK AHEAD • Remember…going thru those 5 tests only tell us ONE thing….will we be allowed to elect to aggregate the trades or businesses? • That exercise does NOT tell us if we SHOULD aggregate…or which ones to aggregate.

  45. New Proposed Regs re: IRC §199A Aggregation Rules – Prop. Reg. 1.199A-4 • MIKEY’S RECOMMENDATION • Develop some kind of checklist patterned after those 5 tests. • That checklist should be filled out for EACH client that has more than one trade or business. • Keep that checklist in your Permanent File as well as each current year file.

  46. New Proposed Regs re: IRC §199A Aggregation Rules – Prop. Reg. 1.199A-4 Anybody contemplating selling yogurt yet?

  47. New Proposed Regs re: IRC §199A IRC §754 Step-Up • Reg. Section 1.199A-2(c)(1)(iii) • Page 137 of regs • Basis adjustments under 734(b) and 743(b) are NOT treated as qualifying property for applying the UBIA limits.

  48. New Proposed Regs re: IRC §199A 1031 Transactions • Reg. Section 1.199A-2(c)(2)(iii) • Page 137 of regs • Main issue: When “placed in service”. This impacts the 10 year rule for UBIA limits. General rule is….. • “Exchanged basis”….use date placed in service for the relinquished property. • “Excess basis”….use date placed in service for the replacement property.

  49. New Proposed Regs re: IRC §199A Allocating UBIA of Qualifying Property Held by an RPE SURPRISE!! • Reg. Section 1.199A-2(a)(3) • Pages 128-129 of regs • Each partner/shareholder share of UBIA is allocated pro-rata… • Based on tax depreciation!

  50. New Proposed Regs re: IRC §199A Allocating UBIA of Qualifying Property Held by an RPE • This will impact the allocation of UBIA (for those of us preparing K-1s and needing to disclose UBIA information).

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