Tax Reform

IRS Releases Proposed 199A Regulations: Do you qualify?

Tyler Horton, Managing Director

thorton@alvarezandmarsal.com

Brian Goldblatt, Senior Director

bgoldblatt@alvarezandmarsal.com

Andrew Johnson, Managing Director

ajohnson@alvarezandmarsal.com

Jeffrey Richman, Senior Director

jrichman@alvarezandmarsal.com

Jennifer Hicks, Senior Director

jhicks@alvarezandmarsal.com

August 22, 2018 / North America

WHAT DO YOU NEED TO KNOW?

As a result of IRC Section 199A of the Tax Cuts and Jobs Act of 2017 (TCJA), the IRS released its proposed reliance regulations on the 20% deduction for certain pass-through business income (definitions, computations, and anti-avoidance). For eligible businesses, this deduction is dependent on the following items:

  • Qualified Business Income (QBI)
  • W-2 Wages
  • Qualified Property Basis; and
  • Overall Taxable Income

There are six separate proposed regulations:

  • 1.199A-1 Operational Rules
  • 1.199A-2 Determination of W-2 Wages and unadjusted basis immediately after acquisition (UBIA) of qualified property
  • 1.199A-3 Qualified business income, qualified REIT dividends, and qualified PTP income
  • 1.199A-4 Aggregation Rules
  • 1.199A-5 Specified service trades or businesses (SSTBs) and the trade or business of performing services as an employee
  • 1.199A-6 Special rules for pass-through entities (RPEs), publicly traded partnerships (PTPs), trusts, and estates

A public hearing has been set for October 16, 2018 before the proposals may become final.

HOW WILL IT AFFECT YOU?

The regulations will affect and may provide a 20% deduction for individuals, trusts, and estates (including partners in partnerships and shareholders in S-corporations) that receive QBI from US trades or businesses. QBI generally includes operating income and losses; QBI excludes capital gains and losses, dividends, guaranteed payments to a partner, and wages paid to an employee.

If the proposed 199A regulations remain as is and you are a pass-through owner doing business in other than the industries noted below, you may potentially lower your tax rate on qualifying income by a maximum 7.4%:

The pass-through deduction will likely not apply for the following industries referred to as specified service trades or businesses or SSTBs:


trading
(hedge funds)

investment
management

law

consulting

investment
banking

private
equity

healthcare
(Nursing facilities, veterinarians)

financial
services

actuarial
science

accounting

performing
arts

athletics

WHAT CAN A&M TAXAND DO FOR YOU?

The proposed regulations are highly complicated and may take considerable consultation before concluding on their impact. Still, some key questions may remain:

  • How can companies proactively maximize their 199A deduction while avoiding the anti-abuse provisions?
  • How do complex companies navigate the impact of SSTBs within their structures?
  • Whether a business with greater than 5% of its total business classified as a SSTB taints all activity?
  • Will 1231 gains remain outside of QBI?
  • Will partnership basis adjustments remain outside of UBIA?
  • How will W-2 classifications impact the calculations and application to pass-through structures?

Closely monitoring & navigating the status of these proposed regulations in the coming weeks is key. Amidst this ever-changing regulatory environment, our Alvarez & Marsal Taxand team has the critical industry expertise and the advantage of an integrated team to successfully guide the way towards keeping compliant and attaining maximum tax benefits for you and your company.

To learn more about our services, visit: https://www.alvarezandmarsal.com/expertise/tax


North America