40884 Federal Register / Vol. 83, No. 159 / Thursday, August 16, 2018 / Proposed Rules 

DEPARTMENT OF THE TREASURY 

Internal Revenue Service 

26 CFR Part 1 

[REG–107892–18] 

RIN 1545–BO71 

Qualified Business Income Deduction 

AGENCY: Internal Revenue Service (IRS), 

Treasury. 

ACTION: Notice of proposed rulemaking 

and notice of public hearing. 

SUMMARY: This document contains 

proposed regulations concerning the 

deduction for qualified business income 

under section 199A of the Internal 

Revenue Code (Code). The regulations 

will affect individuals, partnerships, S 

corporations, trusts, and estates engaged 

in domestic trades or businesses. The 

proposed regulations also contain an 

anti-avoidance rule under section 643 of 

the Code to treat multiple trusts as a 

single trust in certain cases. This 

document also provides notice of a 

public hearing on these proposed 

regulations. 

DATES: Written or electronic comments 

must be received by October 1, 2018. 

Outlines of topics to be discussed at the 

public hearing scheduled for October 

16, 2018, at 10 a.m. must be received by 

October 1, 2018. If no outlines of topics 

are received by October 1, 2018 the 

public hearing will be cancelled. 

ADDRESSES: Send submissions to 

CC:PA:LPD:PR (REG–107892–18), Room 

5203, Internal Revenue Service, P.O. 

Box 7604, Ben Franklin Station, 

Washington, DC 20044. Submissions 

may be hand-delivered Monday through 

Friday between the hours of 8 a.m. and 

4 p.m. to CC:PA:LPD:PR (REG–107892– 

18), Courier’s Desk, Internal Revenue 

Service, 1111 Constitution Avenue NW, 

Washington, DC 20224, or via the 

Federal eRulemaking Portal at 

www.regulations.gov (indicate IRS and 

REG–107892–18). The public hearing 

will be held in the Auditorium, Internal 

Revenue Service, 1111 Constitution 

Avenue NW, Washington, DC. 

FOR FURTHER INFORMATION CONTACT: 

Concerning the proposed regulations, 

Vishal R. Amin, Frank J. Fisher, or 

Wendy L. Kribell at (202) 317–6850 or 

Adrienne M. Mikolashek at 202–317– 

5279; concerning submissions of 

comments and outlines of topics for the 

public hearing, Regina Johnson at (202) 

317–6901 (not toll-free numbers). 

SUPPLEMENTARY INFORMATION: 

Paperwork Reduction Act 

The collection of information 

contained in this notice of proposed 

rulemaking has been submitted to the 

Office of Management and Budget for 

review in accordance with the 

Paperwork Reduction Act of 1995 (44 

U.S.C. 3507(d)). The Department of the 

Treasury (Treasury Department) and the 

IRS request comment on the 

assumptions, methodology, and burden 

estimates related to this information 

collection. Comments on the collection 

of information should be sent to the 

Office of Management and Budget, Attn: 

Desk Officer for the Department of the 

Treasury, Office of Information and 

Regulatory Affairs, Washington, DC 

20503, with copies to the Internal 

Revenue Service, Attn: IRS Reports 

Clearance Officer, SE-:CAR:MP:T:T:SP, 

Washington, DC 20224. Comments on 

the collection of information should be 

received by October 15, 2018. 

Comments are specifically requested 

concerning: 

Whether the proposed collection of 

information is necessary for the proper 

performance of the IRS, including 

whether the information will have 

practical utility; 

The accuracy of the estimated burden 

associated with the proposed collection 

of information; 

How the quality, utility, and clarity of 

the information to be collected may be 

enhanced; 

How the burden of complying with 

the proposed collection of information 

may be minimized, including through 

the application of automated collection 

techniques or other forms of information 

technology; and 

Estimates of capital or start-up costs 

and costs of operation, maintenance, 

and purchase of service to provide 

information. 

Details of the estimated collection 

burden can be found in Section I.J. of 

the Special Analyses section later in this 

document. 

The collection of information required 

by this proposed regulation is in 

proposed § 1.199A–4 and proposed 

§ 1.199A–6. The collection of 

information in proposed § 1.199A–4 is 

required for taxpayers that choose to 

aggregate two or more trades or 

businesses. The collection of 

information in proposed § 1.199A–6 is 

required for passthrough entities that 

report section 199A information to their 

owners or beneficiaries. It is necessary 

to report the information to the IRS in 

order to ensure that taxpayers properly 

report in accordance with the rules of 

the proposed regulations the correct 

amount of deduction under section 

199A. The collection of information is 

necessary to ensure tax compliance. 

The likely respondents are 

individuals with qualified business 

income from more than one trade or 

business as well as most partnerships, S 

corporations, trusts, and estates that 

have qualified business income. 

Estimated total annual reporting 

burden: 25 million hours. 

Estimated average annual burden 

hours per respondent will vary from 30 

minutes to 20 hours, depending on 

individual circumstances, with an 

estimated average of 2.5 hours. 

Estimated number of respondents: 10 

million. 

Estimated annual frequency of 

responses: annually. 

Estimated monetized burden: Using 

the IRS’s taxpayer compliance cost 

estimates, taxpayers who are selfemployed with multiple businesses are 

estimated to have a monetization rate of 

$39 per hour. Pass-throughs that issue 

K–1s have a monetization rate of $53 

per hour. (See ‘‘Taxpayer compliance 

Costs for Corporations and Partnerships: 

A New Look,’’ Contos, et al. IRS 

Research Bulletin (2012) p. 5 for a 

description of the model.) 

An agency may not conduct or 

sponsor, and a person is not required to 

respond to, a collection of information 

unless it displays a valid control 

number assigned by the Office of 

Management and Budget. 

Books or records relating to a 

collection of information must be 

retained as long as their contents may 

become material in the administration 

of any internal revenue law. Generally, 

tax returns and tax return information 

are confidential, as required by section 

6103. 

Background 

This document contains proposed 

amendments to the Income Tax 

Regulations (26 CFR part 1) under 

sections 199A and 643 of the Code. 

I. Section 199A 

Section 199A was enacted on 

December 22, 2017, by § 11011 of ‘‘An 

Act to provide for reconciliation 

pursuant to titles II and V of the 

concurrent resolution on the budget for 

fiscal year 2018,’’ Public Law 115–97 

(TCJA), and was amended on March 23, 

2018, retroactively to January 1, 2018, 

by § 101 of Division T of the 

Consolidated Appropriations Act, 2018, 

Public Law 115–141, (2018 Act). Section 

199A applies to taxable years beginning 

after 2017 and before 2026. 

Section 199A provides a deduction of 

up to 20 percent of income from a 

domestic business operated as a sole 


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Federal Register / Vol. 83, No. 159 / Thursday, August 16, 2018 / Proposed Rules 40885 

proprietorship or through a partnership, 

S corporation, trust, or estate (section 

199A deduction). The section 199A 

deduction may be taken by individuals 

and by some estates and trusts. A 

section 199A deduction is not available 

for wage income or for business income 

earned through a C corporation. For 

taxpayers whose taxable income 

exceeds a statutorily-defined amount 

(threshold amount), section 199A may 

limit the taxpayer’s section 199A 

deduction based on (i) the type of trade 

or business engaged in by the taxpayer, 

(ii) the amount of W–2 wages paid with 

respect to the trade or business (W–2 

wages), and/or (iii) the unadjusted basis 

immediately after acquisition (UBIA) of 

qualified property held for use in the 

trade or business (UBIA of qualified 

property). These statutory limitations 

are subject to phase-in rules based upon 

taxable income above the threshold 

amount. 

Section 199A also allows individuals 

and some trusts and estates (but not 

corporations) a deduction of up to 20 

percent of their combined qualified real 

estate investment trust (REIT) dividends 

and qualified publicly traded 

partnership (PTP) income, including 

qualified REIT dividends and qualified 

PTP income earned through 

passthrough entities. This component of 

the section 199A deduction is not 

limited by W–2 wages or UBIA of 

qualified property. 

The section 199A deduction is the 

lesser of (1) the sum of the combined 

amounts described in the prior two 

paragraphs or (2) an amount equal to 20 

percent of the excess (if any) of taxable 

income of the taxpayer for the taxable 

year over the net capital gain of the 

taxpayer for the taxable year. 

Additionally, section 199A(g) 

provides that specified agricultural or 

horticultural cooperatives may claim a 

special entity-level deduction that is 

substantially similar to the domestic 

production activities deduction under 

former section 199. 

Finally, the statute expressly grants 

the Secretary authority to prescribe such 

regulations as are necessary to carry out 

the purposes of section 199A (section 

199A(f)(4)), and provides specific grants 

of authority with respect to: The 

treatment of acquisitions, dispositions, 

and short-tax years (section 199A(b)(5)); 

certain payments to partners for services 

rendered in a non-partner capacity 

(section 199A(c)(4)(C)); the allocation of 

W–2 wages and UBIA of qualified 

property (section 199A(f)(1)(A)(iii)); 

restricting the allocation of items and 

wages under section 199A and such 

reporting requirements as the Secretary 

determines appropriate (section 

199A(f)(4)(A)); the application of section 

199A in the case of tiered entities 

(section 199A(f)(4)(B)); preventing the 

manipulation of the depreciable period 

of qualified property using transactions 

between related parties (section 

199A(h)(1)); and determining the UBIA 

of qualified property acquired in likekind exchanges or involuntary 

conversions (section 199A(h)(2)). 

II. Section 643 

Part I of subchapter J of chapter 1 of 

the Code provides rules related to the 

taxation of estates, trusts, and 

beneficiaries. For various subparts of 

part I of subchapter J, sections 643(a), 

643(b), and 643(c) define the terms 

distributable net income (DNI), income, 

and beneficiary, respectively. Sections 

643(d) through 643(i) (other than section 

643(f)) provide additional rules. Section 

643(f) grants the Secretary authority to 

treat two or more trusts as a single trust 

for purposes of subchapter J if (1) the 

trusts have substantially the same 

grantors and substantially the same 

primary beneficiaries and (2) a principal 

purpose of such trusts is the avoidance 

of the tax imposed by chapter 1 of the 

Code. Section 643(f) further provides 

that, for these purposes, spouses are 

treated as a single person. 

Explanation of Provisions 

The purpose of these proposed 

regulations is to provide taxpayers with 

computational, definitional, and antiavoidance guidance regarding the 

application of section 199A. These 

proposed regulations contain six 

substantive sections, §§ 1.199A–1 

through 1.199A–6, each of which 

provides rules relevant to the 

calculation of the section 199A 

deduction. Additionally, the proposed 

regulations would establish anti-abuse 

rules under section 643(f) to prevent 

taxpayers from establishing multiple 

non-grantor trusts or contributing 

additional capital to multiple existing 

non-grantor trusts in order to avoid 

Federal income tax, including abuse of 

section 199A. This Explanation of 

Provisions describes each of the 

proposed regulation sections in turn. 

I. Proposed § 1.199A–1: Operational 

Rules 

Section 1.199A–1 of the proposed 

regulations (proposed § 1.199A–1) 

provides guidance on the determination 

of the section 199A deduction. For 

simplicity, the proposed regulations use 

the term individual when referring to an 

individual, trust, estate, or other person 

eligible to claim the section 199A 

deduction. The term relevant 

passthrough entity (RPE) is used to 

describe passthrough entities that 

directly operate the trade or business or 

pass through the trade or business’ 

items of income, gain, loss, or deduction 

from lower-tier RPEs to the individual. 

Proposed § 1.199A–1(b) contains 

definitions applicable for section 199A 

and §§ 1.199A–1 through 1.199A–6. 

Proposed § 1.199A–1(c) provides 

guidance on the computation of the 

section 199A deduction for individuals 

with taxable income at or below the 

threshold amount. Proposed § 1.199A– 

1(d) provides guidance on the 

computation of the section 199A 

deduction for individuals with taxable 

income above the threshold amount, 

including individuals with taxable 

income within a phase-in range above 

the threshold amount. Proposed 

§ 1.199A–1(e) provides special rules 

related to the section 199A deduction. 

A. Defined Terms 

Defined terms in proposed § 1.199A– 

1(b) include aggregated trade or 

business, applicable percentage, phasein range, qualified business income 

(QBI), QBI component, qualified PTP 

income, qualified REIT dividends, 

reduction amount, RPE, specified 

service trade or business (SSTB), 

threshold amount, total QBI amount, 

UBIA of qualified property, and W–2 

wages. 

Proposed § 1.199A–1(b) also defines 

trade or business for purposes of section 

199A and proposed §§ 1.199A–1 

through 1.199A–6. Neither the statutory 

text of section 199A nor the legislative 

history provides a definition of trade or 

business for purposes of section 199A. 

Multiple commenters stated that section 

162 is the most appropriate definition 

for purposes of section 199A. Although 

the term trade or business is defined in 

more than one provision of the Code, 

the Department of the Treasury 

(Treasury Department) and the IRS agree 

with commenters that for purposes of 

section 199A, section 162(a) provides 

the most appropriate definition of a 

trade or business. This is based on the 

fact that the definition of trade or 

business under section 162 is derived 

from a large body of existing case law 

and administrative guidance 

interpreting the meaning of trade or 

business in the context of a broad range 

of industries. Thus, the definition of a 

trade or business under section 162 

provides for administrable rules that are 

appropriate for the purposes of section 

199A and which taxpayers have 

experience applying and therefore 

defining trade or business as a section 

162 trade or business will reduce 

compliance costs, burden, and 

administrative complexity. 


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The proposed regulations extend the 

definition of trade or business for 

purposes of section 199A beyond 

section 162 in one circumstance. Solely 

for purposes of section 199A, the rental 

or licensing of tangible or intangible 

property to a related trade or business 

is treated as a trade or business if the 

rental or licensing and the other trade or 

business are commonly controlled 

under proposed § 1.199A–4(b)(1)(i). It is 

not uncommon that for legal or other 

non-tax reasons taxpayers may segregate 

rental property from operating 

businesses. This rule allows taxpayers 

to aggregate their trades or businesses 

with the associated rental or intangible 

property under proposed § 1.199A–4 if 

all of the requirements of proposed 

§ 1.199A–4 are met. In addition, this 

rule may prevent taxpayers from 

improperly allocating losses or 

deductions away from trades or 

businesses that generate income that is 

eligible for a section 199A deduction. 

B. Computation of the Section 199A 

Deduction for Individuals With Taxable 

Income Below the Threshold Amount 

1. Basic Computational Rules 

An individual with income 

attributable to one or more domestic 

trades or businesses, other than as a 

result of owning stock of a C corporation 

or engaging in the trade or business of 

being an employee, and with taxable 

income (before computing the section 

199A deduction) at or below the 

threshold amount, is entitled to a 

section 199A deduction equal to the 

lesser of (i) 20 percent of the QBI 

(generally defined as the net amount of 

qualified items of income, gain, 

deduction, and loss with respect to a 

qualified trade or business of the 

taxpayer) from the individual’s trades or 

businesses plus 20 percent of the 

individual’s combined qualified REIT 

dividends and qualified PTP income or 

(ii) 20 percent of the excess (if any) of 

the individual’s taxable income over the 

individual’s net capital gain. Proposed 

§ 1.199A–1(c) contains guidance on 

calculating the amount of the deduction 

in these circumstances. If an 

individual’s combined QBI is negative 

or combined qualified REIT dividends 

and PTP income is less than zero, 

proposed § 1.199A–1(c)(2) provides 

rules for the carryover of the losses. 

2. Carryover Loss Rules for Negative 

Total QBI Amounts 

If an individual has multiple trades or 

businesses, the individual must 

calculate the QBI from each trade or 

business and then net the amounts. 

Section 199A(c)(2) provides that, for 

purposes of section 199A, if the net QBI 

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. Proposed 

§ 1.199A–1(c)(2)(i) repeats this rule and 

provides that the section 199A carryover 

rules do not affect the deductibility of 

the losses for purposes of other 

provisions of the Code. 

3. Carryover Loss Rules if Combined 

Qualified REIT Dividends and Qualified 

PTP Income is Less Than Zero 

One commenter stated it was not clear 

whether, if a taxpayer has an overall 

loss from combined qualified REIT 

dividends and qualified PTP income 

(because a loss from a PTP exceeds REIT 

dividends and PTP income), the 

negative amount should be netted 

against any net positive QBI (regardless 

of source), or whether the negative 

amount should be segregated and 

subject to its own loss carryforward rule 

distinct from but analogous to the QBI 

loss carryforward rule. Section 199A 

contemplates that qualified REIT 

dividends and qualified PTP income are 

computed and taken into account 

separately from QBI and should not 

affect QBI. If overall losses attributable 

to qualified REIT dividends and 

qualified PTP income were netted 

against QBI, these losses would affect 

QBI. Therefore, a separate loss 

carryforward rule is needed to segregate 

an overall loss attributable to qualified 

REIT dividends and qualified PTP 

income from QBI. Additionally, 

commenters have expressed concern 

that losses in excess of income could 

create a negative section 199A 

deduction, a result incompatible with 

the statute. Accordingly, proposed 

§ 1.199A–1(c)(2)(ii) provides that if an 

individual has an overall loss after 

qualified REIT dividends and qualified 

PTP income are combined, the portion 

of the individual’s section 199A 

deduction related to qualified REIT 

dividends and qualified PTP income is 

zero for the taxable year. In addition, the 

overall loss does not affect the amount 

of the taxpayer’s QBI. Instead, such 

overall loss is carried forward and must 

be used to offset combined qualified 

REIT dividends and qualified PTP 

income in the succeeding taxable year 

or years for purposes of section 199A. 

C. Computation of the Section 199A 

Deduction for Individuals With Taxable 

Income Above the Threshold Amount 

Proposed § 1.199A–1(d) addresses the 

calculation of the section 199A 

deduction for individuals with taxable 

income above the threshold amount. All 

of the rules relating to the REIT/PTP 

component of the section 199A 

deduction applicable to individuals 

with taxable income at or below the 

threshold amount also apply to 

individuals with taxable income above 

the threshold amount. The QBI 

component of the section 199A 

deduction, however, is subject to 

limitations for individuals with taxable 

income exceeding the threshold 

amount. These limitations include the 

exclusion or reduction of items from an 

SSTB and limitations based on the W– 

2 wages of the trade or business or a 

combination of the W–2 wages and the 

UBIA of qualified property. Proposed 

§ 1.199A–1(d) provides guidance on the 

application of these limitations. 

Proposed § 1.199A–1(d)(2)(i) 

addresses the limitation or exclusion 

from QBI for SSTBs. SSTBs are 

specified service trades or businesses as 

defined in section 199A(d)(2) and 

proposed § 1.199A–5 (see part V. of the 

Explanation of Provisions). If an 

individual’s taxable income is above the 

threshold amount but within the phasein range then the individual must 

calculate an applicable percentage that 

limits the QBI, W–2 wages, and UBIA of 

qualified property from an SSTB that 

are used to calculate the individual’s 

section 199A deduction. If the 

individual’s taxable income is above the 

phase-in range, then no amount of QBI, 

W–2 wages, or UBIA of qualified 

property from an SSTB can be used by 

the individual in calculating the 

individual’s section 199A deduction. 

Proposed § 1.199A–1(d)(iv) addresses 

the limitations on QBI based on W–2 

wages and UBIA of qualified property. 

An individual must determine the W–2 

wages and the UBIA of qualified 

property attributable to each trade or 

business contributing to the individual’s 

combined QBI under the rules of 

proposed § 1.199A–2. The W–2 wages 

and UBIA of qualified property amounts 

are compared to QBI in order to 

determine an individual’s QBI 

component for each trade or business. 

After determining the QBI for each 

trade or business, the individual must 

compare 20 percent of that trade or 

business’ QBI to the alternative 

limitations for that trade or business. 

The limitation to which the 20 percent 

of QBI is compared is the greater of 50 

percent of the W–2 wages attributable to 

the trade or business or 25 percent of 

those W–2 wages plus 2.5 percent of the 

UBIA of qualified property for that trade 

or business. If 20 percent of the QBI of 

the trade or business is greater than the 

relevant alternative limitation, the QBI 

component is limited in the calculations 


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Federal Register / Vol. 83, No. 159 / Thursday, August 16, 2018 / Proposed Rules 40887 

under the proposed regulations to the 

amount of the alternative limitation. If 

an individual’s taxable income is within 

the phase-in range and 20 percent of 

QBI is greater than either of the 

limitation amounts, the individual’s QBI 

component for the trade or business is 

instead equal to 20 percent of QBI 

reduced by the reduction amount as 

described in proposed § 1.199A– 

1(d)(iv)(B). 

One commenter noted that, if 

combined QBI from all of an 

individual’s trades or businesses is 

greater than zero, but the individual’s 

QBI from one or more trades or 

businesses is less than zero, the 

mechanics of how the loss should be 

offset against the QBI income for 

purposes of calculating the section 199A 

deduction are unclear. How such a loss 

is allocated matters in situations in 

which an individual has taxable income 

above the threshold amount and more 

than one trade or business with positive 

QBI. The commenter suggested that a 

‘‘netting’’ approach best reflects 

Congress’s intent, and that the absence 

of a netting approach would lead to 

inconsistent and counterintuitive results 

that Congress did not intend. The 

Treasury Department and the IRS agree 

that a netting approach is contemplated 

by the carryforward rule of section 

199A(c)(2) and is necessary to ensure 

results consistent with the intent of 

section 199A. Accordingly, proposed 

§ 1.199A–1(d)(iii) provides that, if an 

individual has QBI of less than zero 

from one trade or business, but has 

overall QBI greater than zero when all 

of the individual’s trades or businesses 

are taken together, then the individual 

must offset the net income in each trade 

or business that produced net income 

with the net loss from each trade or 

business that produced net loss before 

the individual applies the limitations 

based on W–2 wages and UBIA of 

qualified property. The individual must 

apportion the net loss among the trades 

or businesses with positive QBI in 

proportion to the relative amounts of 

QBI in such trades or businesses. Then, 

for purposes of applying the limitation 

based on W–2 wages and UBIA of 

qualified property, the net gain or 

income with respect to each trade or 

business (as offset by the apportioned 

losses) is the taxpayer’s QBI with 

respect to that trade or business. The 

W–2 wages and UBIA of qualified 

property from the trades or businesses 

which produced negative QBI are not 

taken into account for purposes of 

proposed § 1.199A–1(d) and are not 

carried over into the subsequent year. 

The Treasury Department and the IRS 

request comments on the approach 

described above. 

D. Special Rules 

Proposed § 1.199A–1(e) incorporates 

special rules contained in sections 199A 

and 6662. Section 199A(f)(1) provides 

that in the case of a partnership or S 

corporation, section 199A is applied at 

the partner or shareholder level. The 

proposed regulations provide that the 

section 199A deduction has no effect on 

the adjusted basis of the partner’s 

interest in the partnership. With respect 

to S corporations, the section 199A 

deduction has no effect on the adjusted 

basis of a shareholder’s stock in an S 

corporation or the S corporation’s 

accumulated adjustments account. 

The proposed regulations provide that 

the deduction under section 199A does 

not reduce net earnings from selfemployment under section 1402 or net 

investment income under section 1411. 

Therefore, both sections 1402 and 1411 

are calculated as though there is no 

section 199A deduction. 

Section 199A(f)(1)(C) provides that if 

in the case of a taxpayer with QBI from 

within the Commonwealth of Puerto 

Rico, if such income is taxable under 

section 1 for a taxable year, then for 

purposes of determining QBI of such 

individual for such taxable year, the 

term ‘‘United States’’ shall include the 

Commonwealth of Puerto Rico. 

Proposed § 1.199A–1(e)(3) repeats this 

statutory language. 

Section 199A(f)(2) provides that for 

purposes of determining alternative 

minimum taxable income under section 

55, QBI shall be determined without 

regard to any adjustments under 

sections 56 through 59. To clarify that 

the section 199A deduction does not 

result in individuals being subject to the 

alternative minimum tax, proposed 

§ 1.199A–1(e)(4) provides that, for 

purposes of determining alternative 

minimum taxable income under section 

55, the deduction allowed under section 

199A(a) for a taxable year shall be equal 

in amount to the deduction allowed 

under section 199(A)(a) in determining 

taxable income for that taxable year. 

Section 6662(a) provides a penalty for 

an underpayment of tax required to be 

shown on a return. Under section 

6662(b)(2), the penalty applies to the 

portion of any underpayment that is 

attributable to a substantial 

understatement of income tax. Section 

6662(d)(1) defines substantial 

understatement of income tax, which is 

generally an understatement that 

exceeds the greater of 10 percent of the 

tax required to be shown on the return 

or $5,000. Section 6662(d)(1)(C) 

provides a special rule in the case of any 

taxpayer who claims the deduction 

allowed under section 199A for the 

taxable year, which requires that section 

6662(d)(1)(A) is applied by substituting 

‘‘5 percent’’ for ‘‘10 percent.’’ Proposed 

§ 1.199A–1(e)(5) cross-references this 

rule. 

Section 199A(b)(7) provides that in 

the case of any qualified trade or 

business of a patron of a specified 

agricultural or horticultural cooperative, 

the amount determined under section 

199A(b)(2) with respect to such trade or 

business shall be reduced by the lesser 

of (A) 9 percent of so much of the 

qualified business income with respect 

to such trade or business as is properly 

allocable to qualified payments received 

from such cooperative, or (B) 50 percent 

of so much of the W–2 wages with 

respect to such trade or business as are 

so allocable. Proposed § 1.199A–1(e)(6) 

repeats this statutory language. 

II. Proposed § 1.199A–2: Determination 

of W–2 Wages and the UBIA of 

Qualified Property 

As described in part I.C. of this 

Explanation of Provisions, if an 

individual’s taxable income exceeds the 

threshold amount, section 199A(b)(2)(B) 

imposes a limit on the section 199A 

deduction based on the greater of either 

(i) the W–2 wages paid, or (ii) the W– 

2 wages paid and UBIA of qualified 

property attributable to a trade or 

business. This part of this Explanation 

of Provisions describes the rules in 

proposed § 1.199A–2 regarding the 

determination of W–2 wages and UBIA 

of qualified property. 

A. W–2 Wages Attributable to a Trade or 

Business 

The W–2 wage rules of proposed 

§ 1.199A–2 generally follow the rules 

under former section 199. Section 199, 

which was repealed by the TCJA, 

provided for a deduction with respect to 

certain domestic production activities 

and contained a W–2 wage limitation 

similar to the one in section 199A. The 

legislative text of the W–2 wage 

limitation in section 199A is modeled 

on the text of former section 199, and 

both taxpayers and the IRS have 

developed experience in applying those 

W–2 wage rules for over a decade. The 

regulations under former section 199 

provided rules to determine W–2 wages, 

which provide a useful starting point in 

developing the W–2 wage rules under 

section 199A, including rules on the 

definition of W–2 wages, wages paid by 

persons other than the common-law 

employer, and methods for calculating 

W–2 wages. 

The Treasury Department and the IRS 

have received comments concerning 


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40888 Federal Register / Vol. 83, No. 159 / Thursday, August 16, 2018 / Proposed Rules 

whether amounts paid to workers who 

receive Forms W–2 from third party 

payors (such as professional employer 

organizations, certified professional 

employer organizations, or agents under 

section 3504) that pay these wages to 

workers on behalf of their clients and 

report wages on Forms W–2, with the 

third party payor as the employer listed 

in Box c of the Forms W–2, may be 

included in the W–2 wages of the 

clients of third party payors. In order for 

wages reported on a Form W–2 to be 

included in the determination of W–2 

wages of a taxpayer, the Form W–2 must 

be for employment by the taxpayer. The 

regulations under former section 199, 

specifically § 1.199–2(a)(2), addressed 

this issue, providing that, since 

employees of the taxpayer are defined in 

the regulations as including only 

common law employees of the taxpayer 

and officers of a corporate taxpayer, 

taxpayers may take into account wages 

reported on Forms W–2 issued by other 

parties provided that the wages reported 

on the Forms W–2 were paid to 

employees of the taxpayer for 

employment by the taxpayer. 

Proposed § 1.199A–2(b)(2)(ii) 

provides a rule for wages paid by a 

person other than the common law 

employer that is substantially similar to 

the rule in § 1.199–2(a)(2). Specifically, 

the proposed regulations provide that, 

in determining W–2 wages, a person 

may take into account any W–2 wages 

paid by another person and reported by 

the other person on Forms W–2 with the 

other person as the employer listed in 

Box c of the Forms W–2, provided that 

the W–2 wages were paid to common 

law employees or officers of the person 

for employment by the person. In such 

cases, the person paying the W–2 wages 

and reporting the W–2 wages on Forms 

W–2 is precluded from taking into 

account such wages for purposes of 

determining W–2 wages with respect to 

that person. Persons that pay and report 

W–2 wages on behalf of or with respect 

to others can include certified 

professional employer organizations 

under section 7705, statutory employers 

under section 3401(d)(1), and agents 

under section 3504. Under this rule, 

persons who otherwise qualify for the 

deduction under section 199A are not 

limited in applying the deduction 

merely because they use a third party 

payor to pay and report wages to their 

employees. However, with respect to 

individuals who taxpayers assert are 

their common law employees for 

purposes of section 199A, taxpayers are 

reminded of their duty to file returns 

and apply the tax law on a consistent 

basis. 

Unlike former section 199, the W–2 

wage limitation in section 199A applies 

separately for each trade or business. 

Accordingly, proposed § 1.199A–2 

provides that, 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 to be in the same 

proportion to total W–2 wages as the 

deductions associated with those wages 

are allocated among the particular 

trades or businesses. Section 199A(b)(4) 

also requires that to be taken into 

account, W–2 wages must be properly 

allocable to QBI. W–2 wages are 

properly allocable to QBI if the 

associated wage expense is taken into 

account in computing QBI. 

Additionally, proposed § 1.199A– 

2(b)(4) restates the rule of section 

199A(f)(1)(A)(iii), which provides that, 

in the case of a trade or business 

conducted by an RPE, a partner’s or 

shareholder’s allocable share of wages 

must be determined in the same manner 

as the partner’s allocable share or a 

shareholder’s pro rata share of wage 

expenses. 

Consistent with section 199A(b)(5) 

and the legislative history of the TCJA, 

which direct the Secretary to provide 

rules for applying the W–2 wage 

limitation in cases in which the 

taxpayer acquires, or disposes of, a trade 

or business, the major portion of a trade 

or business, or the major portion of a 

separate unit of a trade or business 

during the year, proposed § 1.199A– 

2(b)(2)(iv)(B) provides rules that apply 

in the case of an acquisition or 

disposition of a trade or business. See 

Joint Explanatory Statement of the 

Committee of Conference, 38. 

Specifically, proposed § 1.199A– 

2(b)(2)(iv)(B)(1) provides that, in the 

case of an acquisition or disposition of 

a trade or business, the major portion of 

a trade or business, or the major portion 

of a separate unit of a trade or business 

that causes more than one individual or 

entity to be an employer of the 

employees of the acquired or disposed 

of trade or business during the calendar 

year, the W–2 wages of the individual 

or entity for the calendar year of the 

acquisition or disposition are allocated 

between each individual or entity based 

on the period during which the 

employees of the acquired or disposed 

of trade or business were employed by 

the individual or entity, regardless of 

which permissible method is used for 

reporting predecessor and successor 

wages on Form W–2. For this purpose, 

the period of employment is determined 

consistently with the principles for 

determining whether an individual is an 

employee described in proposed 

§ 1.199A–2(b). 

A notice of proposed revenue 

procedure, Notice 2018–64, 2018–35 

IRB ____, which provides three methods 

for calculating W–2 wages is being 

issued concurrently with this notice of 

proposed rulemaking. The three 

methods in the notice are substantially 

similar to the methods provided in Rev. 

Proc. 2006–47, 2006–2 C.B. 869, for 

purposes of calculating ‘‘paragraph 

(e)(1) wages’’ (that is, wages described 

in § 1.199–2(e)(1) issued under former 

section 199). The first method (the 

unmodified Box method) allows for a 

simplified calculation while the second 

and third methods (the modified Box 1 

method and the tracking wages method) 

provide for greater accuracy. 

B. The UBIA of Qualified Property 

Section 199A(b)(2)(B)(ii) provides an 

alternative deduction limitation based 

on 25 percent of W–2 Wages with 

respect to the qualified trade or business 

and 2.5 percent of the UBIA of qualified 

property. Proposed § 1.199A–2 restates 

the statutory definitions under the 

qualified property rules, and provides 

additional guidance. 

1. General Definition of UBIA of 

Qualified Property 

Proposed § 1.199A–2(c)(1) restates the 

definition of qualified property in 

section 199A(b)(6)(A), which provides 

that ‘‘qualified property’’ means tangible 

property of a character subject to 

depreciation that is held by, and 

available for use in, a trade or business 

at the close of the taxable year, and 

which is used in the production of QBI, 

and for which the depreciable period 

has not ended before the close of the 

taxable year. Proposed § 1.199A–2(c)(2) 

also restates the definition of 

depreciable period in section 

199A(b)(6)(B), which provides that 

‘‘depreciable’’ period means the period 

beginning on the date the property is 

first placed in service by the taxpayer 

and ending on the later of (a) the date 

10 years after that 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 the application of section 

168(g). 

Because the applicable recovery 

period under section 168(c) of the 

property is not changed by any 

additional first-year depreciation 

deduction allowable under section 168, 

proposed § 1.199A–2(c)(2)(ii) also 

clarifies that the additional first-year 

depreciation deduction allowable under 

section 168 (for example, under section 

168(k) or section 168(m)) does not affect 


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the applicable recovery period under 

section 168(c). 

Proposed § 1.199A–2(c)(3) provides a 

definition of UBIA. The Treasury 

Department and the IRS believe that 

existing general principles used to 

define ‘‘unadjusted basis’’ in § 1.263(a)– 

3(h)(5) provide a reasonable basis for an 

administrable rule that is appropriate 

for the purposes of section 199A and 

that their use will reduce compliance 

costs, burden, and administrative 

complexity because taxpayers have 

experience applying them. In addition, 

the Treasury Department and the IRS 

believe that ‘‘immediately after 

acquisition’’ means as of the date the 

property is placed in service because 

section 199A provides that ‘‘qualified 

property’’ must be used in the 

production of QBI. In order to be used 

in the production of QBI, the qualified 

property necessarily must be placed in 

service. Determining UBIA as of the date 

the property is placed in service ensures 

consistency between purchased and 

produced qualified property, and 

reduces compliance costs, burden, and 

administrative complexity because 

taxpayers are already required to 

determine that amount. Accordingly, 

proposed § 1.199A–2 provides that the 

term ‘‘UBIA’’ means the basis as 

determined under section 1012 or other 

applicable sections of chapter 1, 

including subchapter O (relating to gain 

or loss on dispositions of property), 

subchapter C (relating to corporate 

distributions and adjustments), 

subchapter K (relating to partners and 

partnerships), and subchapter P 

(relating to capital gains and losses). 

UBIA is determined without regard to 

any adjustments described in section 

1016(a)(2) or (3), any adjustments for tax 

credits claimed by the taxpayer (for 

example, under section 50(c)), or any 

adjustments for any portion of the basis 

for which the taxpayer has elected to 

treat as an expense (for example, under 

sections 179, 179B, or 179C). Therefore, 

for purchased or produced qualified 

property, UBIA generally will be its cost 

under section 1012 as of the date the 

property is placed in service. For 

qualified property contributed to a 

partnership in a section 721 transaction 

and immediately placed in service, 

UBIA generally will be its basis under 

section 723. For qualified property 

contributed to an S corporation in a 

section 351 transaction and immediately 

placed in service, UBIA generally will 

be its basis under section 362. Further, 

for property inherited from a decedent 

and immediately placed in service by 

the heir, the UBIA generally will be its 

fair market value at the time of the 

decedent’s death under section 1014. 

However, proposed § 1.199A–2(c)(3) 

provides that UBIA does reflect the 

reduction in basis for the percentage of 

the taxpayer’s use of property for the 

taxable year other than in the taxpayer’s 

trade or business. 

2. Partnership Special Basis 

Adjustments 

After the enactment of the TCJA, the 

Treasury Department and the IRS 

received comments requesting guidance 

as to whether partnership special basis 

adjustments under sections 734(b) or 

743(b) constitute qualified property for 

purposes of section 199A. Treating 

partnership special basis adjustments as 

qualified property could result in 

inappropriate duplication of UBIA of 

qualified property (if, for example, the 

fair market value of the property has not 

increased and its depreciable period has 

not ended). Accordingly, proposed 

§ 1.199A–2(c)(1)(iii) provides that 

partnership special basis adjustments 

are not treated as separate qualified 

property. 

3. Property Transferred With a Principal 

Purpose of Increasing Section 199A 

Deduction 

Qualified property includes 

depreciable property used during the 

taxable year in the production of QBI 

and held by, and available for use in, 

the trade or business at the close of the 

taxable year. However, it would be 

inconsistent with the purposes of 

section 199A to permit trades or 

businesses to transfer or acquire 

property at the end of the year merely 

to manipulate the UBIA of qualified 

property attributable to the trade or 

business. Therefore, pursuant to the 

authority granted to the Secretary under 

section 199A(f)(4), proposed § 1.199A– 

2(c)(1)(iv) provides that 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 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 

section 199A deduction. 

4. Like-Kind Exchanges and Involuntary 

Conversions 

Section 199A does not provide rules 

to determine UBIA for qualified 

property in the case of an exchange of 

property under section 1031 (like-kind 

exchange) or involuntary conversion 

under section 1033. However, section 

199A(h)(2) specifically instructs the 

Secretary to do so. The Treasury 

Department and the IRS believe that 

existing general principles used for likekind exchanges and involuntary 

conversions under § 1.168(i)–(6) provide 

a useful analogy for administrable rules 

that are appropriate for the purposes of 

section 199A and that their use will 

reduce compliance costs, burden, and 

administrative complexity because 

taxpayers have experience applying 

them. Accordingly, proposed § 1.199A– 

2(c)(2)(iii) generally follows the rules of 

§ 1.168(i)–6 to provide that qualified 

property that is acquired in a like-kind 

exchange, as defined in § 1.168(i)– 

6(b)(11), or in an involuntary 

conversion, as defined in § 1.168(i)– 

6(b)(12), is treated as replacement 

Modified Accelerated Cost Recovery 

System (MACRS) property as defined in 

§ 1.168(i)–6(b)(1) whose depreciable 

period generally is determined as of the 

date the relinquished property was first 

placed in service. Accordingly, subject 

to one exception, proposed § 1.199A– 

2(c)(2)(iii) provides that, for purposes of 

determining the depreciable period, the 

date the exchanged basis in the 

replacement qualified property is first 

placed in service by the trade or 

business is the date on which the 

relinquished property was first placed 

in service by the individual or RPE and 

the date the excess basis in the 

replacement qualified property is first 

placed in service by the individual or 

RPE is the date on which the 

replacement qualified property was first 

placed in service by the individual or 

RPE. As a result, the depreciable period 

under section 199A for the exchanged 

basis of the replacement qualified 

property will end before the depreciable 

period for the excess basis of the 

replacement qualified property ends. 

The exception is that proposed 

§ 1.199A–2(c)(2)(iii)(C) provides that, for 

purposes of determining the depreciable 

period, if the individual or RPE makes 

an election under § 1.168(i)–6(i)(1) (the 

election not to apply § 1.168(i)–6)), the 

date the exchanged basis and excess 

basis in the replacement qualified 

property are first placed in service by 

the trade or business is the date on 

which the replacement qualified 

property is first placed in service by the 

individual or RPE, with UBIA 

determined as of that date. In this case, 

the depreciable periods under section 

199A for the exchanged basis and the 

excess basis of the replacement 

qualified property will end on the same 

date. 

Thus, unless the exception applies, 

qualified property acquired in a likekind exchange or involuntary 

conversion will have two separate 

placed in service dates under the 


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40890 Federal Register / Vol. 83, No. 159 / Thursday, August 16, 2018 / Proposed Rules 

proposed regulations: For purposes of 

determining the UBIA of the property, 

the relevant placed in service date will 

be the date the acquired property is 

actually placed in service; for purposes 

of determining the depreciable period of 

the property, the relevant placed in 

service date generally will be the date 

the relinquished property was first 

placed in service. The proposed 

regulations contain an example 

illustrating these rules. 

5. Other Nonrecognition Transactions 

The Treasury Department and the IRS 

have received comments requesting 

guidance on the application of the 

qualified property rules to 

nonrecognition transfers involving 

transferred basis property within the 

meaning of section 7701(a)(43) 

(transferred basis transactions). For 

example, taxpayers and practitioners 

requested guidance on how to 

determine the depreciable period of the 

property if a partnership conducts a 

trade or business and qualified property 

is contributed to that trade or business 

in a nonrecognition transfer under 

section 721(a). Also of relevance in the 

context of non-recognition transfers, 

section 199A(h)(1) grants the Secretary 

anti-abuse authority to apply rules 

similar to the rules under section 

179(d)(2) (which can restrict the 

expensing of certain assets in 

transferred basis transactions) to prevent 

the manipulation of the depreciable 

period of qualified property using 

transactions between related parties. 

The Treasury Department and the IRS 

believe that existing general principles 

used for transferred basis transactions 

under § 168(i)(7) provide a useful 

analogy for administrable rules that are 

appropriate for the purposes of section 

199A and that their use will reduce 

compliance costs, burden, and 

administrative complexity because 

taxpayers have experience applying 

them. Accordingly, proposed § 1.199A– 

2(c)(2)(iv) provides that, for purposes of 

determining the depreciable period, if 

an individual or RPE (the transferee) 

acquires qualified property in a 

transaction described in section 

168(i)(7)(B), the transferee determines 

the date on which the qualified property 

was first placed in service using a twostep approach. First, for the portion of 

the transferee’s UBIA of the qualified 

property that does not exceed the 

transferor’s UBIA of such property, the 

date such portion was first placed in 

service by the transferee is the date on 

which the transferor first placed the 

qualified property in service. Second, 

for the portion of the transferee’s UBIA 

of the qualified property that exceeds 

the transferor’s UBIA of such property, 

if any, such portion is treated as 

separate qualified property that the 

transferee first placed in service on the 

date of the transfer. Thus, qualified 

property acquired in these nonrecognition transactions will have two 

separate placed in service dates under 

the proposed regulations: For purposes 

of determining the UBIA of the 

property, the relevant placed in service 

date will be the date the acquired 

property is placed in service by the 

transferee (for instance, the date the 

partnership places in service property 

received in a section 721 transaction); 

for purposes of determining the 

depreciable period of the property, the 

relevant placed in service date generally 

will be the date the transferor first 

placed the property in service (for 

instance, the date the partner placed the 

property in service in his or her sole 

proprietorship). The proposed 

regulations contain an example 

illustrating these rules. 

The Treasury Department and the IRS 

request comments concerning 

appropriate methods for accounting for 

non-recognition transactions, including 

rules to prevent the manipulation of the 

depreciable period of qualified property 

using transactions between related 

parties. 

6. Redetermination of UBIA and 

Subsequent Improvements to Qualified 

Property 

The Treasury Department and the IRS 

have received comments requesting 

guidance on the treatment of subsequent 

improvements to qualified property. 

Subsequent improvements to qualified 

property are generally treated as a 

separate item of property under section 

168(i)(6). The Treasury Department and 

the IRS do not believe a different 

approach is necessary for purposes of 

section 199A. Accordingly, proposed 

§ 1.199A–2(c)(1)(ii) provides that, in the 

case of any addition to, or improvement 

of, qualified property that is already 

placed in service by the taxpayer, such 

addition or improvement is treated as 

separate qualified property that the 

taxpayer first placed in service on the 

date such addition or improvement is 

placed in service by the taxpayer for 

purposes of determining the depreciable 

period of the qualified property. For 

example, if a taxpayer acquired and 

placed in service a machine on March 

26, 2018, and then incurs additional 

capital expenditures to improve the 

machine in May 2020, and places such 

improvements in service on May 27, 

2020, the taxpayer has two qualified 

properties: The machine acquired and 

placed in service on March 26, 2018, 

and the improvements to the machine 

incurred in May 2020 and placed in 

service on May 27, 2020. 

7. Allocation of UBIA of Qualified 

Property by RPEs 

In the case of a trade or business 

conducted by an RPE, section 199A(f) 

provides that a partner’s or 

shareholder’s allocable share of the 

UBIA of qualified property is 

determined in the same manner as the 

partner’s allocable share or 

shareholder’s pro rata share of 

depreciation. Proposed § 1.199A–2(a)(3) 

provides that, in the case of qualified 

property held by an RPE, each partner’s 

or shareholder’s share of the UBIA of 

qualified property is an amount that 

bears the same proportion to the total 

UBIA of qualified property as the 

partner’s or shareholder’s share of tax 

depreciation bears to the entity’s total 

tax depreciation attributable to the 

property for the year. In the case of 

qualified property of a partnership that 

does not produce tax depreciation 

during the year (for example, property 

that has been held for less than 10 years 

but whose recovery period has ended), 

each partner’s share of the UBIA of 

qualified property is based on how gain 

would be allocated to the partners 

pursuant to sections 704(b) and 704(c) if 

the qualified property were sold in a 

hypothetical transaction for cash equal 

to the fair market value of the qualified 

property. In the case of qualified 

property of an S corporation that does 

not produce tax depreciation during the 

year, each shareholder’s share of the 

UBIA of the qualified property is a share 

of the UBIA proportionate to the ratio of 

shares in the S corporation held by the 

shareholder over the total shares of the 

S corporation. 

III. Proposed § 1.199A–3: QBI, 

Qualified REIT Dividends, Qualified 

PTP Income 

Proposed § 1.199A–3 restates the 

definitions in section 199A(c) and 

provides additional guidance on the 

determination of QBI, qualified REIT 

dividends, and qualified PTP income. 

A. QBI 

Section 199A(c)(1) provides that the 

term ‘‘QBI’’ means, for any taxable year, 

the net amount of qualified items of 

income, gain, deduction, and loss 

attributable to any qualified trade or 

business of the taxpayer. QBI does not 

include any qualified REIT dividends or 

qualified PTP income. Section 

199A(c)(3)(A) provides that the term 

‘‘qualified items of income, gain, 

deduction, and loss’’ means items of 

income, gain, deduction, and loss to the 


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extent such items are (i) effectively 

connected with the conduct of a trade 

or business within the United States 

(within the meaning of section 864(c), 

determined by substituting ‘‘qualified 

trade or business (within the meaning of 

section 199A)’’ for ‘‘nonresident alien 

individual or a foreign corporation’’ or 

for ‘‘a foreign corporation’’ each place it 

appears), and (ii) included or allowed in 

determining taxable income for the 

taxable year. Section 199A(c)(3)(B) 

provides a list of items that are not 

taken into account as qualified items of 

income, gain, deduction, and loss, 

including capital gain or loss, 

dividends, interest income other than 

interest income properly allocable to a 

trade or business, amounts received 

from an annuity other than in 

connection with a trade or business, 

certain items described in section 954, 

and items of deduction or loss properly 

allocable to these items. Section 

199A(c)(4) provides that QBI does not 

include 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, any guaranteed payment 

described in section 707(c) paid to a 

partner for services rendered with 

respect to the trade or business, and 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. 

i. Treatment of Section 751 Gain 

The Treasury Department and the IRS 

have received comments stating that it 

is unclear whether gain or loss that is 

treated as ordinary income under 

section 751 should be QBI if the section 

751 income meets all of the other 

requirements to be QBI. This 

uncertainty is caused because section 

199A(e)(5) lists: (i) The taxpayer’s 

allocable share of the QBI from a 

publicly traded partnership and (ii) 

income described in section 751(a) as 

separate categories of qualified publicly 

traded partnership income, which could 

be read to imply that income described 

in section 751 is not QBI. Section 1.199– 

5(f), issued under former section 199, 

specifically included section 751(a) or 

(b) gains as domestic production gross 

receipts. 

The Treasury Department and the IRS 

do not view the statutory reference to 

section 751(a) gain as qualified PTP 

income to exclude section 751 gain from 

being QBI, but rather view such 

reference as clarifying the rules for 

PTPs. Accordingly, proposed § 1.199A– 

3(b)(1)(i) clarifies that any gain 

attributable to assets of a partnership 

giving rise to ordinary income under 

section 751(a) or (b) is considered 

attributable to the trades or businesses 

conducted by the partnership, and 

therefore, may constitute QBI if the 

other requirements of section 199A and 

proposed § 1.199A–3 are satisfied. 

ii. Guaranteed Payments for the Use of 

Capital 

Because guaranteed payments for the 

use of capital under section 707(c) are 

determined without regard to the 

income of the partnership, proposed 

§ 1.199A–3(b)(1)(ii) provides that such 

payments are not considered 

attributable to a trade or business, and 

thus do not constitute QBI. However, 

the partnership’s related expense for 

making the guaranteed payments may 

constitute QBI if the other requirements 

are satisfied. 

iii. Section 481 Adjustments 

Section 1.199–8(g), issued under 

former section 199, provides rules on 

how section 481(a) adjustments are 

taken into account for purposes of 

former section 199. Similarly, proposed 

§ 1.199A–3(b)(1)(iii) provides that 

section 481 adjustments attributable to a 

trade or business, whether positive or 

negative, and arising in a taxable year 

ending after December 31, 2017, are 

treated as attributable to that trade or 

business. Accordingly, such section 481 

adjustments will constitute QBI to the 

extent the requirements of section 199A, 

including proposed § 1.199A–3, are 

satisfied. Section 481 adjustments 

arising in a taxable year ending before 

January 1, 2018, do not constitute QBI. 

iv. Previously Suspended Losses 

Several sections of the Code, 

including sections 465, 469, 704(d), and 

1366(d), provide for disallowance of 

losses and deductions in certain cases. 

Generally, the disallowed amounts are 

suspended and carried forward to the 

following year, at which point they are 

re-tested and may become allowable. 

Proposed § 1.199A–3(b)(1)(iv) provides 

that, to the extent that any previously 

disallowed losses or deductions are 

allowed in the taxable year, they are 

treated as items attributable to the trade 

or business. However, losses or 

deductions that were disallowed for 

taxable years beginning before January 

1, 2018, are not taken into account for 

purposes of computing QBI in a later 

taxable year. 

v. Net Operating Losses 

Generally, items giving rise to a net 

operating loss are allowed in computing 

taxable income in the year incurred. 

Because those items would have been 

taken into account in computing QBI in 

the year incurred, the net operating loss 

should not be treated as QBI in 

subsequent years. Otherwise, the same 

loss could be taken into account in 

multiple tax years. However, losses 

disallowed by section 461(l) give rise to 

a net operating loss without ever having 

been allowable in computing taxable 

income. Thus, if deductions are 

disallowed by reason of 461(l), those 

disallowed deductions will not be 

included in the QBI computation in the 

year incurred (because they are not 

includable in taxable income), and, if 

the resulting net operating loss also is 

not included in the QBI computation, 

the deduction would permanently 

escape the QBI rules. This result would 

be inappropriate. Accordingly, proposed 

§ 1.199A–3(b)(1)(v) provides that 

generally, a deduction under section 

172 for a net operating loss is not 

considered attributable to a trade or 

business and therefore, is not taken into 

account in computing QBI. However, to 

the extent the net operating loss is 

comprised of amounts attributable to a 

trade or business that were disallowed 

under section 461(l), the net operating 

loss is considered attributable to that 

trade or business, and will constitute 

QBI to the extent the requirements of 

section 199A, including proposed 

§ 1.199A–3, are satisfied. 

The Treasury Department and the IRS 

request comments regarding the 

interaction of section 199A and 461(l) 

generally. 

vi. Requirement That an Item Be 

Effectively Connected With a U.S. Trade 

or Business 

Section 199A applies to all 

noncorporate taxpayers, whether such 

taxpayers are domestic or foreign. 

Accordingly, section 199A applies to 

both U.S. citizens and resident aliens as 

well as nonresident aliens that have 

QBI. As noted previously in this 

Explanation of Provisions, QBI includes 

items of income, gain, deduction, and 

loss to the extent such items are (i) 

included or allowed in determining 

taxable income for the taxable year and 

(ii) effectively connected with the 

conduct of a trade or business within 

the United States (within the meaning of 

section 864(c), determined by 

substituting ‘‘qualified trade or business 

(within the meaning of section 199A)’’ 

for ‘‘nonresident alien individual or a 

foreign corporation’’ or for ‘‘a foreign 

corporation’’ each place it appears). 


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40892 Federal Register / Vol. 83, No. 159 / Thursday, August 16, 2018 / Proposed Rules 

a. Summary of Rules for Generally 

Determining Whether Income Is 

Effectively Connected With a United 

States Trade or Business 

Section 864(c) provides rules that 

nonresident alien individuals and 

foreign corporations use to determine 

which items of income, gain, or loss are 

effectively connected with a United 

States trade or business. Section 873(a) 

permits nonresident aliens to deduct 

expenses only if and to the extent that 

they are connected with, or properly 

allocable and apportioned to, income 

effectively connected with a United 

States trade or business. 

Thus, for example, a U.S. partner of 

a partnership that operates a trade or 

business in both the United States and 

in a foreign country would only include 

the items of income, gain, deductions, 

and loss that would be effectively 

connected with a United States trade or 

business. Similarly, a shareholder of an 

S corporation that is engaged in a trade 

or business in both the United States 

and in a foreign country would only 

take into account the items of income, 

gain, deduction, and loss that would be 

effectively connected to the portion of 

the business conducted by the S 

corporation in the United States, 

determined by applying the principles 

of section 864(c). 

In general, whether a nonresident 

alien is engaged in a trade or business 

within the United States, as opposed to 

a trade or business conducted solely 

outside the United States, is based upon 

the all the facts and circumstances, as 

developed through case law and other 

published guidance. Pursuant to section 

875(1), a nonresident alien is considered 

engaged in a trade or business within 

the United States if the partnership of 

which such individual is a member is so 

engaged. 

Section 864(b) provides that the term 

‘‘trade or business within the United 

States’’ includes (but is not limited to) 

the performance of personal services 

within the United States at any time 

during the taxable year, but excludes the 

performance of services described in 

section 864(b)(1) and (2). Section 

864(b)(1) covers a limited set of 

nonresident aliens who perform services 

in the United States on behalf of foreign 

persons not otherwise engaged in a U.S. 

trade or business, or on behalf of U.S. 

persons through a foreign office, if the 

nonresident aliens are present in the 

United States less than 90 days during 

the taxable year and their compensation 

does not exceed $3,000. Section 

864(b)(2) generally treats foreign 

persons, including partnerships, who 

are trading in stocks, securities, and in 

commodities for their own account or 

through a broker or other independent 

agent as not engaged in a United States 

trade or business. 

b. Application to Section 199A 

Although the cross reference in 

section 199A(c)(3)(A)(i) to section 864 is 

limited to paragraph (c) of that section, 

no income derived from excluded 

services under section 864(b)(1) or (2) 

could ever be effectively connected 

income in the hands of a nonresident 

alien. Accordingly, section 199A 

incorporates the specific rules regarding 

the scope of the term ‘‘trade or business 

in the United States’’ in determining 

QBI. As such, if a trade or business is 

not engaged in a U.S. trade or business 

by reason of section 864(b), items of 

income, gain, deduction, or loss from 

that trade or business will not be 

included in QBI because such items 

would not be effectively connected with 

the conduct of a U.S. trade or business. 

If a trade or business is determined to 

be conducted in the United States, 

section 864(c)(3) generally treats all 

income of a nonresident alien from 

sources within the United States as 

effectively connected with the conduct 

of a U.S. trade or business. However, 

any income from sources within the 

United States described in section 

871(a)(1) or (h) and any gain or loss 

from the sale of capital assets are only 

effectively connected if the income 

meets requirements of section 864(c)(2) 

and the regulations thereunder. Under 

section 864(c)(4), income from sources 

without the United States is generally 

not treated as effectively connected with 

the conduct of a U.S. trade or business 

unless an exception under section 

864(c)(4)(B) applies. Thus, a trade or 

business’s foreign source income, gain, 

or loss, (and any deductions effectively 

connected with such foreign source 

income, gain, or loss) would generally 

not be included in QBI, unless the 

income meets an exception in section 

864(c)(4)(B). Whether income is U.S. or 

foreign sourced is determined under 

sections 861, 862, 863, and 865, and the 

regulations thereunder. 

This rule does not mean that any item 

that is effectively connected with the 

conduct of a trade or business with the 

United States is therefore QBI. As 

discussed previously, the item must also 

be ‘‘with respect to’’ a trade or business. 

Certain provisions of the Code allow 

items to be treated as effectively 

connected, even though they are not 

with respect to a trade or business. For 

example, section 871(d) allows a 

nonresident alien individual to elect to 

treat income from real property in the 

United States that would not otherwise 

be treated as effectively connected with 

the conduct of a trade or business 

within the United Sates as effectively 

connected. However, for purposes of 

section 199A, if items are not 

attributable to a trade or business under 

162, such items do not constitute QBI. 

Similarly, the fact that a deduction is 

allowed for purposes of computing 

effectively connected taxable income 

does not necessarily mean that it is 

taken into account for purposes of 

section 199A. For example, for purposes 

of computing effectively connected 

taxable income, section 873(b) allows 

certain deductions, including for theft 

losses of property located within the 

United States and charitable 

contributions allowed under section 

170, to be taken into account regardless 

of whether they are connected with 

income that is effectively connected 

with the conduct of a trade or business 

within the United States. However, for 

purposes of section 199A, these items 

would not be taken into account 

because section 199A only permits a 

deduction for income that is both 

attributable to a trade or business and 

that is also effectively connected 

income. 

vii. Exclusion From QBI for Certain 

Items 

a. Treatment of Section 1231 Gains and 

Losses 

Section 199A(c)(3)(B)(i) provides that 

QBI does not include any item of shortterm capital gain, short-term capital 

loss, long-term capital gain, or long-term 

capital loss. The Treasury Department 

and the IRS have received comments 

requesting guidance on the extent to 

which gains and losses subject to 

section 1231 may be taken into account 

in calculating QBI. Section 1231 

provides rules under which gains and 

losses from certain involuntary 

conversions and the sale of certain 

property used in a trade or business are 

either treated as long-term capital gains 

or long-term capital losses, or not 

treated as gains and losses from sales or 

exchanges of capital assets. 

Section 199A(c)(3)(B)(i) excludes 

capital gains or losses, regardless of 

whether those items arise from the sale 

or exchange of a capital asset. The 

legislative history of section 199A 

provides that QBI does not include any 

item taken into account in determining 

net long-term capital gain or net longterm capital loss. Conference Report 

page 30. Accordingly, proposed 

§ 1.199A–3(b)(2)(ii)(A) clarifies that, to 

the extent gain or loss is treated as 

capital gain or loss, it is not included in 

QBI. Specifically, if gain or loss is 


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treated as capital gain or loss under 

section 1231, it is not QBI. Conversely, 

if section 1231 provides that gains or 

losses are not treated as gains and losses 

from sales or exchanges of capital assets, 

section 199A(c)(3)(B)(i) does not apply 

and thus, the gains or losses must be 

included in QBI (provided all other 

requirements are met). 

b. Interest Income 

Section 199A(c)(4)(C) provides that 

QBI does not include any interest 

income other than interest income that 

is properly allocable to a trade or 

business. The Treasury Department and 

the IRS believe that interest income 

received on working capital, reserves, 

and similar accounts is not properly 

allocable to a trade or business, and 

therefore should not be included in QBI, 

because such interest income, although 

held by a trade or business, is simply 

income from assets held for investment. 

Accordingly, proposed § 1.199A– 

3(b)(2)(ii)(C) provides that interest 

income received on working capital, 

reserves, and similar accounts is not 

properly allocable to a trade or business. 

In contrast, interest income received on 

accounts or notes receivable for services 

or goods provided by the trade or 

business is not income from assets held 

for investment, but income received on 

assets acquired in the ordinary course of 

trade or business. 

c. Reasonable Compensation 

Section 199A(c)(4)(A) provides that 

QBI does not include ‘‘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.’’ 

Similarly, guaranteed payments for 

services under section 707(c) are 

excluded from QBI. The phrase 

‘‘reasonable compensation’’ is a wellknown standard in the context of S 

corporations. Under Rev. Rul. 74–44, 

1974–1 C.B. 287, S corporations must 

pay shareholder-employees ‘‘reasonable 

compensation for services performed’’ 

prior to making ‘‘dividend’’ 

distributions with respect to 

shareholder-employees’ stock in the S 

corporation under section 1368. See 

also David E. Watson, P.C. v. United 

States, 668 F.3d 1008, 1017 (8th Cir. 

2012). The legislative history of section 

199A confirms that the reasonable 

compensation rule was intended to 

apply to S corporations. 

The Treasury Department and the IRS 

have received requests for guidance on 

whether the phrase ‘‘reasonable 

compensation’’ within the meaning of 

section 199A extends beyond the 

context of S corporations for purposes of 

section 199A. The Treasury Department 

and the IRS believe ‘‘reasonable 

compensation’’ is best read as limited to 

the context from which it derives: 

Compensation of S corporation 

shareholders-employees. If reasonable 

compensation were to apply outside of 

the context of S corporations, a 

partnership could be required to apply 

the concept of reasonable compensation 

to its partners, regardless of whether 

amounts paid to partners were 

guaranteed. Such a result would violate 

the principle set forth in Rev. Rul. 69– 

184, 1969–1 CB 256, that a partner of a 

partnership cannot be an employee of 

that partnership. There is no indication 

that Congress intended to change this 

long-standing Federal income tax 

principle. Accordingly, proposed 

§ 1.199A–3(b)(2)(ii)(H) provides that 

QBI does not include reasonable 

compensation paid by an S corporation 

but does not extend this rule to 

partnerships. Because the trade or 

business of performing services as an 

employee is not a qualified trade or 

business under section 199A(d)(1)(B), 

wage income received by an employee 

is never QBI. The rule for reasonable 

compensation is merely a clarification 

that, even if an S corporation fails to pay 

a reasonable wage to its shareholderemployees, the shareholder-employees 

are nonetheless prevented from 

including an amount equal to 

reasonable compensation in QBI. 

d. Guaranteed Payments 

Section 199A(c)(4)(B) provides that 

QBI does not include any guaranteed 

payment described in section 707(c) 

paid by a partnership to a partner for 

services rendered with respect to the 

trade or business. Proposed § 1.199A– 

3(b)(2)(ii)(I) restates this statutory rule 

and clarifies that the partnership’s 

deduction for such guaranteed payment 

is an item of QBI if it is properly 

allocable to the partnership’s trade or 

business and is otherwise deductible for 

Federal income tax purposes. It may be 

unclear whether a guaranteed payment 

to an upper-tier partnership for services 

performed for a lower-tier partnership is 

QBI for the individual partners of the 

upper-tier partnership if the upper-tier 

partnership does not itself make a 

guaranteed payment to its partners. 

Section 199A(c)(4)(B) does not limit the 

term ‘‘partner’’ to an individual. 

Consequently, for purposes of the 

guaranteed payment rule, a partner may 

be an RPE. Accordingly, proposed 

§ 1.199A–3(b)(2)(ii)(I) clarifies that QBI 

does not include any guaranteed 

payment described in section 707(c) 

paid to a partner for services rendered 

with respect to the trade or business, 

regardless of whether the partner is an 

individual or an RPE. Therefore, for the 

purposes of this rule, a guaranteed 

payment paid by a lower-tier 

partnership to an upper-tier partnership 

retains its character as a guaranteed 

payment and is not included in QBI of 

a partner of the upper-tier partnership 

regardless of whether it is guaranteed to 

the ultimate recipient. 

e. Section 707(a) Payments 

Section 199A(c)(4)(C) provides that 

QBI does not include, 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. Section 707(a) 

addresses arrangements in which a 

partner engages with the partnership 

other than in its capacity as a partner. 

Within the context of section 199A, 

payments under section 707(a) for 

services are similar to, and therefore, 

should be treated similarly as, 

guaranteed payments, reasonable 

compensation, and wages, none of 

which is includable in QBI. In addition, 

consistent with the tiered partnership 

rule for guaranteed payments described 

previously, to the extent an upper-tier 

RPE receives a section 707(a) payment, 

that income should not constitute QBI 

to the partners of the upper-tier entity. 

Accordingly, proposed § 1.199A– 

3(b)(2)(ii)(J) provides that QBI does not 

include any payment described in 

section 707(a) to a partner for services 

rendered with respect to the trade or 

business, regardless of whether the 

partner is an individual or an RPE. The 

Treasury Department and the IRS 

request comments on whether there are 

situations in which it is appropriate to 

include section 707(a) payments in QBI. 

viii. Allocation of Items Not Clearly 

Attributable to a Single Trade or 

Business 

Proposed § 1.199A–3(b)(5) provides 

that, 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 taxpayer or entity must 

allocate those items among the several 

trades or businesses to which they are 

attributable using a reasonable method 

that is consistent with the purposes of 

section 199A. The chosen reasonable 

method for each item must be 

consistently applied from one taxable 

year to another and must clearly reflect 

the income of each trade or business. 

There are several different ways to 

allocate expenses, such as direct tracing 

or allocating based on gross income, but 

whether these are reasonable depends 

on the facts and circumstances of each 


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trade or business. The Treasury 

Department and the IRS are considering 

whether ‘‘reasonable method’’ should be 

defined to include the direct tracing 

method, allocations based on gross 

income, or other methods, within 

appropriate parameters. The Treasury 

Department and the IRS request 

comments on reasonable methods for 

the allocation of items not clearly 

attributable to a single trade or business 

and whether any safe harbors may be 

appropriate. 

B. Qualified REIT Dividends and 

Qualified PTP Income 

Proposed § 1.199A–3(c)(1) restates the 

statutory provisions regarding qualified 

REIT dividends and provides additional 

guidance relating to such dividends. 

Pursuant to the regulatory authority 

conferred under section 199A(f)(4), 

proposed § 1.199A–3(c) provides an 

anti-abuse rule to prevent dividend 

stripping and similar transactions aimed 

at capturing qualified REIT dividends 

without having economic exposure to 

the REIT stock for a meaningful period 

of time. The proposed anti-abuse rule 

incorporates the principles of section 

246(c). 

Proposed § 1.199A–3(c)(2) restates the 

statutory provisions regarding qualified 

PTP income and provides additional 

guidance regarding such income. One 

commenter questioned whether section 

751 income recognized upon the sale of 

an interest in a PTP must meet the 

standards for QBI (such as the 

requirement that the income be 

effectively connected with a U.S. trade 

or business) to qualify as qualified PTP 

income. Section 199A includes special 

rules exempting qualified PTP income 

from the W–2 wage and UBIA of 

qualified property limitations. However, 

these statutory rules do not exempt 

qualified PTP income from the other 

QBI requirements. Accordingly, 

proposed § 1.199A–3(c)(3)(ii) clarifies 

that the other rules applicable to the 

determination of QBI apply to the 

determination of qualified PTP income. 

IV. Proposed § 1.199A–4: Aggregation 

Rules 

A. Overview 

The proposed regulations incorporate 

the rules under section 162 for 

determining whether a trade or business 

exists for purposes of section 199A. A 

taxpayer can have more than one trade 

or business for purposes of section 162. 

See § 1.446–1(d)(1). However, in most 

cases, a trade or business cannot be 

conducted through more than one 

entity. 

The Treasury Department and the IRS 

have received comments requesting that 

the regulations provide that taxpayers 

be permitted to group or ‘‘aggregate’’ 

trades or businesses under section 199A 

using the grouping rules described in 

§ 1.469–4 (grouping rules). Section 

1.469–4 sets forth the rules for grouping 

a taxpayer’s trade or business activities 

and rental activities for purposes of 

applying the passive activity loss and 

credit limitation rules of section 469. 

Section 469 uses the term ‘‘activities’’ in 

determining the application of the 

limitation rules under section 469. In 

contrast, section 199A applies to trades 

or businesses. By focusing on activity, 

the grouping rules may be both under 

and over inclusive in determining what 

activities give rise to a trade or business 

for section 199A purposes. 

Additionally, section 469 is a loss 

limitation rule used to prevent 

taxpayers from sheltering passive losses 

with nonpassive income. The section 

199A deduction is not based on the 

level of a taxpayer’s involvement in the 

trade or business (that is, both active 

and passive owners of a trade or 

business may be entitled to a section 

199A deduction if they otherwise satisfy 

the requirements of section 199A and 

these proposed regulations). 

Complicating matters further, a 

taxpayer’s section 469 groupings may 

include specified service trades or 

businesses, requiring separate rules to 

segregate the two categories of trades or 

businesses to calculate the section 199A 

deduction. 

Therefore, the grouping rules under 

section 469 are not appropriate for 

determining a trade or business for 

section 199A purposes. Accordingly, the 

Treasury Department and the IRS are 

not adopting the section 469 grouping 

rules as the means by which taxpayers 

can aggregate trades or businesses for 

purposes of applying section 199A. 

Although it is not appropriate to 

apply the grouping rules under section 

469 to section 199A, the Treasury 

Department and the IRS agree with 

practitioners that some amount of 

aggregation should be permitted. It is 

not uncommon for what are commonly 

thought of as single trades or businesses 

to be operated across multiple entities. 

Trades or businesses may be structured 

this way for various legal, economic, or 

other non-tax reasons. The fact that 

businesses are operated across entities 

raises the question of whether, in 

defining trade or business for purposes 

of section 199A, section 162 trades or 

businesses should be permitted or 

required to be aggregated or 

disaggregated, and if so, whether such 

aggregation or disaggregation should 

occur at the entity level or the 

individual level. Allowing taxpayers to 

aggregate trades or businesses offers 

taxpayers a means of combining their 

trades or businesses for purposes of 

applying the W–2 wage and UBIA of 

qualified property limitations and 

potentially maximizing the deduction 

under section 199A. If such aggregation 

is not permitted, taxpayers could be 

forced to incur costs to restructure 

solely for tax purposes. In addition, 

business and non-tax law requirements 

may not permit many taxpayers to 

restructure their operations. Therefore, 

proposed § 1.199A–4 permits the 

aggregation of separate trades or 

businesses, provided certain 

requirements are satisfied. 

The Treasury Department and the IRS 

are aware that many commenters were 

concerned with having multiple regimes 

for grouping (that is, under sections 

199A, 1411, and 469). Accordingly, 

comments are requested on the 

aggregation method described in 

proposed § 1.199A–4, including 

whether this would be an appropriate 

grouping method for purposes of 

sections 469 and 1411, in addition to 

section 199A. 

B. Aggregation Rules 

Under proposed § 1.199A–4, 

aggregation is permitted but is not 

required. However, an individual may 

aggregate trades or businesses only if the 

individual can demonstrate that the 

requirements in proposed § 1.199A– 

4(b)(1) are satisfied. First, consistent 

with other provisions in the proposed 

regulations, each trade or business must 

itself be a trade or business as defined 

in § 1.199A–1(b)(13). 

Second, the same person, or group of 

persons, must directly or indirectly, 

own a majority interest in each of the 

businesses to be aggregated for the 

majority of the taxable year in which the 

items attributable to each trade or 

business are included in income. All of 

the items attributable to the trades or 

businesses must be reported on returns 

with the same taxable year (not 

including short years). Proposed 

§ 1.199A–4(b)(3) provides rules allowing 

for family attribution. Because the 

proposed rules look to a group of 

persons, non-majority owners may 

benefit from the common ownership 

and are permitted to aggregate. The 

Treasury Department and the IRS 

considered certain reporting 

requirements in which the majority 

owner or group of owners would be 

required to provide information about 

all of the other pass-through entities in 

which they held a majority interest. Due 

to the complexity and potential burden 


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on taxpayers of such an approach, 

proposed § 1.199A–4 does not provide 

such a reporting requirement. The 

Treasury Department and the IRS 

request comments on whether a 

reporting or other information sharing 

requirement should be required. 

Third, none of the aggregated trades 

or businesses can be an SSTB. Proposed 

§ 1.199A–5 addresses SSTBs and trades 

or businesses with SSTB income. 

Fourth, individuals and trusts must 

establish that the trades or businesses 

meet at least two of three factors, which 

demonstrate that the businesses are in 

fact part of a larger, integrated trade or 

business. These factors include: (1) The 

businesses provide products and 

services that are the same (for example, 

a restaurant and a food truck) or they 

provide products and services that are 

customarily provided together (for 

example, a gas station and a car wash); 

(2) the businesses share facilities or 

share significant centralized business 

elements (for example, common 

personnel, accounting, legal, 

manufacturing, purchasing, human 

resources, or information technology 

resources); or (3) the businesses are 

operated in coordination with, or 

reliance on, other businesses in the 

aggregated group (for example, supply 

chain interdependencies). 

C. Individuals 

An individual is permitted to 

aggregate trades or businesses operated 

directly and trades or businesses 

operated through RPEs. Individual 

owners of the same RPEs are not 

required to aggregate in the same 

manner. 

An individual directly engaged in a 

trade or business must compute QBI, 

W–2 wages, and UBIA of qualified 

property for each trade or business 

before applying the aggregation rules. If 

an individual has aggregated two or 

more trades or businesses, then the 

combined QBI, W–2 wages, and UBIA of 

qualified property for all aggregated 

trades or businesses is used for purposes 

of applying the W–2 wage and UBIA of 

qualified property limitations described 

in proposed § 1.199A–1(d)(2)(iv). 

D. RPEs 

RPEs must compute QBI, W–2 wages, 

and UBIA of qualified property for each 

trade or business. An RPE must provide 

its owners with information regarding 

QBI, W–2 wages, and UBIA of qualified 

property attributable to its trades or 

businesses. 

The Treasury Department and the IRS 

considered permitting aggregation by an 

RPE in a tiered structure. The Treasury 

Department and the IRS considered 

several approaches to tiered structures, 

including permitting only the operating 

entity to aggregate the trades or 

businesses or permitting each tier to add 

to the aggregated trade or business from 

a lower-tier, provided that the combined 

aggregated trade or business otherwise 

satisfied the requirements of proposed 

§ 1.199A–4(b)(1) had the businesses all 

been owned by the lower-tier entity. 

The Treasury Department and the IRS 

are concerned that the reporting 

requirements needed for either of these 

rules would be overly complex for both 

taxpayers and the IRS to administer. In 

addition, because the section 199A 

deduction is in all cases taken at the 

individual level, it should not be 

detrimental, and in fact may provide 

flexibility to taxpayers, to provide for 

aggregation at only one level. The 

Treasury Department and the IRS 

request comments on the proposed 

approach to tiered structures and the 

reporting necessary to allow an 

individual to demonstrate to which 

trades or businesses his or her QBI, W– 

2 wages, and UBIA of qualified property 

are attributable for purposes of 

calculating his or her section 199A 

deduction. 

E. Reporting and Consistency 

Proposed § 1.199A–4(c)(1) requires 

that once multiple trades or businesses 

are aggregated into a single aggregated 

trade or business, individuals must 

consistently report the aggregated group 

in subsequent tax years. Proposed 

§ 1.199A–4(c)(1) provides rules for 

situations in which the aggregation rules 

are no longer met as well as rules for 

when a newly created or acquired trade 

or business can be added to an existing 

aggregated group. 

Proposed § 1.199A–4(c)(2)(i) provides 

reporting and disclosure requirements 

for individuals that choose to aggregate, 

including identifying information about 

each trade or business that constitutes a 

part of the aggregated trade or business. 

Proposed § 1.199A–4(c)(2)(ii) allows the 

Commissioner to disaggregate trades or 

businesses if an individual fails to make 

the required aggregation disclosure. The 

Treasury Department and the IRS 

request comments as to whether it is 

administrable to create a standard under 

which trades or businesses will be 

disaggregated by the Commissioner and 

what that standard might be. 

V. Proposed § 1.199A–5: Specified 

Service Trade or Business and the 

Trade or Business of Performing 

Services as an Employee 

Section 199A(c)(1) provides that only 

items attributable to a qualified trade or 

business are taken into account in 

determining the section 199A deduction 

for QBI. Section 199A(d)(1) provides 

that a ‘‘qualified trade or business’’ 

means any trade or business other than 

(A) an SSTB, or (B) the trade or business 

of performing services as an employee. 

A. SSTB 

This part V.A. explains the provisions 

under proposed § 1.199A–5 relating to 

SSTBs. First, the effect of classification 

as an SSTB is discussed. Second, the 

exceptions for taxpayers below the 

threshold amount and a de minimis 

exception are described. Third, 

guidance is provided on the meaning of 

the activities listed in the definition of 

SSTB. Fourth, the rules for determining 

whether a trade or business is treated as 

part of an SSTB are described. Finally, 

rules regarding classification as an 

employee for purposes of section 199A 

are discussed. 

1. Effect of being an SSTB 

a. General Rule 

Consistent with section 199A, 

proposed § 1.199A–5(a)(2) provides that, 

unless an exception applies, if a trade or 

business is an SSTB, none of its items 

are to be taken into account for purposes 

of determining a taxpayer’s QBI. In the 

case of an SSTB conducted by an entity, 

such as a partnership or an S 

corporation, if it is determined that the 

trade or business is an SSTB, none of 

the income from that trade or business 

flowing to an owner of the entity is QBI, 

regardless of whether the owner 

participates in the specified service 

activity. Therefore, a direct or indirect 

owner of a trade or business engaged in 

an SSTB is treated as engaged in the 

SSTB for purposes of section 199A 

regardless of whether the owner is 

passive or participated in the SSTB. 

Similarly, none of the W–2 wages or 

UBIA of qualified property will be taken 

into account for purposes of section 

199A. For example, because the field of 

athletics is an SSTB, if a partnership 

owns a professional sports team, the 

partners’ distributive shares of income 

from the partnership’s athletics trade or 

business is not QBI, regardless of 

whether the partners participate in the 

partnership’s trade or business. 

Proposed § 1.199A–5 contains further 

examples illustrating the operation of 

this rule. 

b. Exceptions to the General Rule 

Under section 199A(d)(3), individuals 

with taxable income below the 

threshold amount are not subject to a 

restriction with respect to SSTBs. 

Therefore, if an individual or trust has 

taxable income below the threshold 

amount, the individual or trust is 


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40896 Federal Register / Vol. 83, No. 159 / Thursday, August 16, 2018 / Proposed Rules 

eligible to receive the deduction under 

section 199A notwithstanding that a 

trade or business is an SSTB. As 

described in part I.C of this Explanation 

of Provisions, the exclusion of QBI, W– 

2 wages, and UBIA of qualified property 

from the computation of the section 

199A deduction is subject to a phase-in 

for individuals with taxable income 

within the phase-in range. The 

application of this phase-in is 

determined at the individual, trust, or 

estate level, which may not be where 

the trade or business is operated. 

Therefore, if a partnership or an S 

corporation operates an SSTB, the 

application of the threshold does not 

depend on the partnership or S 

corporation’s taxable income but rather, 

the taxable income of the individual 

partner or shareholder claiming the 

section 199A deduction. For example, if 

the partnership’s taxable income is less 

than the threshold amount, but each of 

the partnership’s individual partners 

have income that exceeds the threshold 

amount plus $50,000 ($100,000 in the 

case of a joint return) then none of the 

partners may claim a section 199A 

deduction with respect to any income 

from the partnership’s SSTB. 

An RPE conducting an SSTB may not 

know whether the taxable income of any 

of its equity owners is below the 

threshold amount. However, the RPE is 

best positioned to make the 

determination as to whether its trade or 

business is an SSTB. Therefore, 

reporting rules under proposed 

§ 1.199A–6(b)(3)(B) requires each RPE to 

determine whether it conducts an SSTB 

and disclose that information to its 

partners, shareholders, or owners. With 

respect to each trade or business, once 

it is determined that a trade or business 

is an SSTB, it remains an SSTB and 

cannot be aggregated with other trades 

or business. In the case of a trade or 

business conducted by an individual, 

such as a sole proprietorship, 

disregarded entity, or grantor trust, the 

determination of whether the business 

is an SSTB is made by the individual. 

Section 199A defines an SSTB to 

include any trade or business that 

‘‘involves the performance of services 

in’’ a specified service activity. 

Although the statute, read literally, does 

not suggest that a certain quantum of 

specified service activity is necessary to 

find an SSTB, the Treasury Department 

and the IRS believe that requiring all 

taxpayers to evaluate and quantify any 

amount of specified service activity 

would create administrative complexity 

and undue burdens for both taxpayers 

and the IRS. Therefore, analogous to the 

regulations under section 448, it is 

appropriate to provide a de minimis 

rule, under which a trade or business 

will not be considered to be an SSTB 

merely because it provides a small 

amount of services in a specified service 

activity. 

Accordingly, proposed § 1.199A– 

5(c)(1) provides that a trade or business 

(determined before the application of 

the aggregation rules in proposed 

§ 1.199A–4) is not an SSTB if the trade 

or business has gross receipts of $25 

million or less (in a taxable year) and 

less than 10 percent of the gross receipts 

of the trade or business is attributable to 

the performance of services in an SSTB. 

For trades or business with gross 

receipts greater than $25 million (in a 

taxable year), a trade or business is not 

an SSTB if less than 5 percent of the 

gross receipts of the trade or business 

are attributable to the performance of 

services in an SSTB. 

2. Definition of Specified Service Trade 

or Business 

The definition of an SSTB set forth in 

section 199A incorporates, with 

modifications, the text of section 

1202(e)(3)(A). The text of section 

1202(e)(3)(A) substantially tracks the 

definition of ‘‘qualified personal service 

corporation’’ under section 448. 

Therefore, consistent with ordinary 

rules of statutory construction, the 

guidance in proposed § 1.199A–5(b) is 

informed by existing interpretations and 

guidance under both sections 1202 and 

448 when relevant. However, existing 

guidance under those sections is sparse 

and the scope and purpose of those 

sections and section 199A are different. 

The Treasury Department and the IRS 

also note that, unlike sections 

1202(e)(3)(A) and 448, the purpose of 

section 199A is to provide a deduction 

based on the character of the taxpayer’s 

trade or business. Distinct guidance for 

section 199A is warranted. Therefore, 

the guidance in proposed § 1.199A–5(b) 

applies only to section 199A, not 

sections 1202 and 448. 

a. Guidance on the Meaning of the 

Listed Activities 

Section 199A(d)(2)(A) provides that 

an SSTB is any trade or business 

described in section 1202(e)(3)(A) 

(applied without regard to the words 

‘‘engineering [and] architecture’’) or that 

would be so described if the term 

‘‘employees or owners’’ were 

substituted for ‘‘employees’’ therein. 

Section 199A(d)(2)(B) provides that an 

SSTB is any trade or business that 

involves the performance of services 

that consist of investing and investment 

management, trading, or dealing in 

securities (as defined in section 

475(c)(2)), partnership interests, or 

commodities (as defined in section 

475(e)(2)). 

Section 1202 provides an exclusion 

from gross income for some or all of the 

gain on the sale of certain qualified 

small business stock. Section 1202 

generally requires that, for stock to be 

qualified small business stock, the 

corporation must be engaged in a 

qualified trade or business. Section 

1202(e)(3) provides that, for purposes of 

section 1201(e), the term ‘‘qualified 

trade or business’’ means any trade or 

business other than any trade or 

business involving the performance of 

services in the fields of health, law, 

engineering, architecture, accounting, 

actuarial science, performing arts, 

consulting, athletics, financial services, 

brokerage services, or any trade or 

business where the principal asset of 

such trade or business is the reputation 

or skill of 1 or more of its employees; 

any banking, insurance, financing, 

leasing, investing, or similar business; 

any farming business (including the 

business of raising or harvesting trees); 

any business involving the production 

or extraction of products of a character 

with respect to which a deduction is 

allowable under section 613 or 613A; 

and any business of operating a hotel, 

motel, restaurant, or similar business. 

Thus, after application of the 

modifications described in section 

199A(d)(2)(A), the definition of an SSTB 

for purposes of section 199A is (1) any 

trade or business involving the 

performance of services in the fields of 

health, law, accounting, actuarial 

science, performing arts, consulting, 

athletics, financial services, brokerage 

services, or 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, and 

(2) any trade or business that involves 

the performance of services that consist 

of investing and investment 

management, trading, or dealing in 

securities (as defined in section 

475(c)(2)), partnership interests, or 

commodities (as defined in section 

475(e)(2)). 

The Treasury Department and the IRS 

have received comments requesting 

guidance on the meaning and scope of 

the various trades or businesses 

described in the preceding paragraph. 

The Treasury Department and the IRS 

agree with commenters that guidance 

with respect to these trades or 

businesses is necessary for several 

reasons. Most importantly, section 199A 

is a new Code provision intended to 

benefit a wide range of businesses, and 

taxpayers need certainty in determining 

whether their trade or business 

generates income that is eligible for the 


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section 199A deduction. As previously 

discussed, given the differing scope, 

objectives, and, in some respects, 

language of sections 199A, 448, and 

1202, the guidance under sections 

1202(e)(3)(A) and 448(d)(2) is not an 

appropriate substitute for clear and 

distinct guidance governing what 

constitutes an SSTB under section 

199A. In particular, some SSTBs are 

listed in section 1202(e)(3)(A), but not 

listed in section 448(d)(2), such as 

athletics, financial services, brokerage 

services, and 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. 

In addition, some activities are 

mentioned only in 199A, such as 

investment management, trading, and 

dealing. As described in the remainder 

of this part V.A.2., proposed § 1.199A– 

5(b) provides guidance on the definition 

of an SSTB based on the plain meaning 

of the statute, past interpretations of 

substantially similar language in other 

Code provisions, and other indicia of 

legislative intent. 

i. SSTBs Listed in Section 199A(d)(2)(A) 

The definition of an SSTB under 

section 199A is substantially similar to 

the list of service trades or businesses 

provided in section 448(d)(2)(A) and 

§ 1.448–1T(e)(4)(i), as the legislative 

history notes. See Joint Explanatory 

Statement of the Committee of 

Conference, footnotes 44–46. Section 

448 prohibits certain taxpayers from 

computing taxable income under the 

cash receipts and disbursements method 

of accounting. Under section 448, 

qualified personal service corporations 

generally are not subject to the 

prohibition from using the cash method. 

Section 448(d)(2) defines the term 

qualified personal service corporation to 

include certain employee-owned 

corporations, substantially all of the 

activities of which involve the 

performance of services in the fields of 

health, law, engineering, architecture, 

accounting, actuarial science, 

performing arts, or consulting. The 

regulations under section 448(d)(2), 

found in § 1.448–1T(e)(4)(i), provide 

additional guidance on several of the 

terms, including health, performing arts, 

and consulting. In addition, there have 

been several court opinions, technical 

advice memoranda, and private letter 

rulings interpreting the various fields 

listed in section 448(d)(2) and § 1.448– 

1T(e)(4)(i). 

In general, the guidance under section 

448(d)(2) emphasizes the direct 

provision of services by the employees 

of a trade or business, rather than the 

application of capital. Commenters have 

suggested that the regulations under 

section 448 serve as a reasonable 

starting point for defining an SSTB for 

purposes of section 199A. However, 

commenters also noted that the 

objectives and included categories of 

trades or businesses within section 448 

and section 199A are different. 

Consistent with ordinary rules of 

statutory construction and the 

legislative history of section 199A, 

proposed § 1.199A–5(b) draws upon the 

existing guidance under section 

448(d)(2) when appropriate for purposes 

of section 199A. Proposed § 1.199A–5(b) 

generally follows the guidance issued 

under section 448(d)(2) with some 

modifications. In certain instances, the 

principles of section 448(d)(2) provide 

useful analogies in defining the 

particular fields listed in section 

1202(e)(3)(A) (as modified by section 

199A(d)(2)(A)) for purposes of section 

199A. 

In addition, section 1202(e)(3)(A) also 

includes ‘‘any trade or business where 

the principal asset of such trade or 

business is the reputation of skill of 1 

or more of its employees.’’ Section 

199A(d)(2)(A) modifies this clause by 

adding the words ‘‘or owners’’ to the 

end, to read as follows: ‘‘any trade or 

business where the principal asset of 

such trade or business is the reputation 

or skill of 1 or more of its employees or 

owners.’’ The meaning of this clause is 

best determined by examining the 

language of section 1202(e)(3)(A) in 

light of the purpose of section 199A. 

Case law under section 448 provides 

that whether a service is performed in 

a qualifying field under section 

448(d)(2) is to be decided by examining 

all relevant indicia and is not controlled 

by state licensing laws. See Rainbow 

Tax Serv., Inc. v. Commissioner, 128 

T.C. 42 (2007); Kraatz & Craig Surveying 

Inc., v. Commissioner, 134 T.C. 167 

(2010). This approach also is 

appropriate for section 199A purposes. 

Additionally, states can widely vary in 

what they require in terms of licensure 

or certification. The Treasury 

Department and the IRS believe that the 

Federal tax law should not treat 

similarly situated taxpayers differently 

based on a particular state’s decision 

that for consumer protection purposes 

or otherwise a particular business type 

requires a license or certification. Thus, 

proposed § 1.199A–5(b) does not adopt 

a bright-line licensing rule for purposes 

of determining whether a trade or 

business is within a certain field for 

purposes of section 199A. 

a. Health 

Proposed § 1.199A–5(b)(2)(ii) is 

informed by the definition of ‘‘health’’ 

under section 448 and provides that the 

term ‘‘performance of services in the 

field of health’’ means the provision of 

medical services by physicians, 

pharmacists, nurses, dentists, 

veterinarians, physical therapists, 

psychologists, and other similar 

healthcare professionals who provide 

medical services directly to a patient. 

The performance of services in the field 

of health does not include the provision 

of services not directly related to a 

medical field, even though the services 

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 

research, testing, and manufacture and/ 

or sales of pharmaceuticals or medical 

devices. 

b. Law 

Proposed § 1.199A–5(b)(2)(iii) is 

based on the ordinary meaning of 

‘‘services in the field of law’’ and 

provides that the term ‘‘performance of 

services in the field of law’’ means the 

provision of services by lawyers, 

paralegals, legal arbitrators, mediators, 

and similar professionals 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. 

c. Accounting 

Proposed § 1.199A–5(b)(2)(iv) is based 

on the ordinary meaning of 

‘‘accounting’’ and provides that the term 

‘‘performance of services in the field of 

accounting’’ means the provision of 

services by accountants, enrolled agents, 

return preparers, financial auditors, and 

similar professionals in their capacity as 

such. Provision of services in the field 

of accounting is not limited to services 

requiring state licensure as a certified 

public accountant (CPA). The aim of 

proposed § 1.199A–5(b)(2)(iv) is to 

capture the common understanding of 

accounting, which includes tax return 

and bookkeeping services, even though 

the provision of such services may not 

require the same education, training, or 

mastery of accounting principles as a 

CPA. The field of accounting does not 

include payment processing and billing 

analysis. 


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d. Actuarial Science 

Proposed § 1.199A–5(b)(2)(v) is based 

on the ordinary meaning ‘‘actuarial 

science’’ and provides that the term 

‘‘performance of services in the field of 

actuarial science’’ means the provision 

of services by actuaries and similar 

professionals in their capacity as such. 

Accordingly, the field of actuarial 

science does not include the provision 

of services by analysts, economists, 

mathematicians, and statisticians not 

engaged in analyzing or assessing the 

financial costs of risk or uncertainty of 

events. 

e. Performing Arts 

Proposed § 1.199A–5(b)(2)(vi) is 

informed by the definition of 

‘‘performing arts’’ under section 448 and 

provides that the term ‘‘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. 

f. Consulting 

Proposed § 1.199A–5(b)(2)(vii) is 

informed by the definition of 

‘‘consulting’’ under section 448 and 

provides that the term ‘‘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. 

This determination is made based on all 

the facts and circumstances of a 

person’s business. 

Additionally, the Treasury 

Department and the IRS are aware of the 

concern noted by commenters that in 

certain kinds of sales transactions it is 

common for businesses to provide 

consulting services in connection with 

the purchase of goods by customers. For 

example, a company that sells 

computers may provide customers with 

consulting services relating to the setup, 

operation, and repair of the computers, 

or a contractor who remodels homes 

may provide consulting prior to 

remodeling a kitchen. As described 

previously in this Explanation of 

Provisions, proposed § 1.199A–5(c) 

provides a de minimis rule, under 

which a trade or business is not an 

SSTB if less than 10 percent of the gross 

receipts (5 percent if the gross receipts 

are greater than $25 million) of the trade 

or business are attributable to the 

performance of services in a specified 

service activity. However, this de 

minimis rule may not provide sufficient 

relief for certain trades or business that 

provide ancillary consulting services. 

The Treasury Department and the IRS 

believe that if a trade or business 

involves the selling or manufacturing of 

goods, and such trade or business 

provides ancillary consulting services 

that are not separately purchased or 

billed, then such trades or businesses 

are not in a trade or business in the field 

of consulting. Accordingly, proposed 

§ 1.199A–5(b)(2)(vii) provides that the 

field of consulting does not include 

consulting that is embedded in, or 

ancillary to, the sale of goods if there is 

no separate payment for the consulting 

services. 

g. Athletics 

The field of athletics is not listed in 

section 448(d)(2), and there is little 

guidance on its meaning as used in 

section 1202(e)(3)(A). However, 

commenters noted, and the Treasury 

Department and the IRS agree, that 

among the services specified in section 

199A(d)(2)(A) the field of athletics is 

most similar to the field of performing 

arts. Accordingly, proposed § 1.199A– 

5(b)(2)(viii) provides that the term 

‘‘performance of services in the field of 

athletics’’ means the performances 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. 

h. Financial Services 

Commenters requested guidance as to 

whether financial services includes 

banking. These commenters noted that 

section 1202(e)(3)(A) includes the term 

financial services, but that banking in 

separately listed in section 1202(e)(3)(B) 

which suggests that banking is not 

included as part of financial services in 

section 1202(e)(3)(A). The Treasury 

Department and the IRS agree with such 

commenters that this suggests that 

financial services should be more 

narrowly interpreted here. Therefore, 

proposed § 1.199A–5(b)(2)(ix) limits the 

definition of financial services to 

services typically performed by 

financial advisors and investment 

bankers and provides that the field of 

financial services includes 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 

(including in title 11 or similar cases), 

and raising financial capital by 

underwriting, or acting as the 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, but does not 

include taking deposits or making loans. 

i. Brokerage Services 

Proposed § 1.199A–5(b)(2)(x) uses the 

ordinary meaning of ‘‘brokerage 

services’’ and provides that the field of 

brokerage services includes services in 

which a person arranges transactions 

between a buyer and a seller with 

respect to securities (as defined in 

section 475(c)(2)) 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. 

j. Any Trade or Business Where the 

Principal Asset of Such Trade or 

Business Is the Reputation or Skill of 1 

or More of Its Employees or Owners 

Guidance on the meaning of the 

‘‘reputation or skill’’ clause in section 


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Federal Register / Vol. 83, No. 159 / Thursday, August 16, 2018 / Proposed Rules 40899 

1202(e)(3)(A) is limited to dicta in one 

case. In John P. Owen v. Commissioner, 

T.C. Memo 2012–21, the Tax Court 

examined whether Mr. Owen, whose 

business was insurance, was entitled to 

benefits under section 1202 with respect 

to the sale of his interest in a 

corporation conducting such business. 

Under the facts described in the case, 

the corporation had extensive training 

programs and sales structures, but 

primarily relied on the services of 

independent contractors (including Mr. 

Owen) in conducting its business. 

Although the Tax Court acknowledged 

that the business’ success was due to 

Mr. Owen’s efforts, it found that the 

principal asset of the company in 

question was the training program and 

sales structure of the business rather 

than Mr. Owen’s services. 

The Treasury Department and the IRS 

received several comments regarding 

the meaning of the ‘‘reputation or skill’’ 

clause. Commenters described potential 

methods to give maximum effect to the 

literal language of the reputation or skill 

clause by describing ways to (1) 

determine the extent to which the 

reputation or skill of employees or 

owners constitutes an asset of the 

business under Federal tax accounting 

principles, and (2) measure whether 

such an asset is in fact the principal 

asset of the business. 

One commenter suggested using an 

activity-based standard under which no 

service-based businesses would qualify 

for the section 199A deduction. An 

SSTB definition this broad would not 

comport with the statute and would 

deny a section 199A deduction to 

businesses that the statute does not 

appear to exclude. If the ‘‘reputation or 

skill’’ clause was intended to exclude all 

service businesses from section 199A, 

there would have been no reason to 

enumerate specific types of businesses 

in section 199A(d)(2); that language 

would be pure surplusage. A broad 

service-based test would also fail to 

provide a clear classification of 

businesses that combine services with 

sales of products, such as plumbing and 

HVAC services, if those businesses sell 

goods or equipment in the course of 

providing services. Therefore, the 

Treasury Department and the IRS do not 

believe it is consistent with the text, 

structure, or purpose of section 199A to 

exclude all service businesses above the 

threshold amount from qualifying for 

the section 199A deduction. 

Another commenter described a 

balance sheet test that would compare 

the value of assets other than goodwill 

and workforce in place to the value of 

such goodwill and workforce in place. 

The commenter acknowledged that such 

a test could also be broader than 

Congress intended. In addition, the 

commenter noted that such a test could 

easily lead to strange and unintuitive 

results, and may be difficult to apply in 

the case of small businesses that do not 

maintain audited financial statements 

and would both be ripe for abuse, and 

could potentially result in many legal 

disputes between taxpayers and the IRS. 

Finally, one commenter described a 

standard based on whether the trade or 

business involves the provision of 

highly-skilled services. The commenter 

argued that the primary benefit of a 

standard like this is that it would 

harmonize the meaning of the 

reputation or skill phrase with the 

trades or businesses listed in section 

1202(e)(3)(A), each of which involve the 

provision of services by professionals 

who either received a substantial 

amount of training (for example, 

doctors, nurses, lawyers, and 

accountants), or who have otherwise 

achieved a high degree of skill in a 

given field (for example, professional 

athletes or performing artists). 

Congress enacted section 199A to 

provide a deduction from taxable 

income to trades or businesses 

conducted by sole proprietorships and 

passthrough entities that do not benefit 

from the income tax rate reduction 

afforded to C corporations under the 

TCJA. The Treasury Department and the 

IRS are concerned that a broad 

definition of the ‘‘reputation or skill’’ 

phrase that relied on a balance sheet test 

or numerical ratios would have several 

consequences inconsistent with the 

intent of section 199A. Testing 

businesses based on metrics, some of 

them subjective, that change over time 

could result in inappropriate year-overyear tax consequences and lead to 

distorted decision-making. As the 

commenters noted, such mechanical 

tests pose administrative difficulties and 

fail to provide taxpayers with needed 

certainty regarding the tax law 

necessary for conducting their business 

affairs. Most significantly, such 

mechanical rules might prevent trades 

or businesses that Congress intended to 

be eligible for the section 199A 

deduction from claiming the section 

199A deduction. 

In sum, the Treasury Department and 

the IRS believe that the ‘‘reputation or 

skill’’ clause as used in section 199A 

was intended to describe a narrow set of 

trades or businesses, not otherwise 

covered by the enumerated specified 

services, in which income is received 

based directly on the skill and/or 

reputation of employees or owners. 

Additionally, the Treasury Department 

and the IRS believe that ‘‘reputation or 

skill’’ must be interpreted in a manner 

that is both objective and administrable. 

Thus, proposed § 1.199A–5(b)(2)(xiv) 

limits the meaning of the ‘‘reputation or 

skill’’ clause to fact patterns in which 

the individual or RPE is engaged in the 

trade or business of: (1) Receiving 

income for endorsing products or 

services, including an individual’s 

distributive share of income or 

distributions from an RPE for which the 

individual provides endorsement 

services; (2) licensing or receiving 

income for the use of an individual’s 

image, likeness, name, signature, voice, 

trademark, or any other symbols 

associated with the individual’s 

identity, including an individual’s 

distributive share of income or 

distributions from an RPE to which an 

individual contributes the rights to use 

the individual’s image; or (3) receiving 

appearance fees or income (including 

fees or income to reality performers 

performing as themselves on television, 

social media, or other forums, radio, 

television, and other media hosts, and 

video game players). Proposed 

§ 1.199A–5(b)(4) contains two examples 

illustrating the application of this 

definition. The Treasury Department 

and the IRS request comments on this 

rule, the clarity of definitions for the 

statutorily enumerated trades or 

businesses that are SSTBs under section 

199A(d)(2)(A), and the accompanying 

examples. 

ii. SSTBs Described in 199A(d)(2)(B) 

As mentioned previously, section 

199A(d)(2)(B) provides that an SSTB 

also includes any trade or business that 

involves the performance of services 

that consist of investing and investment 

management, trading, or dealing in 

securities (as defined in section 

475(c)(2)), partnership interests, or 

commodities (as defined in section 

475(e)(2)). This rule does not appear in 

section 1202(e)(3)(A) or section 

448(d)(2). 

Section 475(c)(2) provides a detailed 

list of interests treated as securities, 

including stock in a corporation; 

ownership interests in widely held or 

publicly traded partnerships or trusts; 

notes, bonds, debentures, or other 

evidences of indebtedness; interest rate, 

currency, or equity notional principal 

contracts; evidences of an interest in, or 

derivative financial instruments in any 

of the foregoing securities or any 

currency, including any option, forward 

contract, short position, or any similar 

financial instruments; and certain 

hedges with respect to any such 

securities. Section 475(e)(2) provides a 

similarly detailed list of property treated 

as a commodity, including any 


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40900 Federal Register / Vol. 83, No. 159 / Thursday, August 16, 2018 / Proposed Rules 

commodity which is actively traded 

(within the meaning of section 

1092(d)(1)) or any notional principal 

contract with respect to any such 

commodity, evidences of an interest in, 

or derivative financial instruments in 

any of the foregoing commodities, and 

certain hedges with respect to any such 

commodities. 

a. Investing and Investment 

Management 

Proposed § 1.199A–5(b)(2)(xi) uses the 

ordinary meaning of ‘‘investing and 

investment management’’ and provides 

that any trade or business that involves 

the ‘‘performance of services that 

consist of investing and investment 

management’’ means a trade or business 

that earns fees for investment, asset 

management services, or investment 

management services including 

providing advice with respect to buying 

and selling investments. The 

performance of services that consist of 

investing and investment management 

would include a trade or business that 

receives either a commission, a flat fee, 

or an investment management fee 

calculated as a percentage of assets 

under management. The performance of 

services of investing and investment 

management does not include directly 

managing real property. 

b. Trading 

Proposed § 1.199A–5(b)(2)(xii) 

provides that any trade or business 

involving the ‘‘performance of services 

that consist of trading’’ means a trade or 

business of trading in securities, 

commodities, or partnership interests. 

Whether a person is a trader is 

determined taking into account the 

relevant facts and circumstances. 

Factors that have been considered 

relevant to determining whether a 

person is a trader include the source 

and type of profit generally sought from 

engaging in the activity regardless of 

whether the activity is being provided 

on behalf of customers or for a 

taxpayer’s own account. See Endicott v. 

Commissioner, T.C. Memo 2013–199; 

Nelson v. Commissioner, T.C. Memo 

2013–259, King v. Commissioner, 89 

T.C. 445 (1987). A person that is a trader 

under these principles will be treated as 

performing the services of trading for 

purposes of section 199A(d)(2)(B). 

c. Dealing in Securities, Partnership 

Interests, and Commodities 

For purposes of proposed § 1.199A– 

5(b)(2)(xiii), the ‘‘performance of 

services that consist of dealing in 

securities (as defined in section 

475(c)(2))’’ 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, 

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 section 199A(d)(2). See 

§ 1.475(c)–1(c)(2) and (4) for the 

definition of negligible sales. 

For purposes of proposed § 1.199A– 

5(b)(2)(xiii), ‘‘the performance of 

services that consist of dealing in 

partnership interests’’ means 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. 

For purposes of proposed § 1.199A– 

5(b)(2)(xiii), ‘‘the performance of 

services that consist of dealing in 

commodities (as defined in section 

475(e)(2))’’ 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. 

3. Defining What Is Included in an SSTB 

The Treasury Department and the IRS 

are aware that some taxpayers have 

contemplated a strategy to separate out 

parts of what otherwise would be an 

integrated SSTB, such as the 

administrative functions, in an attempt 

to qualify those separated parts for the 

section 199A deduction. Such a strategy 

is inconsistent with the purpose of 

section 199A. Therefore, in accordance 

with section 199A(f)(4), in order to carry 

out the purposes of section 199A, 

proposed § 1.199A–5(c)(2) provides that 

an SSTB includes any trade or business 

with 50 percent or more common 

ownership (directly or indirectly) that 

provides 80 percent or more of its 

property or services to an SSTB. 

Additionally, if a trade or business has 

50 percent or more common ownership 

with an SSTB, to the extent that the 

trade or business provides property or 

services to the commonly-owned SSTB, 

the portion of the property or services 

provided to the SSTB will be treated as 

an SSTB (meaning the income will be 

treated as income from an SSTB). For 

example, A, a dentist, owns a dental 

practice and also owns an office 

building. A rents half the building to the 

dental practice and half the building to 

unrelated persons. Under proposed 

§ 1.199A–5(c)(2), the renting of half of 

the building to the dental practice will 

be treated as an SSTB. 

Additionally, proposed § 1.199A–5 

provides a rule that if a trade or 

business (that would not otherwise be 

treated as an SSTB) has 50 percent or 

more common ownership with an SSTB 

and shared expenses, including wages 

or overhead expenses with the SSTB, it 

is treated as incidental to an SSTB and, 

therefore, as an SSTB, if the trade or 

business represents no more than five 

percent of gross receipts of the 

combined business. 

B. Trade or Business of Performing 

Services as an Employee 

Under section 199(d)(1)(B), the trade 

or business of performing services as an 

employee is not a qualified trade or 

business. Unlike an SSTB, there is no 

threshold amount that applies to the 

trade or business of performing services 

as an employee. Thus, wage or 

compensation income earned by any 

employee is not eligible for the section 

199A deduction no matter the amount. 

1. Definition 

An individual is an employee for 

Federal employment tax purposes if he 

or she has the status of an employee 

under the usual common law and 

statutory rules applicable in 

determining the employer-employee 

relationship. Guides for determining 

employment status are found in 

§§ 31.3121(d)–1, 31.3306(i)–1, and 

31.3401(c)–1. As stated in the 

regulations, generally, the common law 

relationship of employer and employee 

exists when the person for whom the 

services are performed has the right to 

direct and control the individual who 

performs the services, not only as to the 

result to be accomplished by the work 

but also as to the details and means by 

which that result is accomplished. That 

is, an employee is subject to the 

direction and control of the employer 

not only as to what shall be done but 

how it shall be done. In this connection 

it is not necessary that the employer 

actually direct or control the manner in 

which the services are performed; it is 

sufficient if he or she has the right to do 

so. 

In addition, the regulations and 

section 3401(c) state, generally, that an 

officer of a corporation (including an S 

Corporation) is an employee of the 

corporation. However, an officer of a 


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corporation who does not perform any 

services or performs only minor services 

in his or her capacity as officer and who 

neither receives nor is entitled to 

receive, directly or indirectly, any 

remuneration is not considered to be an 

employee of the corporation. Whether 

an officer’s services are minor is a 

question of fact that depends on the 

nature of the services, the frequency and 

duration of their performance, and the 

actual and potential importance or 

necessity of the services in relation to 

the conduct of the corporation’s 

business. See Rev. Rul. 74–390. 

To provide clarity, proposed 

§ 1.199A–5(d) provides a general rule 

that income from the trade or business 

of performing services as an employee 

refers to all wages (within the meaning 

of section 3401(a)) and other income 

earned in a capacity as an employee, 

including payments described in 

§ 1.6041–2(a)(1) (other than payments to 

individuals described in section 

3121(d)(3)) and § 1.6041–2(b)(1). If an 

individual derives income in the course 

of a trade or business that is not 

described in section 3401(a), § 1.6041– 

2(a)(1) (other than payments to 

individuals described in section 

3121(d)(3)), or § 1.6041–2(b)(1), that 

individual is not considered to be in the 

trade or business of performing services 

as an employee with regard to such 

income. 

2. Presumption for Former Employees 

Section 199A provides that the trade 

or business of providing services as an 

employee is not eligible for the section 

199A deduction. Therefore, taxpayers 

and practitioners noted that it may be 

beneficial for employees to treat 

themselves as independent contractors 

or as having an equity interest in a 

partnership or S corporation in order to 

benefit from the deduction under 

section 199A. 

Section 530(b) of the Revenue Act of 

1978 (Pub. L. 95–600), as amended by 

section 9(d)(2) of Public Law 96–167, 

section 1(a) of Public Law 96–541, and 

section 269(c) of Public Law 97–248, 

provides a prohibition against 

regulations and rulings on employment 

status for purposes of employment 

taxes. Specifically, section 530(b) 

provides that no regulation or revenue 

ruling shall be published before the 

effective date of any law clarifying the 

employment status of individuals for 

purposes of the employment taxes by 

the Treasury Department (including the 

IRS) with respect to the employment 

status of any individual for purposes of 

the employment taxes. Section 530(c) of 

the Revenue Act of 1978 provides that, 

for purposes of section 530, the term 

‘‘employment tax’’ means any tax 

imposed by subtitle C of the Internal 

Revenue Code of 1954, and the term 

‘‘employment status’’ means the status 

of an individual, under the usual 

common law rules applicable in 

determining the employer-employee 

relationship as an employee or as an 

independent contractor (or other 

individual who is not an employee). 

These longstanding rules of section 530 

of the Revenue Act of 1978 limit the 

ability of the IRS to impose employment 

tax liability on employers for 

misclassifying employees as 

independent contractors but do not 

preclude challenging a worker’s status 

for purposes of section 199A, an income 

tax provision under subtitle A of the 

Code. 

Therefore, proposed § 1.199A–5(d)(3) 

provides that for purposes of section 

199A, if an employer improperly treats 

an employee as an independent 

contractor or other non-employee, the 

improperly classified employee is in the 

trade or business of performing services 

as an employee notwithstanding the 

employer’s improper classification. This 

issue is particularly important in the 

case of individuals who cease being 

treated as employees of an employer, 

but subsequently provide substantially 

the same services to the employer (or a 

related entity) but claim to do so in a 

capacity other than as an employee. 

However, it would not be appropriate to 

provide that someone who formerly was 

an employee of an employer is now 

‘‘less likely’’ to be respected as an 

independent contractor. Such a rule 

would not treat similarly-situated 

taxpayers similarly: Two individuals 

who have a similar relationship with a 

company and each claim to be treated 

as independent contractors would be 

treated differently depending on any 

prior employment history with the 

company. Therefore, proposed 

§ 1.199A–5(d)(3) does not provide any 

new or different standards to be 

properly classified as an independent 

contractor or owner of a business. 

Instead, proposed § 1.199A–5(d)(3) 

contains a presumption that applies in 

certain situations to ensure that 

individuals properly substantiate their 

status. 

Specifically, proposed § 1.199A– 

5(d)(3) provides that, solely for purposes 

of section 199A(d)(1)(B) and the 

regulations thereunder, an individual 

who was treated as an employee for 

Federal employment tax purposes by 

the person to whom he or she provided 

services, and who is subsequently 

treated as other than an employee by 

such person with regard to the provision 

of substantially the same services 

directly or indirectly to the person (or 

a related person), is presumed to be in 

the trade or business of performing 

services as an employee with regard to 

such services. This presumption may be 

rebutted only upon a showing by the 

individual that, under Federal tax rules, 

regulations, and principles (including 

common-law employee classification 

rules), the individual is performing 

services in a capacity other than as an 

employee. This presumption applies 

regardless of whether the individual 

provides services directly or indirectly 

through an entity or entities. This 

presumption is solely for purposes of 

section 199A and does not otherwise 

change the employment tax 

classification of the individual. Section 

199A is in subtitle A of the Code, and 

this rule does not apply for purposes of 

any other subtitle, including subtitle C. 

Accordingly, this rule does not 

implicate section 530(b) of the Revenue 

Act of 1978. Proposed § 1.199A– 

5(d)(3)(ii) contains three examples 

illustrating this rule. 

VI. Proposed § 1.199A–6: Special Rules 

for RPEs, PTPs, Trusts, and Estates 

Proposed § 1.199A–6 provides 

guidance that certain specified entities 

(for example, RPEs, PTPs, trusts, and 

estates) may need to follow for purposes 

of computing the entities’ or their 

owners’ section 199A deductions. 

A. Computational Steps for RPEs and 

PTPs 

Although RPEs cannot take the 

section 199A deduction at the RPE 

level, each RPE must determine and 

report the information necessary for its 

direct and indirect owners to determine 

their own section 199A deduction. 

Proposed § 1.199A–6(b) follows the 

rules applicable to individuals with 

taxable income above the threshold 

amount set forth in § 1.199A–1(d) in 

directing RPEs to determine what 

amounts and information to report to 

their owners and the IRS, including 

QBI, W–2 wages, the UBIA of qualified 

property for each trade or business 

directly engaged in, and whether any of 

its trades or businesses are SSTBs. RPEs 

must also determine and report 

qualified REIT dividends and qualified 

PTP income received directly by the 

RPE. Proposed § 1.199A–6(b)(3) then 

requires each RPE to report this 

information on or with the Schedules 

K–1 issued to the owners. RPEs must 

report this information regardless of 

whether a taxpayer is below the 

threshold. The Treasury Department 

and the IRS request comments whether 

it is administrable to provide a special 

rule that if none of the owners of the 


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RPE have taxable income above the 

threshold amount, the RPE does not 

need to determine and report W–2 

wages, UBIA of qualified property, or 

whether the trade or business is an 

SSTB. Although such a rule would 

relieve an RPE of an unnecessary 

burden, the RPE would need to have 

knowledge of the ultimate owner’s 

taxable income. 

The definition of an RPE does not 

include a PTP. However, PTPs must still 

determine and report QBI under the 

rules of proposed § 1.199A–3 for each 

trade or business in which the PTP is 

engaged and whether those trades or 

businesses are SSTBs. A PTP must also 

determine whether it has received any 

qualified REIT dividends or qualified 

PTP income or loss from another PTP. 

These items must be reported on or with 

the Schedule K–1. A PTP is not required 

to determine or report W–2 wages or the 

UBIA of qualified property. 

B. Application to Trusts, Estates, and 

Beneficiaries 

Proposed § 1.199A–6(d) contains 

special rules for applying section 199A 

to trusts and decedents’ estates. To the 

extent that a grantor or another person 

is treated as owning all or part of a trust 

under sections 671 through 679 (grantor 

trust), including qualified subchapter S 

trusts (QSSTs) with respect to which the 

beneficiary has made an election under 

section 1361(d), the owner will compute 

its QBI with respect to the owned 

portion of the trust as if that QBI had 

been received directly by the owner. 

In the case of a section 199A 

deduction claimed by a non-grantor 

trust or estate, section 199A(f)(1)(B) 

applies rules similar to the rules under 

former section 199(d)(1)(B)(i) for the 

apportionment of W–2 wages and the 

apportionment of UBIA of qualified 

property. In the case of a non-grantor 

trust or estate, the QBI and expenses 

properly allocable to the business, 

including the W–2 wages relevant to the 

computation of the wage limitation, and 

relevant UBIA of depreciable property 

must be allocated among the trust or 

estate and its various beneficiaries. 

Specifically, proposed § 1.199A– 

6(d)(3)(ii) provides that each 

beneficiary’s share of the trust’s or 

estate’s W–2 wages is determined based 

on the proportion of the trust’s or 

estate’s DNI that is deemed to be 

distributed to that beneficiary for that 

taxable year. Similarly, the proportion 

of the entity’s DNI that is not deemed 

distributed by the trust or estate will 

determine the entity’s share of the QBI 

and W–2 wages. In addition, if the trust 

or estate has no DNI in a particular 

taxable year, any QBI and W–2 wages 

are allocated to the trust or estate, and 

not to any beneficiary. 

In addition, proposed § 1.199A– 

6(d)(3)(ii) provides that, to the extent 

the trust’s or estate’s UBIA of qualified 

property is relevant to a trust or estate 

and any beneficiary, the trust’s or 

estate’s UBIA of qualified property will 

be allocated among the trust or estate 

and its beneficiaries in the same 

proportion as DNI of the trust or estate 

is allocated. This is the case regardless 

of how any depreciation or depletion 

deductions resulting from the same 

property may be allocated under section 

643(c) among the trust or estate and its 

beneficiaries for purposes other than 

section 199A. 

Under section 199A, the threshold 

amount is determined at the trust level 

without taking into account any 

distribution deductions. Commenters 

have noted that taxpayers could 

circumvent the threshold amount by 

dividing assets among multiple trusts, 

each of which would claim its own 

threshold amount. This result is 

inappropriate and inconsistent with the 

purpose of section 199A. Therefore, 

proposed § 1.199A–6(d)(3)(v) provides 

that trusts formed or funded with a 

significant purpose of receiving a 

deduction under section 199A will not 

be respected for purposes of section 

199A. 

The Treasury Department and the IRS 

request comments with respect to 

whether taxable recipients of annuity 

and unitrust interests in charitable 

remainder trusts and taxable 

beneficiaries of other split-interest trusts 

may be eligible for the section 199A 

deduction to the extent that the amounts 

received by such recipients include 

amounts that may give rise to the 

deduction. Such comments should 

include explanations of how amounts 

that may give rise to the section 199A 

deduction would be identified and 

reported in the various classes of 

income of the trusts received by such 

recipients and how the excise tax rules 

in section 664(c) would apply to such 

amounts. 

VII. Proposed § 1.643(f)–1: AntiAvoidance Rules for Multiple Trusts 

As described in section VI B of the 

Explanation of Provisions, under section 

199A, the threshold amount is 

determined at the trust level without 

taking into account any distribution 

deductions. Therefore, taxpayers could 

circumvent the threshold amount by 

dividing assets among multiple trusts, 

each of which would claim its own 

threshold amount. This result is 

inappropriate and inconsistent with the 

purpose of section 199A and general 

trust principles. 

To address this and other concerns 

regarding the abusive use of multiple 

trusts, proposed § 1.643(f)–1 confirms 

the applicability of section 643(f). As 

noted in part II of the Background, 

section 643(f) permits the Secretary to 

prescribe regulations to prevent 

taxpayers from establishing multiple 

non-grantor trusts or contributing 

additional capital to multiple existing 

non-grantor trusts in order to avoid 

Federal income tax. Proposed § 1.643(f)– 

1 provides that, in the case in which 

two or more trusts have substantially 

the same grantor or grantors and 

substantially the same primary 

beneficiary or beneficiaries, and a 

principal purpose for establishing such 

trusts or contributing additional cash or 

other property to such trusts is the 

avoidance of Federal income tax, then 

such trusts will be treated as a single 

trust for Federal income tax purposes. 

For purposes of applying this rule, 

spouses are treated as only one person 

and, accordingly, multiple trusts 

established for a principal purpose of 

avoiding Federal income tax may be 

treated as a single trust even in cases 

where separate trusts are established or 

funded independently by each spouse. 

Proposed § 1.643(f)–1 further provides 

examples to illustrate specific situations 

in which multiple trusts will or will not 

be treated as a single trust under this 

rule, including a situation where 

multiple trusts are created with a 

principal purpose of avoiding the 

limitations of section 199A. The 

application of proposed § 1.643(f)–1, 

however, is not limited to avoidance of 

the limitations under section 199A and 

proposed §§ 1.199A–1 through 1.199A– 

6. 

The rule in proposed § 1.643(f)–1 

would apply to any arrangement 

involving multiple trusts entered into or 

modified on or after August 16, 2018. In 

the case of any arrangement involving 

multiple trusts entered into or modified 

before August 16, 2018, the 

determination of whether an 

arrangement involving multiple trusts is 

subject to treatment under section 643(f) 

will be made on the basis of the statute 

and the guidance provided regarding 

that provision in the legislative history 

of section 643(f). Pending the 

publication of final regulations, the 

position of the Treasury Department and 

the IRS is that the rule in proposed 

§ 1.643(f)–1 generally reflects the intent 

of Congress regarding the arrangements 

involving multiple trusts that are 

appropriately subject to treatment under 

section 643(f). 


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VIII. Specified Agricultural or 

Horticultural Cooperatives 

In the TCJA and the 2018 Act, 

Congress provided special rules for 

applying section 199A in the case of 

specified agricultural and horticultural 

cooperatives. The Treasury Department 

and the IRS continue to study this area 

and intend to issue separate proposed 

regulations describing rules for applying 

section 199A to specified agricultural 

and horticultural cooperatives and their 

patrons later this year. As provided in 

section 199A(g)(6), such regulations will 

generally be based on the regulations 

applicable to cooperatives and their 

patrons under former section 199 (as in 

effect before its repeal). The Treasury 

Department and the IRS anticipate that 

the regulations will provide that section 

199A(g) applies only to the patronage 

business of a relevant cooperative. The 

proposed regulations will also provide 

more information for taxpayers that 

must apply the reduction under section 

199A(b)(7), which is a special rule with 

respect to income received from 

cooperatives. 

Availability of IRS Documents 

IRS notices cited in this preamble are 

made available by the Superintendent of 

Documents, U.S. Government Printing 

Office, Washington, DC 20402. 

Proposed Effective/Applicability Date 

Section 7805(b)(1)(A) and (B) of the 

Code generally provide that no 

temporary, proposed, or final regulation 

relating to the internal revenue laws 

may apply to any taxable period ending 

before the earliest of (A) the date on 

which such regulation is filed with the 

Federal Register, or (B) in the case of a 

final regulation, the date on which a 

proposed or temporary regulation to 

which the final regulation relates was 

filed with the Federal Register. 

However, section 7805(b)(2) provides 

that regulations filed or issued within 

18 months of the date of the enactment 

of the statutory provision to which they 

relate are not prohibited from applying 

to taxable periods prior to those 

described in section 7805(b)(1). 

Furthermore, section 7805(b)(3) 

provides that the Secretary may provide 

that any regulation may take effect or 

apply retroactively to prevent abuse. 

Accordingly, proposed §§ 1.199A–1 

through 1.199A–6 generally are 

proposed to apply to taxable years 

ending after the date of publication of a 

Treasury decision adopting these rules 

as final regulations in the Federal 

Register. However, taxpayers may rely 

on the rules set forth in proposed 

§§ 1.199A–1 through 1.199A–6, in their 

entirety, until the date a Treasury 

decision adopting these regulations as 

final regulations is published in the 

Federal Register. In addition, to prevent 

abuse of section 199A and the 

regulations thereunder, the anti-abuse 

rules of proposed §§ 1.199A–2(c)(1)(iv), 

1.199A–3(c)(2)(B), 1.199A–5(c)(2), 

1.199A–5(c)(3), 1.199A–5(d)(3), and 

1.199A–6(d)(3)(v) are proposed to apply 

to taxable years ending after December 

22, 2017, the date of enactment of the 

TCJA. Finally, the provisions of 

proposed § 1.643–1, which prevent 

abuse of the Code generally through the 

use of trusts, are proposed to apply to 

taxable years ending after August 16, 

2018. 

Section 199A(f)(1) provides that 

section 199A applies at the partner or S 

corporation shareholder level, and that 

each partner or shareholder takes into 

account such person’s allocable share of 

each qualified item. Section 199A(c)(3) 

provides that the term ‘‘qualified item’’ 

means items that are effectively 

connected with a U.S. trade or business, 

and ‘‘included or allowed in 

determining taxable income from the 

taxable year.’’ Section 199A applies to 

taxable years beginning after December 

31, 2017. However, there is no statutory 

requirement under section 199A that a 

qualified item arise after December 31, 

2017. 

Section 1366(a) generally provides 

that, in determining the income tax of 

a shareholder for the shareholder’s 

taxable year in which the taxable year 

of the S corporation ends, the 

shareholder’s pro rata share of the 

corporation’s items is taken into 

account. Similarly, section 706(a) 

generally provides that, in computing 

the taxable income of a partner for a 

taxable year, the partner includes items 

of the partnership for any taxable year 

of the partnership ending within or with 

the partner’s taxable year. Therefore, 

income flowing to an individual from a 

partnership or S corporation is subject 

to the tax rates and rules in effect in the 

year of the individual in which the 

entity’s year closes, not the year in 

which the item actually arose. 

Accordingly, for purposes of 

determining QBI, W–2 wages, and UBIA 

of qualified property, the effective dates 

provisions provide that if an individual 

receives QBI, W–2 wages, or UBIA of 

qualified property from an RPE with a 

taxable year that begins before January 

1, 2018, and ends after December 31, 

2017, such items are treated as having 

been incurred by the individual during 

the individual’s tax year during which 

such RPE taxable year ends. 

Special Analyses 

I. Regulatory Planning and Review— 

Economic Analysis 

Executive Orders 13563 and 12866 

direct agencies to assess costs and 

benefits of available regulatory 

alternatives and, if regulation is 

necessary, to select regulatory 

approaches that maximize net benefits 

(including potential economic, 

environmental, public health and safety 

effects, distributive impacts, and 

equity). Executive Order 13563 

emphasizes the importance of 

quantifying both costs and benefits, of 

reducing costs, of harmonizing rules, 

and of promoting flexibility. 

These proposed regulations have been 

designated as subject to review under 

Executive Order 12866 pursuant to the 

Memorandum of Agreement (April 11, 

2018) between the Treasury Department 

and the Office of Management and 

Budget (OMB) regarding review of tax 

regulations. The Treasury Department 

has determined that the proposed 

rulemaking is subject to review as 

economically significant under section 

1(c) of the Memorandum of Agreement, 

and OMB concurs with this designation. 

Accordingly, these proposed regulations 

have been reviewed by the Office of 

Management and Budget. For more 

detail on the economic analysis, please 

refer to the following analysis. 

A. Overview 

Congress enacted section 199A to 

provide individuals, estates, and trusts 

a deduction of up to 20 percent of QBI 

from domestic businesses, which 

includes trades or businesses operated 

as a sole proprietorship or through a 

partnership, S corporation, trust, or 

estate. As stated in the Explanation of 

Provisions, these proposed regulations 

are necessary to provide taxpayers with 

computational, definitional, and antiavoidance guidance regarding the 

application of section 199A. The 

proposed regulations provide guidance 

to taxpayers for purposes of calculating 

the section 199A deduction. They 

provide clarity for taxpayers in 

determining their eligibility for the 

deduction and the amount of the 

allowed deduction. Among other 

benefits, this clarity helps ensure that 

taxpayers all calculate the deduction in 

a similar manner, which encourages 

decision-making that is economically 

efficient contingent on the provisions of 

the overall Code. 

The proposed regulations contain 

seven sections, six proposed under 

section 199A (proposed §§ 1.199A–1 

through 1.199A–6) and one proposed 

under section 643(f) (proposed 


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40904 Federal Register / Vol. 83, No. 159 / Thursday, August 16, 2018 / Proposed Rules 

§ 1.643(f)–1). Each of proposed 

§§ 1.199A–1 through 1.199A–6 provides 

rules relevant to the section 199A 

deduction and proposed § 1.643(f)–1 

would establish anti-abuse rules to 

prevent taxpayers from establishing 

multiple non-grantor trusts or 

contributing additional capital to 

multiple existing non-grantor trusts in 

order to avoid Federal income tax, 

including abuse of section 199A. This 

economic analysis describes the 

economic benefits and costs of each of 

the seven sections of the proposed 

regulations. 

B. Baseline 

The analysis in this section compares 

the proposed regulation to a no-action 

baseline reflecting anticipated Federal 

income tax-related behavior in the 

absence of these proposed regulations. 

C. Economic Analysis of Proposed 

§ 1.199A–1 

1. Background 

Because the section 199A deduction 

has not previously been available, a 

large number of the relevant terms and 

necessary calculations taxpayers are 

currently required to apply under the 

statute can benefit from greater 

specificity. For example, the statute uses 

the term trade or business to refer to the 

enterprise whose income would be 

potentially eligible for the deduction but 

does not define what constitutes a trade 

or business for purposes of section 

199A; the proposed regulations provide 

that taxpayers should generally apply 

the definition of a trade or business 

provided by section 162(a). The 

definition of trade or business in 

proposed § 1.199A–1 is extended 

beyond the section 162 definition if a 

taxpayer chooses to aggregate businesses 

under the rules of proposed § 1.199A–4. 

In addition, solely for purposes of 

section 199A, the rental or licensing of 

property to a related trade or business 

is treated as a trade or business if the 

rental or licensing and the other trade or 

business are commonly controlled 

under proposed § 1.199A–4(b)(1)(i). The 

proposed regulations also make clear 

that the section 199A deduction is 

allowed when calculating alternative 

minimum taxable income of 

individuals. 

Because the section 199A deduction 

has multiple components that may 

interact in determining the deduction, it 

is also valuable to lay out rules for 

calculating the deduction since the 

statute does not provide each of those 

particulars. 

Alternative approaches the Treasury 

Department and the IRS could have 

proposed would be to remain silent on 

additional definitional specificities and 

to allow post-limitation netting in 

calculating the section 199A deduction. 

The Treasury Department and the IRS 

concluded these approaches would 

likely give rise to less economically 

efficient tax-related decisions than 

would relying on statutory language 

alone and requiring or leaving open the 

possibility of post-limitation netting. 

2. Anticipated Benefits of Proposed 

§ 1.199A–1 

The Treasury Department and the IRS 

expect that the definitions and guidance 

provided in § 1.199A–1 will implement 

the 199A deduction in an economically 

efficient manner. An economically 

efficient tax system generally aims to 

treat income derived from similar 

economic decisions similarly in order to 

reduce incentives to make choices based 

on tax rather than market incentives. In 

this context, the principal benefit of 

proposed § 1.199A–1 is to reduce 

taxpayer uncertainty regarding the 

calculation of the section 199A 

deduction relative to an alternative 

scenario in which no such regulations 

were issued. In the absence of the 

clarifications in proposed § 1.199A–1 

regarding, for example, the definition of 

an eligible trade or business, similarly 

situated taxpayers might interpret the 

statutory rules of section 199A 

differently, given the statute’s limited 

prescription of the implementation 

details. In addition, without these 

regulations it is likely that many 

taxpayers impacted by section 199A 

would take on more (or less) than the 

optimal level of risk in allocating 

resources within or across their 

businesses. Both of these actions would 

give rise to economic inefficiencies. The 

proposed regulations would provide a 

uniform signal to businesses and thus 

lead taxpayers to make decisions that 

are more economically efficient 

contingent on the overall Code. As an 

example, proposed § 1.199A–1 

prescribes the steps taxpayers must take 

to calculate the QBI deduction in a 

manner that avoids perverse incentives 

for shifting wages and capital assets 

across businesses. The statute does not 

address the ordering for how the W–2 

wages and UBIA of qualified property 

limitations should be applied when 

taxpayers have both positive and 

negative QBI from different businesses. 

The proposed regulations clarify that in 

such cases the negative QBI should 

offset positive QBI prior to applying the 

wage and capital limitations. For 

taxpayers who would have assumed in 

the alternate that negative QBI offsets 

positive QBI after applying the wage 

and capital limitations, the proposed 

approach weakens the incentive to shift 

W–2 wage labor or capital (in the form 

of qualified property) from one business 

to another to maximize the section 199A 

deduction. 

To illustrate this, consider a taxpayer 

who is above the statutory threshold 

and owns two non-service sector 

businesses, A and B. A has net qualified 

income of $10,000, while B has net 

qualified income of ¥$5,000. Suppose 

that A paid $3,000 in W–2 wages, B 

paid $1,000 in W–2 wages, and neither 

business has tangible capital. If negative 

QBI offsets positive QBI after applying 

the wage and capital limitations, then A 

generates a tentative deduction of 

$1,500, while B generates a tentative 

deduction of ¥$1,000, for a total 

deduction of $500. After moving B’s W– 

2 wages to A, A’s tentative deduction 

rises to $2,000, while B’s remains 

¥$1,000, increasing the total deduction 

to $1,000. If, on the other hand, negative 

QBI offsets positive QBI prior to 

applying the wage and capital 

limitations (as in the proposed 

regulations), then A and B have 

combined income of $5,000, and the 

total deduction is $1,000 because the 

wage and capital limitations are nonbinding. After moving B’s wages to A, 

the total deduction remains $1,000. 

Thus, an incentive to shift wages arises 

if negative QBI offsets positive QBI after 

applying the wage and capital 

limitations. By taking the opposite 

approach, proposed § 1.199A–1 reduces 

incentives for such tax-motivated, 

economically inefficient reallocations of 

labor (or capital) relative to a scenario 

in which offsets were taken after wage 

and capital limitations were applied. 

3. Anticipated Costs of Proposed 

§ 1.199A–1 

The Treasury Department and the IRS 

do not anticipate any meaningful 

economic distortions to be induced by 

proposed § 1.199A–1 and request 

comment regarding this anticipated 

impact. However, changes to the 

collective paperwork burden arising 

from this and other sections of these 

regulations are discussed in section J, 

Anticipated impacts on administrative 

and compliance costs, of this analysis. 

D. Economic Analysis of Proposed 

§ 1.199A–2 

1. Background 

Section 199A provides a deduction of 

up to 20 percent of the taxpayer’s 

income from qualifying trades or 

businesses. Taxpayers with incomes 

above a threshold amount cannot enjoy 

the full 20 percent deduction unless 


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they determine that their businesses pay 

a sufficient amount of wages and/or 

maintain a sufficient stock of tangible 

capital, among other requirements. 

Because this deduction has not 

previously been available, proposed 

§ 199A–2 provides greater specificity 

than is available from the statute 

regarding the definitions of W–2 wages 

and UBIA of qualified property (that is, 

depreciable capital stock) relevant to 

this aspect of the deduction. For 

example, the proposed regulations make 

clear that property that is transferred or 

acquired within a specific timeframe 

with a principal purpose of increasing 

the section 199A deduction is not 

considered qualified property for 

purposes of the section 199A deduction. 

In addition, proposed § 1.199A–2 

generally follows prior guidance for the 

former section 199 deduction in 

determining which W–2 wages are 

relevant for section 199A purposes, with 

additional rules for allocating wages 

amongst multiple trades or businesses. 

In these and other cases, the proposed 

regulations generally aim, within the 

context of the legislative language and 

other tax considerations, to ensure that 

only genuine business income is eligible 

for the section 199A deduction, and to 

reduce business compliance costs and 

government administrative costs. 

Alternative approaches would be to 

remain silent or to choose different 

definitions of W–2 wages or qualified 

property for the purposes of claiming 

the deduction. The Treasury 

Department and the IRS rejected these 

alternatives as being inconsistent with 

other definitions or requirements under 

the Code and therefore unnecessarily 

costly for taxpayers to comply with and 

the IRS to administer. 

2. Anticipated Benefits of Proposed 

§ 1.199A–2 

The Treasury Department and IRS 

expect that proposed § 1.199A–2 will 

implement the 199A deduction in an 

economically efficient manner. For 

example, proposed § 1.199A–2 will 

discourage some inefficient transfers of 

capital given the statute’s silence 

regarding the circumstances in which 

certain property transfers would or 

would not be considered under section 

199A. Specifically, the proposed rules 

make clear that property transferred or 

acquired within a specific timeframe 

with a principal purpose of increasing 

the section 199A deduction is not 

considered qualified for purposes of the 

199A deduction. 

The proposed regulations will also 

reduce taxpayer uncertainty regarding 

the implementation of the section 199A 

deduction relative to a scenario in 

which no regulations were issued. In the 

absence of such clarification, similarly 

situated taxpayers would likely 

interpret the section 199A deduction 

differently to the extent that the statute 

does not adequately specify the 

particular implementation issues 

addressed by 199A–2; and as a result, 

taxpayers might take on more (or less) 

than the optimal level of risk in their 

interpretations. The proposed 

regulations would lead taxpayers to 

make decisions that were more 

economically efficient, conditional on 

the overall Code. 

3. Anticipated Costs of Proposed 

§ 1.199A–2 

The Treasury Department and the IRS 

do not anticipate any meaningful 

economic distortions to be induced by 

proposed § 1.199A–2, and request 

comment regarding this anticipated 

impact. However, changes to the 

collective paperwork burden arising 

from this and other sections of these 

regulations are discussed in section J, 

Anticipated impacts on administrative 

and compliance costs, of this analysis. 

E. Economic Analysis of Proposed 

§ 1.199A–3 

1. Background 

Section 199A provides a deduction of 

up to 20 percent of the taxpayer’s 

income from qualifying trades or 

businesses. In the absence of legislative 

and regulatory constraints, taxpayers 

would have an incentive to count as 

income some income that, from an 

economic standpoint, did not accrue 

specifically from qualifying economic 

activity. The proposed regulations 

clarify what does and does not 

constitute QBI for purposes of the 199A 

deduction, providing greater 

implementation specificity than 

provided by the statute. Because 

guaranteed payments for capital, for 

example, are not at risk in the same way 

as other forms of income, they might 

reasonably be excluded from QBI. 

Similarly, Treasury proposes that 

income that is a guaranteed payment, 

but which is filtered through a tiered 

partnership in order to avoid being 

labeled as such, should be treated 

similarly to guaranteed payments in 

general and therefore excluded from 

QBI. This principle applies to other 

forms of income that similarly represent 

income that either is not at risk or does 

not flow from the specific economic 

value provided by a qualifying trade or 

business, such as returns on 

investments of working capital. The 

proposed regulations define and clarify 

the types of income that might 

reasonably be considered QBI, within 

the constraints of the legislation. 

2. Anticipated Benefits of Proposed 

§ 1.199A–3 

The Treasury Department and IRS 

expect that proposed § 1.199A–3 

regulations will implement the 199A 

deduction in an economically efficient 

manner. For example, 199A–3 will 

discourage the creation of tiered 

partnerships purely for the purposes of 

increasing the section 199A deduction. 

In the absence of regulation, some 

taxpayers would likely create tiered 

partnerships under which a lower-tier 

partnership would make a guaranteed 

payment to an upper-tier partnership, 

and the upper-tier partnership would 

pay out this income to its partners 

without guaranteeing it. Such an 

organizational structure would likely be 

economically inefficient because it was, 

apparently, created solely for tax 

minimization purposes and not for 

reasons related to efficient economic 

decision-making. 

The Treasury Department and the IRS 

further expect that the proposed 

regulations will reduce uncertainty over 

whether particular forms of income do 

or do not constitute QBI relative to a 

scenario in which no regulations were 

issued. In the absence of regulations, 

taxpayers would still need to determine 

what income is considered QBI and 

similarly situated taxpayers might 

interpret the statutory rules differently 

and pursue income-generating activities 

based on different assumptions about 

whether that income would qualify for 

QBI. Proposed § 1.199A–3 provides 

clearer guidance for how to determine 

QBI, helping to ensure that taxpayers 

face uniform incentives when making 

economic decisions, a tenet of economic 

efficiency. 

3. Anticipated Costs of Proposed 

§ 1.199A–3 Relative to the Baseline 

The Treasury Department and the IRS 

do not anticipate any meaningful 

economic distortions to be induced by 

proposed § 1.199A–3, and request 

comment regarding this anticipated 

impact. However, changes to the 

collective paperwork burden arising 

from this and other sections of these 

regulations are discussed in section J, 

Anticipated impacts on administrative 

and compliance costs, of this analysis. 

F. Economic Analysis of Proposed 

§ 1.199A–4 

1. Background 

Businesses may organize either as C 

corporations, which are owned by 

stockholders, or in a form generally 


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40906 Federal Register / Vol. 83, No. 159 / Thursday, August 16, 2018 / Proposed Rules 

called a passthrough, which may take 

one of several legal forms including sole 

proprietorships, under which there does 

not exist a clear separation between the 

owners and the business’s decisionmakers. Each organizational structure, 

in some circumstance, may be 

economically efficient, depending on 

the risk profile, information 

asymmetries, and decision-making 

challenges pertaining to the specific 

business and on the risk preferences and 

economic situations of the individual 

owners. An economically efficient tax 

system would keep the choice among 

organizational structures neutral 

contingent on the provisions of the 

corporate income tax. 

This principle of neutral tax treatment 

further applies to the various 

organizational structures that qualify as 

passthroughs. Many passthrough 

business entities are connected through 

ownership, management, or shared 

decision-making. The proposed 

aggregation rule allows individuals to 

aggregate their trades or businesses for 

the purposes of calculating the section 

199A deduction. It thus helps ensure 

that significant choices over ownership 

and management relationships within 

businesses are not chosen solely to 

increase the section 199A deduction. 

An alternative approach would be not 

to allow aggregation for purposes of 

claiming the deduction. The Treasury 

Department and the IRS decided to 

allow aggregation in the specified 

circumstances to minimize or avoid 

distortions in organizational form that 

could arise if aggregation were not 

allowed. 

2. Anticipated Benefits of Proposed 

§ 1.199A–4 

The Treasury Department and the IRS 

expect that the aggregation guidance 

provided in proposed § 1.199A–4 will 

implement the 199A deduction in an 

economically efficient manner. 

Economic tax principles are called into 

play here because a large number of 

businesses that could commonly be 

thought of as a single trade or business 

actually may be divided across multiple 

entities for legal or economic reasons. 

Allowing taxpayers to aggregate trades 

or businesses offers taxpayers a means 

of putting together what they think of as 

their trade or business for the purposes 

of claiming the deduction under section 

199A without otherwise changing 

ownership and management structures. 

If such aggregation were not permitted, 

certain taxpayers would restructure 

solely for tax purposes, with the 

resulting structures leading to less 

efficient economic decision-making. 

3. Anticipated Costs of Proposed 

§ 1.199A–4 

The proposed regulations require 

common majority ownership to apply 

the aggregation rule. If no aggregation 

were allowed, taxpayers would have to 

combine businesses to calculate the 

deduction based on the combined 

income, wages, and capital. The 

majority ownership threshold may thus 

encourage owners to concentrate their 

ownership in order to benefit from the 

aggregation rule. The additional costs of 

the proposed regulations would be 

limited to those owners who would find 

merging entities too costly based on 

other market conditions, but under 

these regulations may find it beneficial 

to increase their ownership share in 

order to aggregate their businesses and 

maximize their QBI deduction. 

Changes to the collective paperwork 

burden arising from proposed § 1.199A– 

4 and other sections of these regulations 

are discussed in section J, Anticipated 

impacts on administrative and 

compliance costs, of this analysis. The 

Treasury Department and the IRS 

request comments regarding these and 

other potential costs arising from the 

regulations. 

G. Economic Analysis of Proposed 

§ 1.199A–5 

1. Background 

Section 199A provides a deduction of 

up to 20 percent of the taxpayer’s 

income from qualifying trades or 

businesses. In the absence of legislative 

and regulatory constraints, taxpayers 

have an incentive to receive labor 

income as income earned as a an 

independent contractor or through 

ownership of an RPE, even though this 

income may not derive from the riskbearing or decision-making efficiencies 

that are unique to being an independent 

contractor or to owning an equity 

interest in an RPE. The Act provided 

several provisions that bear on this 

distinction. 

Proposed § 1.199A–5 provides 

guidance on what trades or businesses 

would be characterized as an SSTB 

under each type of services trade or 

business listed in the legislative text. In 

addition, proposed § 1.199A–5 provides 

an exception to the SSTB exclusion if 

the trade or business only earns a small 

fraction of its gross income from 

specified service activities (de minimis 

exception). Finally, the proposed 

regulations state that former employees 

providing services as independent 

contractors to their former employer 

will be presumed to be acting as 

employees unless they provide evidence 

that they are providing services in a 

capacity other than an employee. 

An alternative approach to the de 

minimis exception would be to require 

businesses or their owners to trigger the 

SSTB exclusion regardless of the share 

of gross income from specified service 

activities. The Treasury Department 

concluded that providing a de minimis 

exception is necessary to avoid very 

small amounts of SSTB activity within 

a trade or business making the entire 

trade or business ineligible for the 

deduction, an outcome that is inefficient 

in the context of section 199A. 

2. Anticipated Benefits of Proposed 

§ 1.199A–5 

The Treasury Department and the IRS 

expect that proposed § 1.199A–5 will 

implement the 199A deduction in an 

economically efficient manner. To this 

end, proposed § 1.199A–5 clarifies the 

definition of an SSTB. In the absence of 

such clarification, similarly situated 

taxpayers might interpret the legislative 

text differently, leading some taxpayers 

to invest in particular businesses under 

the assumption income earned from that 

entity was eligible for the deduction 

while other taxpayers might forgo that 

investment due to the opposite 

assumption. These disparate investment 

signals generate economic 

inefficiencies. The proposed regulations 

reduce this inefficiency relative to a 

scenario in which no regulation 

providing a de minimus exception was 

issued. 

Furthermore, in the absence of the 

proposed regulations, some owners of 

businesses may find it advantageous to 

separate their business activity into 

SSTB and non-SSTB businesses in order 

to receive the section 199A deduction 

on their non-SSTB activity. The 

proposed regulations would disallow 

this behavior by stating that a taxpayer 

that provides property or services to an 

SSTB that is commonly-owned will 

have the portion of property or services 

provided to the SSTB treated as 

attributable to an SSTB. Additionally 

without these regulations, some 

businesses may have an incentive to pay 

a portion of their employees as 

independent contractors. Either of these 

actions would entail some loss of 

economic efficiency due to changes in 

businesses’ decision-making structures 

based on tax incentives. They may also 

inefficiently provide incentives to 

change employment relationships in 

favor of independent contractors. The 

proposed regulations help to avoid these 

sources of inefficiency. 


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3. Anticipated Costs of Proposed 

§ 1.199A–5 Relative to the Baseline 

In addition to the statutory threshold 

amount, below which SSTB status is not 

relevant, proposed § 1.199A–5 provides 

a de minimis rule with tiered-thresholds 

of gross revenues arising from specified 

service activity in determining whether 

a trade or business with a smaller 

amount of specified service activity is 

classified as an SSTB. This threshold 

may cause businesses near the cutoff to 

decrease their specified service 

activities or increase their non-specified 

service activities to avoid being 

classified as an SSTB. Additionally, the 

de minimis rule may encourage smaller 

entities engaged in SSTBs to merge with 

larger entities not engaged in an SSTB. 

The economic costs of these mergers are 

difficult to quantify. 

Changes to the collective paperwork 

burden arising from § 1.199A–5 and 

other sections of these regulations are 

discussed in section J, Anticipated 

impacts on administrative and 

compliance costs, of this analysis. The 

Treasury Department and IRS request 

comment regarding these and other 

potential costs arising from the 

regulations. 

H. Economic Analysis of Proposed 

§ 1.199A–6 

1. Background 

The 199A deduction is reduced below 

20 percent for some businesses and 

taxpayers. The attributes that determine 

any such reduction must be determined 

by taxpayers claiming the section 199A 

deduction. Proposed § 1.199A–6 

provides rules for RPEs, PTPs, trusts, 

and estates relevant to making these 

determinations. In particular, RPEs are 

required to calculate and report their 

owners’ QBI, SSTB status, W–2 wages, 

UBIA of qualified property, REIT 

dividends, and PTP income. Similarly, 

PTPs must calculate and report their 

owners’ QBI, SSTB status, REIT 

dividends, and other PTP income. 

2. Anticipated Benefits of Proposed 

§ 1.199A–6 

The Treasury Department and IRS 

expect that proposed § 1.199A–6 will 

implement the 199A deduction in an 

economically efficient manner. As with 

other proposed regulations discussed in 

this Analyses, a principal benefit of 

proposed § 1.199A–6 is to increase the 

likelihood that all taxpayers interpret 

the statutory rules of section 199A 

similarly. Additionally, we expect that 

requiring RPEs to determine and report 

the information necessary to compute 

the section 199A deduction will result 

in a more accurate and uniform 

application of the regulations and 

statute relative to an alternative 

approach under which individual 

owners would most likely determine 

these items. 

3. Anticipated Costs of Proposed 

§ 1.199A–6 Relative to the Baseline 

The Treasury Department and the IRS 

do not anticipate any meaningful 

economic distortions to be induced by 

proposed § 1.199A–6, and request 

comment on these estimated impacts. 

However, changes to the collective 

paperwork burden arising from this and 

other sections of these regulations are 

discussed in section J, Anticipated 

impacts on administrative and 

compliance costs, of this analysis. 

I. Economic Analysis of Proposed 

§ 1.643(f)–1 

1. Background 

Proposed § 1.643(f)–1 provides that 

taxpayers cannot set up multiple trusts 

in certain cases with a principal 

purpose of tax avoidance, which would 

include the avoidance of the statutory 

threshold amounts under section 199A. 

2. Anticipated Benefits of Proposed 

§ 1.643(f)–1 Relative to the Baseline 

The Treasury Department and IRS 

expect that the proposed § 1.643(f)–1 

will implement the 199A deduction in 

an economically efficient manner. 

Because proposed § 1.643(f)–1 defines 

the manner in which trusts are subject 

to the threshold amount where the 

statute is silent, the Treasury 

Department and the IRS anticipate that 

the proposed regulations will lead to 

fewer resources being devoted to setting 

up trusts in attempts to avoid the 

threshold amount rules under section 

199A. If multiple trusts have 

substantially the same grantors and 

beneficiaries, and a principal purpose 

for establishing such trusts or 

contributing additional cash or other 

property to such trusts is the avoidance 

of Federal income tax, then the various 

trusts would be generally considered 

one trust, including for section 199A 

purposes. 

3. Anticipated Costs of Proposed 

§ 1.643(f)–1 Relative to the Baseline 

The Treasury Department and the IRS 

do not anticipate any meaningful 

economic distortions to be induced by 

proposed § 1.643(f)–1, and request 

comment on these estimated impacts. 

However, changes to the collective 

paperwork burden arising from this and 

other sections of these regulations are 

discussed in section J, Anticipated 

impacts on administrative and 

compliance costs, of this analysis. 

J. Anticipated Impacts on 

Administrative and Compliance Costs 

1. Discussion 

The proposed regulations have a 

number of effects on taxpayers’ 

compliance costs. Proposed § 1.199A–2 

provides guidance in determining a 

taxpayer’s share of W–2 wages and 

UBIA of qualified property. The 

Treasury Department and the IRS expect 

that this guidance reduces the tax 

compliance costs of making this 

determination and reduces uncertainty. 

In the absence of the proposed 

regulations, taxpayers would still need 

to determine how to allocate W–2 wages 

and UBIA of qualified property, among 

other calculations. These regulations 

provide clear instructions for how to do 

this, simplifying the process of 

complying with the law. 

Proposed § 1.199A–4 requires that 

owners who decide to aggregate their 

trades or businesses report the 

aggregation annually. This reporting 

requirement adds to the tax compliance 

burden of these owners. For owners 

who consider aggregating, these 

regulations increase compliance costs 

because the owners must calculate their 

deduction for both disaggregated and 

aggregated trades or businesses to make 

the aggregation decision. These 

additional compliance costs would be 

voluntary and accrue only to owners 

who find it beneficial to aggregate for 

the purposes of calculating their section 

199A deduction. 

Proposed § 1.199A–5 includes a 

requirement for former employees 

working as independent contractors for 

their former employer to show that their 

employment relationship has changed 

in order to be eligible for the section 

199A deduction. The burden to 

substantiate employment status exists 

without these proposed regulations; 

however, the proposed regulation may 

increase these individuals’ compliance 

costs slightly. 

Proposed § 1.199A–6 specifies that 

RPEs must report relevant section 199A 

information to owners. Due to these 

entity reporting requirements, the 

proposed regulations will increase 

compliance costs for RPEs. These 

entities will need to keep records of new 

information relevant to the calculation 

of their owners’ section 199A 

deduction, such as QBI, W–2 wages, 

SSTB status, and UBIA of qualified 

property. This recordkeeping is costly. 

Without these regulations, it is likely 

that only some RPEs would engage in 

this record keeping. 

Proposed § 1.199A–6 reduces the 

compliance burden on many 

individuals that own RPEs relative a 


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40908 Federal Register / Vol. 83, No. 159 / Thursday, August 16, 2018 / Proposed Rules 

scenario in which no regulations were 

issued or regulatory alternatives that 

assigned each owner of an RPE the 

responsibility to acquire the required 

information were issued without any 

requirement for the RPE to provide such 

information. Under the proposed 

regulations, owners will receive 

information pertaining to the section 

199A deduction from the RPE, such as 

whether a given trade or business is an 

SSTB, whereas in the alternate they 

could have been required to make such 

determinations themselves. 

Overall, it is likely to be more 

efficient for RPEs, rather than individual 

owners, to keep records of section 199A 

deduction information. Therefore, the 

Treasury Department and the IRS expect 

that proposed § 1.199A–6 will reduce 

compliance costs on net and relative to 

these alternative scenarios. 

2. Estimated Effect on Compliance Costs 

As explained above, key provisions of 

proposed §§ 1.199A–1 through 1.199A– 

6 will reduce compliance costs that 

taxpayers would likely have incurred in 

the absence of the proposed rule. Most 

notably, the de minimis rule of 

proposed § 1.199A–5 provides that a 

trade or business will not be considered 

to be an SSTB merely because it 

provides a small amount of services in 

a specified service activity. This 

provision is expected to reduce 

compliance costs associated with 

section 199A for millions of U.S. 

businesses. In addition, the aggregation 

rules will reduce overall costs for 

taxpayers because some taxpayers 

would restructure their business 

arrangements in order to receive the 

benefit of the deduction. These and 

other discretionary choices by the 

Treasury Department and the IRS in the 

proposed rule will substantially reduce 

taxpayers’ compliance costs. 

The Treasury Department and the IRS 

also assessed the provisions of the 

proposed rule that could increase 

compliance burdens. Estimates of the 

change in annual reporting burden 

associated with these proposed 

regulations are presented here and in 

further detail in the Paperwork 

Reduction Act (PRA) section. The 

Treasury Department and the IRS 

estimate a gross (not net) increase in 

total reporting burden of 25 million 

hours annually. The estimates primarily 

reflect two effects of the regulations. 

First, the Treasury Department and the 

IRS project that approximately 1.2 

million individuals with more than one 

directly owned or pass-through business 

who voluntarily choose to aggregate will 

spend 0.66 hours annually complying 

with proposed § 1.199A–4. Second, the 

Treasury Department and the IRS 

project that—in complying with the 

proposed § 1.199A–6 requirement to 

report relevant section 199A 

information to their approximately 8.8 

million owners—RPEs will spend 2.75 

hours annually per owner. These 

estimates do not include the decrease in 

compliance costs to individuals who 

would no longer find it necessary to 

compute the quantities detailed in 

proposed § 1.199A–6 because they 

would receive this information from 

each RPE. Nor do these estimates reflect 

the decrease in compliance costs 

outlined above. 

Valuations of the burden hours of 

$39/hour in the case of individuals 

making aggregation decisions and $53/ 

hour in the case of RPEs reporting 

section 199A information lead to a PRAbased estimate of the gross reporting 

annualized costs to taxpayers of 

approximately $1.3 billion over ten 

years; this estimate does not account for 

the provisions of the proposed 

regulations that will substantially 

reduce compliance costs. Because these 

estimates assume that the costs are the 

same each year, the annualized costs do 

not vary with the discount rate. It is 

possible that costs will be higher in the 

first years that the deduction is allowed 

and lower in future years once taxpayers 

have more experience with the 

calculations and reporting requirements 

associated with the deduction. Finally, 

the estimates reflect data for entities of 

a size and form expected to be impacted 

by section 199A. More specifically, 

because of the scope of the section 199A 

deduction, the Treasury Department and 

the IRS expect the majority of affected 

entities to be largely small, and medium 

in size. 

The Treasury Department and the IRS 

solicit comments on the assumptions 

and the methodology used to calculate 

the compliance costs imposed by the 

proposed regulations relative to the 

baseline. This includes, among other 

things, assumptions and methodology 

regarding the reporting burden per 

respondent, the number of impacted 

entities, and the hourly labor cost 

estimate for reporting. 

Annualized monetized effect on compliance costs from proposed regulations 

Years 2018 to 2027 

(3% discount rate, 

millions $2018) 

Years 2018 to 2027 

(7% discount rate, 

millions $2018) 

Estimated Gross Costs ........................................................................................................... $1,317 ............................ $1,317. 

Estimated Savings .................................................................................................................. Not quantified ................. Not quantified. 

K. Executive Order 13771 

The Treasury Department and the IRS 

request comment on the Executive 

Order 13771 designation for these 

proposed regulations. Details on the 

estimated costs of the proposed 

regulations can be found in this 

economic analysis. 

II. Regulatory Flexibility Act 

It is hereby certified that the 

collections of information in proposed 

§§ 1.199A–4 and 1.199A–6 will not have 

a significant economic impact on a 

substantial number of small entities. 

Although the Treasury Department and 

the IRS believe that the proposed 

regulations may affect a substantial 

number of small entities, the economic 

impact on small entities as a result of 

the collections of information in this 

notice of proposed rulemaking is not 

expected to be significant. 

The collection in proposed § 1.199A– 

4 may apply to individuals and certain 

trusts or estates that can claim the 

section 199A deduction and that choose 

to aggregate two or more trades or 

businesses for purposes of section 199A. 

If a taxpayer chooses to aggregate its 

trades or businesses, the taxpayer, must 

include an attachment to its tax return 

identifying and describing each trade or 

business aggregated, describing changes 

to the aggregated group, and providing 

other information as the Commissioner 

may require in forms, instructions, or 

other published guidance. RPEs are not 

subject to the collection in proposed 

§ 1.199A–4 because RPEs are not 

permitted to aggregate trades or 

businesses. Aggregation is not required 

by a person claiming the section 199A 

deduction, and therefore the collection 

of information in proposed § 1.199A–4 

is required only if the person chooses to 

aggregate multiple trades or businesses. 

It is not known how many small entities 

will choose to aggregate multiple trades 

or businesses, therefore a number of 

affected entities is not estimated at this 

time. 


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The small entities subject to the 

collection of information in proposed 

§ 1.199A–6 are business entities formed 

as estates, trusts, partnerships, or S 

corporations that conduct, directly or 

indirectly, one or more trades or 

businesses. Proposed § 1.199A–6 

requires such an entity to attach a 

statement describing the QBI, W–2 

wages, and UBIA of qualified property 

for each separate trade or business to the 

Schedule K–1 required under existing 

law to be issued to each beneficiary, 

partner, or shareholder. Although data 

is not available to estimate the number 

of small entities affected by the 

§ 1.199A–6 requirements, the Treasury 

Department and the IRS believe that 

number would include a substantial 

number of small entities. 

As discussed elsewhere in this 

preamble, the reporting burden is 

estimated at 30 minutes to 20 hours, 

depending on individual circumstances, 

with an estimated average of 2.5 hours 

for all affected entities, regardless of 

size. The burden on small entities is 

expected to be at the lower end of the 

range (30 minutes to 2.5 hours). Using 

the IRS’s taxpayer compliance cost 

estimates, taxpayers who are selfemployed with multiple businesses are 

estimated to have a monetization rate of 

$39 per hour. Pass-throughs that issue 

K–1s have a monetization rate of $53 

per hour. 

For these reasons, the Treasury 

Department and the IRS have 

determined that the collection of 

information in this notice of proposed 

rulemaking will not have a significant 

economic impact. Accordingly, a 

regulatory flexibility analysis under the 

Regulatory Flexibility Act (5 U.S.C. 

chapter 6) is not required. 

Notwithstanding this certification, the 

Treasury Department and the IRS invite 

comments from interested members of 

the public on both the number of 

entities affected and the economic 

impact on small entities. 

Pursuant to section 7805(f) of the 

Code, this notice of proposed 

rulemaking has been submitted to the 

Chief Counsel for Advocacy of the Small 

Business Administration for comment 

on its impact on small business. 

Comments and Requests for Public 

Hearing 

The Treasury Department and the IRS 

request comments on all aspects of the 

proposed rules. 

Before these proposed regulations are 

adopted as final regulations, 

consideration will be given to any 

comments that are submitted timely to 

the IRS as prescribed in this preamble 

under the ADDRESSES heading. All 

comments will be available at 

www.regulations.gov or upon request. 

Drafting Information 

The principal authors of these 

regulations are Frank J. Fisher, Wendy 

L. Kribell, Adrienne M. Mikolashek, and 

Benjamin H. Weaver, Office of the 

Associate Chief Counsel (Passthroughs 

and Special Industries). However, other 

personnel from the Treasury 

Department and the IRS participated in 

their development. 

List of Subjects in 26 CFR Part 1 

Income taxes, Reporting and 

recordkeeping requirements. 

Proposed Amendments to the 

Regulations 

Accordingly, 26 CFR part 1 is 

proposed to be amended as follows: 

PART 1—INCOME TAXES 

■ Paragraph 1. The authority citation 

for part 1 are amended by adding 

sectional authorities for §§ 1.199A–1 

through 1.199A–6 and § 1.643(f) to read 

in part as follows: 

Authority: 26 U.S.C. 7805 * * * 

Section § 1.199A–1 also issued under 26 

U.S.C. 199A(f)(4). 

Section § 1.199A–2 also issued under 26 

U.S.C. 199A(b)(5), (f)(1)(A), (f)(4), and (h). 

Section § 1.199A–3 also issued under 26 

U.S.C. 199A(c)(4)(C) and (f)(4.) 

Section § 1.199A–4 also issued under 26 

U.S.C. 199A(f)(4). 

Section § 1.199A–5 also issued under 26 

U.S.C. 199A(f)(4). 

Section § 1.199A–6 also issued under 26 

U.S.C. 199A(f)(1)(B) and (f)(4). 

Section 1.643(f) 091 also issued under 26 

U.S.C. 643(f). 

■ Par. 2. Section 1.199A–0 is added to 

read as follows: 

§ 1.199A–0 Table of Contents 

This section lists the section headings 

that appear in §§ 1.199A–1 through 

1.199A–6. 

§ 1.199A–1 Operational rules. 

(a) Overview. 

(1) In general. 

(2) Usage of term individual. 

(b) Definitions. 

(1) Aggregated trade or business. 

(2) Applicable percentage. 

(3) Phase-in range. 

(4) Qualified business income (QBI). 

(5) QBI component. 

(6) Qualified PTP income. 

(7) Qualified REIT dividends. 

(8) Reduction amount. 

(9) Relevant passthrough entity (RPE). 

(10) Specified service trade or 

business (SSTB). 

(11) Threshold amount. 

(12) Total QBI amount. 

(13) Trade or business. 

(14) Unadjusted basis immediately 

after the acquisition of qualified 

property (UBIA of qualified 

property). 

(15) W–2 Wages. 

(c) Computation of the section 199A 

deduction for individuals with 

taxable income not exceeding 

threshold amount. 

(1) In general. 

(2) Carryover rules. 

(i) Negative total QBI amount. 

(ii) Negative combined qualified REIT 

dividends/qualified PTP income. 

(3) Examples. 

(d) Computation of the section199A 

deduction for individuals with 

taxable income above the threshold 

amount. 

(1) In general. 

(2) QBI component. 

(i) SSTB exclusion. 

(ii) Aggregated trade or business. 

(iii) Netting and carryover. 

(A) Netting. 

(B) Carryover of negative total QBI 

amount. 

(iv) QBI component calculation. 

(A) General rule. 

(B) Taxpayers with taxable income 

within phase-in range. 

(3) Carryover of negative combined 

qualified REIT dividends/qualified 

PTP income. 

(4) Examples. 

(e) Special rules. 

(1) Effect of deduction. 

(2) Self-employment tax and net 

investment income tax. 

(3) Commonwealth of Puerto Rico. 

(4) Coordinated with alternative 

minimum tax. 

(5) Imposition of accuracy-related 

penalty on underpayments. 

(6) Reduction for income received 

from cooperatives. 

(f) Effective/applicability date. 

(1) General rule. 

(2) Exception for non-calendar year 

RPE. 

§ 1.199A–2 Determination of W–2 

Wages and unadjusted basis 

immediately after acquisition of 

qualified property. 

(a) Scope. 

(1) In general. 

(2) W–2 Wages. 

(3) UBIA of qualified property. 

(b) W–2 Wages. 

(1) In general. 

(2) Definition of W–2 Wages. 

(i) In general. 

(ii) Wages paid by a person other than 

a common law employer. 

(iii) Requirement that wages must be 

reported on return filed with the 

Social Security Administration. 

(A) In general. 


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(B) Corrected return filed to correct a 

return that was filed within 60 days 

of the due date. 

(C) Corrected return filed to correct a 

return that was filed later than 60 

days after the due date. 

(iv) Methods for calculating W–2 

Wages. 

(A) In general. 

(B) Acquisition or disposition of a 

trade or business. 

(1) In general. 

(2) Acquisition or disposition. 

(C) Application in the case of a person 

with a short taxable year. 

(1) In general. 

(2) Short taxable year that does not 

include December 31. 

(D) Remuneration paid for services 

performed in the Commonwealth of 

Puerto Rico. 

(3) Allocation of wages to trades or 

businesses. 

(4) Allocation of wages to QBI. 

(5) Non-duplication rule. 

(c) UBIA of qualified property. 

(1) Qualified property. 

(i) In general. 

(ii) Improvements to qualified 

property. 

(iii) Adjustments under sections 

734(b) and 743(b). 

(iv) Property acquired at end of year. 

(2) Depreciable period. 

(i) In general. 

(ii) Additional first-year depreciation 

under section 168. 

(iii) Qualified property acquired in 

transactions subject to section 1031 

or section 1033. 

(iv) Qualified property acquired in 

transactions subject to section 

168(i)(7). 

(3) Unadjusted basis immediately 

after acquisition. 

(4) Examples. 

(d) Effective/applicability date. 

(1) General rule. 

(2) Exceptions. 

(i) Anti-abuse rules. 

(ii) Non-calendar year RPE. 

§ 1.199A–3 Qualified business income, 

qualified REIT dividends, and 

qualified PTP income. 

(a) In general. 

(b) Definition of qualified business 

income. 

(1) In general. 

(i) Section 751 gain. 

(ii) Guaranteed payments for the use 

of capital. 

(iii) Section 481 adjustments. 

(iv) Previously disallowed losses 

(v) Net operating losses. 

(2) Qualified items of income, gain, 

deduction, and loss. 

(i) In general. 

(ii) Items not taken into account. 

(3) Commonwealth of Puerto Rico. 

(4) Wages. 

(5) Allocation of items among 

multiple directly-conducted trades 

or businesses. 

(c) Qualified REIT dividends and 

qualified PTP income. 

(1) In general. 

(2) Qualified REIT dividend. 

(3) Qualified PTP income. 

(i) In general. 

(ii) Special rules. 

(d) Effective/applicability date. 

(1) General rule. 

(2) Exceptions. 

(i) Anti-abuse rules. 

(ii) Non-calendar year RPE. 

§ 1.199A–4 Aggregation. 

(a) Scope and purpose. 

(b) Aggregation rules. 

(1) General rule. 

(2) Operating rules. 

(3) Family attribution. 

(c) Reporting and consistency. 

(1) In general. 

(2) Individual reporting. 

(i) Required annual disclosure. 

(ii) Failure to disclose. 

(d) Examples. 

(e) Effective/applicability date. 

(1) General rule. 

(2) Exception for non-calendar year 

RPE. 

§ 199A–5 Specified service trades or 

businesses and the trade or business 

of performing services as an 

employee. 

(a) Scope and effect. 

(1) Scope. 

(2) Effect of being an SSTB. 

(3) Trade or business of performing 

services as an employee. 

(b) Definition of specified service 

trade or business. 

(1) Listed SSTBs. 

(2) Additional rules for applying 

section 199A(d)(2) and paragraph 

(b) of this section. 

(i) In general. 

(ii) Meaning of services performed in 

the field of health. 

(iii) Meaning of services performed in 

the field of law. 

(iv) Meaning of services performed in 

the field of accounting. 

(v) Meaning of services performed in 

the field of actuarial science. 

(vi) Meaning of services performed in 

the field of performing arts. 

(vii) Meaning of services performed in 

the field of consulting. 

(viii) Meaning of services performed 

in the field of athletics. 

(ix) Meaning of services performed in 

the field of financial services. 

(x) Meaning of services performed in 

the field of brokerage services. 

(xi) Meaning of the provision of 

services in investing and 

investment management. 

(xii) Meaning of the provision of 

services in trading. 

(xiii) Meaning of the provision of 

services in dealing. 

(A) Dealing in securities. 

(B) Dealing in commodities. 

(C) Dealing in partnership interests. 

(xiv) Meaning of 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. 

(3) Examples. 

(c) Special rules. 

(1) De minimis rule. 

(i) Gross receipts of $25 million or 

less. 

(ii) Gross receipts of greater than $25 

million. 

(2) Services or property provided to 

an SSTB. 

(i) In general. 

(ii) Less than substantially all of 

property or services provided. 

(iii) 50 percent or more common 

ownership 

(iv) Example. 

(3) Incidental to specified service 

trade or business. 

(i) In general. 

(ii) Example. 

(d) Trade or business of performing 

services as an employee. 

(1) In general. 

(2) Employer’s Federal employment 

tax classification of employee 

immaterial. 

(3) Presumption that former 

employees are still employees. 

(i) Presumption. 

(ii) Examples. 

(e) Effective/applicability date. 

(1) General rule. 

(2) Exceptions. 

(i) Anti-abuse rules. 

(ii) Non-calendar year RPE. 

§ 1.199A–6 Relevant passthrough 

entities (RPEs), publicly traded 

partnerships (PTPs), trusts, and 

estates. 

(a) Overview. 

(b) Computational and reporting rules 

for RPEs. 

(1) In general. 

(2) Computational rules. 

(3) Reporting rules for RPEs. 

(i) Trade or business directly engaged 

in. 

(ii) Other items. 

(iii) Failure to report information. 

(c) Computational and reporting rules 

for PTPs. 

(1) Computational rules. 

(2) Reporting rules. 

(d) Application to trusts, estates, and 

beneficiaries. 

(1) In general. 

(2) Grantor trusts. 

(3) Non-grantor trusts and estates. 


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(i) Calculation at entity level. 

(ii) Allocation among trust or estate 

and beneficiaries. 

(iii) Threshold amount. 

(iv) Electing small business trusts. 

(v) Anti-abuse rule for creation of 

multiple trusts to avoid exceeding 

the threshold amount. 

(vi) Example. 

(e) Effective/applicability date. 

(1) General rule. 

(2) Exceptions. 

(i) Anti-abuse rules. 

(ii) Non-calendar year RPE 

■ Par. 3. Section 1.199A–1 is added to 

read as follows: 

§ 1.199A–1 Operational rules. 

(a) Overview—(1) In general. This 

section provides operational rules for 

calculating the section 199A(a) qualified 

business income deduction (section 

199A deduction) under section 199A of 

the Internal Revenue Code (Code). This 

section refers to the rules in §§ 1.199A– 

2 through 1.199A–6. This paragraph (a) 

provides an overview of this section. 

Paragraph (b) of this section provides 

definitions that apply for purposes of 

section 199A and §§ 1.199A–1 through 

1.199A–6. Paragraph (c) of this section 

provides computational rules and 

examples for individuals whose taxable 

income does not exceed the threshold 

amount. Paragraph (d) of this section 

provides computational rules and 

examples for individuals whose taxable 

income exceeds the threshold amount. 

Paragraph (e) of this section provides 

special rules for purposes of section 

199A and §§ 1.199A–1 through 1.199A– 

6. This section and §§ 1.199A–2 through 

1.199A–6 do not apply for purposes of 

calculating the deduction in section 

199A(g) for specified agricultural and 

horticultural cooperatives. 

(2) Usage of term individual. For 

purposes of applying the rules of 

§§ 1.199A–1 through 1.199A–6, a 

reference to an individual includes a 

reference to a trust (other than a grantor 

trust) or an estate to the extent that the 

section 199A deduction is determined 

by the trust or estate under the rules of 

§ 1.199A–6. 

(b) Definitions. For purposes of 

section 199A and §§ 1.199A–1 through 

1.199A–6, the following definitions 

apply: 

(1) Aggregated trade or business 

means two or more trades or businesses 

that have been aggregated pursuant to 

§ 1.199A–4. 

(2) 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 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). 

(3) 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) Qualified business income (QBI) 

means the net amount of qualified items 

of income, gain, deduction, and loss 

with respect to any trade or business as 

determined under the rules of § 1.199A– 

3(b). 

(5) QBI component means the amount 

determined under paragraph (d)(2) of 

this section. 

(6) Qualified PTP income is defined in 

§ 1.199A–3(c)(3). 

(7) Qualified REIT dividends are 

defined in § 1.199A–3(c)(2). 

(8) 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). For 

purposes of this paragraph (b)(8), the 

excess amount is 20 percent of QBI over 

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. 

(9) Relevant passthrough entity (RPE) 

means a partnership (other than a PTP) 

or an S corporation that is owned, 

directly or indirectly by at least one 

individual, estate, or trust. A trust or 

estate is treated as an RPE to the extent 

it passes through QBI, W–2 wages, UBIA 

of qualified property, qualified REIT 

dividends, or qualified PTP income. 

(10) Specified service trade or 

business (SSTB) means a specified 

service trade or business as defined in 

§ 1.199A–5(b). 

(11) 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). In the 

case of any taxable year beginning after 

2018, the threshold amount is the dollar 

amount in the preceding sentence 

increased by an amount equal to such 

dollar amount, multiplied by the costof-living adjustment determined under 

section 1(f)(3) of the Code for the 

calendar year in which the taxable year 

begins, determined by substituting 

‘‘calendar year 2017’’ for ‘‘calendar year 

2016’’ in section 1(f)(3)(A)(ii). The 

amount of any increase under the 

preceding sentence is rounded as 

provided in section 1(f)(7) of the Code. 

(12) Total QBI amount means the net 

total QBI from all trades or businesses 

(including the individual’s share of QBI 

from trades or business conducted by 

RPEs). 

(13) Trade or business means a 

section 162 trade or business other than 

the trade or business of performing 

services as an employee. In addition, 

rental or licensing of tangible or 

intangible property (rental activity) that 

does not rise to the level of a section 162 

trade or business is nevertheless treated 

as a trade or business for purposes of 

section 199A, if the property is rented 

or licensed to a trade or business which 

is commonly controlled under 

§ 1.199A–4(b)(1)(i) (regardless of 

whether the rental activity and the trade 

or business are otherwise eligible to be 

aggregated under § 1.199A–4(b)(1)). 

(14) Unadjusted basis immediately 

after acquisition of qualified property 

(UBIA of qualified property) is defined 

in § 1.199A–2(c). 

(15) W–2 wages means a trade or 

business’s W–2 wages properly 

allocable to QBI as defined in § 1.199A– 

2(b). 

(c) Computation of the § 199A 

deduction for individuals with taxable 

income not exceeding threshold 

amount—(1) In general. The section 

199A deduction is determined for 

individuals with taxable income for the 

taxable year that does not exceed the 

threshold amount by adding 20 percent 

of the total QBI amount (including QBI 

attributable to an SSTB) and 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). That 

sum is then compared to 20 percent of 

the amount by which the individual’s 

taxable income exceeds net capital gain. 

The lesser of these two amounts is the 

individual’s section 199A deduction. 

(2) Carryover rules—(i) Negative total 

QBI amount. If the total QBI amount is 

less than zero, the portion of the 

individual’s section 199A deduction 

related to QBI is zero for the taxable 

year. The negative total QBI amount is 

treated as negative QBI from a separate 

trade or business in the succeeding 

taxable year of the individual for 

purposes of section 199A and this 

section. This carryover rule does not 

affect the deductibility of the loss for 

purposes of other provisions of the 

Code. 

(ii) Negative combined qualified REIT 

dividends/qualified PTP income. If the 

combined amount of REIT dividends 

and qualified PTP income is less than 

zero, the portion of the individual’s 

section 199A deduction related to 

qualified REIT dividends and qualified 

PTP income is zero for the taxable year. 

The negative combined amount must be 


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carried forward and used to offset the 

combined amount of REIT dividends 

and qualified PTP income in the 

succeeding taxable year of the 

individual for purposes of section 199A 

and this section. This carryover rule 

does not affect the deductibility of the 

loss for purposes of other provisions of 

the Code. 

(3) Examples. The following examples 

illustrate the provisions of this 

paragraph (c). For purposes of these 

examples, unless indicated otherwise, 

assume that all of the trades or 

businesses are trades or businesses as 

defined in paragraph (b)(1) of this 

section and all of tax items are 

effectively connected to a trade or 

business within the United States 

within the meaning of section 864(c). 

Total taxable income does not include 

the section 199A deduction. 

Example 1 to paragraph (c)(3). 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 

QBI is $100,000, the net amount of its 

qualified items of income, gain, deduction, 

and loss. A’s section 199A deduction for 

2018 is equal to $16,200, the lesser of 20% 

of A’s QBI from the business ($100,000 × 

20% = $20,000) and 20% of A’s total taxable 

income for the taxable year ($81,000 × 20% 

= $16,200). 

Example 2 to paragraph (c)(3). Assume the 

same facts as in Example 1 of this paragraph 

(c)(3), except that A also has $7,000 in net 

capital gain for 2018 and that, after allowable 

deductions not relating to the business, A’s 

taxable income for 2018 is $74,000. A’s 

taxable income minus net capital gain is 

$67,000 ($74,000¥$7,000). A’s section 199A 

deduction is equal to $13,400, the lesser of 

20% of A’s QBI from the business ($100,000 

× 20% = $20,000) and 20% of A’s total 

taxable income minus net capital gain for the 

taxable year ($67,000 × 20% = $13,400). 

Example 3 to paragraph (c)(3). B and C are 

married and file a joint individual income tax 

return. B earned $500,000 in wages as an 

employee of an unrelated company in 2018. 

C owns 100% of the shares of X, an S 

corporation that provides landscaping 

services. X generated $100,000 in net income 

from operations in 2018. X paid C $150,000 

in wages in 2018. B and C have no capital 

gains or losses. After allowable deductions 

not related to X, B and C’s total taxable 

income for 2018 is $270,000. B’s and C’s 

wages are not considered to be income from 

a trade or business for purposes of the section 

199A deduction. Because X is an S 

corporation, its QBI is determined at the S 

corporation level. X’s QBI is $100,000, the 

net amount of its qualified items of income, 

gain, deduction, and loss. The wages paid by 

X to C are considered to be a qualified item 

of deduction for purposes of determining X’s 

QBI. The section 199A deduction with 

respect to X’s QBI is then determined by C, 

X’s sole shareholder, and is claimed on the 

joint return filed by B and C. B and C’s 

section 199A deduction is equal to $20,000, 

the lesser of 20% of C’s QBI from the 

business ($100,000 × 20% = $20,000) and 

20% of B and C’s total taxable income for the 

taxable year ($270,000 × 20% = $54,000). 

Example 4 to paragraph (c)(3). Assume the 

same facts as in Example 3 of this paragraph 

(c)(3) 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 section 

199A deduction is equal to $20,300, the 

lesser of (i) 20% of C’s QBI from the business 

($100,000 × 20% = $20,000) plus 20% of B’s 

combined qualified REIT dividends and 

qualified PTP income ($1,500 × 20% = $300) 

and (ii) 20% of B and C’s total taxable for the 

taxable year ($271,500 × 20% = $54,300). 

(d) Computation of the § 199A 

deduction for individuals with taxable 

income above threshold amount—(1) In 

general. The section 199A deduction is 

determined for individuals with taxable 

income for the taxable year that exceeds 

the threshold amount by adding the QBI 

component and 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). That sum is 

then compared to 20 percent of the 

amount by which the individual’s 

taxable income exceeds net capital gain. 

The lesser of these two amounts is the 

individual’s section 199A deduction. 

(2) QBI component. An individual 

with taxable income for the taxable year 

that exceeds the threshold amount 

determines the QBI component using 

the following computational rules, 

which are to be applied in the order 

they appear. 

(i) SSTB exclusion. If the individual’s 

taxable income is within the phase-in 

range, then only the 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 section 

199A deduction. 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 section 199A deduction. 

(ii) Aggregated trade or business. 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. 

(iii) Netting and Carryover—(A) 

Netting. 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. 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. 

(B) Carryover of negative total QBI 

amount. If an individual’s QBI from all 

trades or businesses combined is less 

than zero, the QBI component is zero for 

the taxable year. 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 section 199A 

and this section. 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. 

(iv) QBI component calculation—(A) 

General rule. Except as provided in 

paragraph (d)(iv)(B) of this section, the 

QBI component is the sum of the 

amounts determined under this 

paragraph (d)(2)(iv)(A) 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; or 

(2) 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 UBIA of 

qualified property with respect to that 

trade or business. 

(B) Taxpayers with taxable income 

within phase-in range. If the 

individual’s taxable income is within 

the phase-in range and the amount 

determined under paragraph 

(d)(2)(iv)(A)(2) of this section for a trade 

or business is less than the amount 

determined under paragraph 

(d)(2)(iv)(A)(1) of this section for that 

trade or business, the amount 


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determined under paragraph 

(d)(2)(iv)(A) of this section for such 

trade or business is modified. Instead of 

the amount determined under paragraph 

(d)(2)(iv)(A)(2) of this section, the QBI 

component for the trade or business is 

the amount determined under paragraph 

(d)(2)(iv)(A)(1) of this section reduced 

by the reduction amount as defined in 

paragraph (b)(8) of this section. This 

reduction amount does not apply if the 

amount determined in paragraph 

(d)(2)(iv)(A)(2) of this section is greater 

than the amount determined under 

paragraph (d)(2)(iv)(A)(1) of this section 

(in which circumstance the QBI 

component for the trade or business will 

be the unreduced amount determined in 

paragraph (d)(2)(iv)(A)(1) of this 

section). 

(3) Negative combined qualified REIT 

dividends/qualified PTP income. If the 

combined amount of REIT dividends 

and qualified PTP income is less than 

zero, the portion of the individual’s 

section 199A deduction related to 

qualified REIT dividends and qualified 

PTP income is zero for the taxable year. 

The negative combined amount must be 

carried forward and used to offset the 

combined amount of REIT dividends/ 

qualified PTP income in the succeeding 

taxable year of the individual for 

purposes of section 199A and this 

section. This carryover rule does not 

affect the deductibility of the loss for 

purposes of other provisions of the 

Code. 

(4) Examples. The following examples 

illustrate the provisions of this 

paragraph (d). For purposes of these 

examples, unless indicated otherwise, 

assume that all of the trades or 

businesses are trades or businesses as 

defined in paragraph (b)(13) of this 

section, none of the trades or businesses 

are SSTBs as defined in paragraph 

(b)(10) of this section and § 1.199A–5(b); 

and all of the tax items associated with 

the trades or businesses are effectively 

connected to a trade or business within 

the United States within the meaning of 

section 864(c). 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 section 199A deduction. 

Example 1 to paragraph (d)(4). D, an 

unmarried individual, owns several parcels 

of land that D manages and which are leased 

to several suburban airports for parking lots. 

The business generated $1,000,000 of QBI in 

2018. The business paid no wages and the 

property was not qualified property because 

it was not depreciable. 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 section 

199A deduction is subject to the W–2 wage 

and UBIA of qualified property limitations. 

D’s section 199A deduction is limited to zero 

because the business paid no wages and held 

no qualified property. 

Example 2 to paragraph (d)(4). Assume the 

same facts as in Example 1 of this paragraph 

(d)(4), except that D developed the land 

parcels in 2019, expending a total of 

$10,000,000 to build parking structures on 

each of the parcels, all of which is 

depreciable. During 2020, D leased the 

parking structures and the land to the 

suburban airports. 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 section 

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 section 199A 

deduction will be 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 section 199A 

deduction is thus limited to $250,000. D’s 

section 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 × 20% = $796,000). 

Therefore, D’s section 199A deduction for 

2020 is $250,000. 

Example 3 to paragraph (d)(4). 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 

reported QBI of $3,000,000. The LLC paid 

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 section 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 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 greater of the limitation 

amounts ($150,000 and $75,750) is $150,000. 

The QBI component of E’s section 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 section 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 × 20% = $176,000). 

Therefore, E’s section 199A deduction is 

$150,000 for 2018. 

Example 4 to paragraph (d)(4). F, an 

unmarried individual, owns a 50% interest 

in Z, an S corporation for Federal income tax 

purposes that conducts a single trade or 

business. In 2018, Z reported QBI of 

$6,000,000. Z paid total W–2 wages of 

$2,000,000, and its total UBIA of qualified 

property is $200,000. For the 2018 taxable 

year, F reports $3,000,000 of QBI from Z. F 

is not an employee of Z and receives no 

wages or reasonable compensation from Z. 

After allowable deductions unrelated to Z 

and a deductible qualified net loss from a 

PTP of ($10,000), F’s taxable income is 

$1,880,000. Because F’s taxable income is 

above the threshold amount, the QBI 

component of F’s section 199A deduction 

will be limited to the lesser of 20% of F’s 

share of Z’s QBI or (ii) the greater of the W– 

2 wage and UBIA of qualified property 

limitations. Twenty percent of F’s share of 

QBI of $3,000,000 is $600,000. The W–2 

wage limitation equals 50% of F’s share of 

Z’s W–2 wages ($1,000,000) or $500,000. The 

UBIA of qualified property limitation equals 

$252,500, the sum of 25% of F’s share of Z’s 

W–2 wages ($1,000,000) or $250,000 plus 

2.5% of E’s share of UBIA of qualified 

property ($100,000) or $2,500. The greater of 

the limitation amounts ($500,000 and 

$252,500) is $500,000. The QBI component of 

F’s section 199A deduction is thus limited to 

$500,000, the lesser of 20% of QBI ($600,000) 

and the greater of the limitations amounts 

($500,000). F reported a qualified loss from 

a PTP and has no qualified REIT dividend. 

F does not net the ($10,000) loss against QBI. 

Instead, the portion of F’s section 199A 

deduction related to qualified REIT 

dividends and qualified PTP income is zero 

for 2018. F’s section is 199A deduction is 

equal to the lesser of 20% of the QBI from 

the business as limited ($500,000) or 20% of 

F’s taxable income over net capital gain 

($1,880,000 × 20% = $376,000). Therefore, 

F’s section 199A deduction is $376,000 for 

2018. F must also carry forward the $(10,000) 

qualified loss from a PTP to be netted against 

F’s qualified REIT dividends and qualified 

PTP income in the succeeding taxable year. 

Example 5 to paragraph (d)(4). Phase-in 

range. (i) 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 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 section 199A 

deduction may be limited by the W–2 wage 

and UBIA of qualified property limitations 

but the limitations will be phased in. 

(ii) The UBIA of qualified property 

limitation amount is zero because M does not 

hold qualified property. B and C must apply 

the W–2 wage 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 


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$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 

section 199A deduction by reducing 20% of 

B’s share of M’s QBI by the reduction 

amount. 

(iii) B and C are 60% through the phasein 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. Thus, 

the QBI component of B and C’s section 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 section 199A 

deduction is equal to the lesser of 20% of the 

QBI from the business as limited ($36,000) or 

(ii) 20% of B and C’s taxable income 

($375,000 × 20% = $75,000). Therefore, B 

and C’s section 199A deduction is $36,000 

for 2018. 

Example 6 to paragraph (d)(4). (i) Assume 

the same facts as in Example 5 to paragraph 

(d)(4), except that M was engaged in an 

SSTB. Because B and C are within the phasein 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 

× 40% =) $120,000, and the applicable 

percentage of B’s share of W–2 wages is 

($40,000 × 40% =) $16,000. These reduced 

numbers must then be used to determine 

how B’s section 199A deduction is limited. 

(ii) B and C must apply the W–2 wage 

limitation by first determining 20% of B’s 

share of M’s QBI as limited by paragraph (i) 

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 W–2 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 section 199A deduction 

by reducing 20% of B’s share of M’s QBI by 

the reduction amount. 

(iii) B and C are 60% through the phasein 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 paragraph (i) of this example or 

$24,000, over 50% of B’s share of M’s W–2 

wages, as adjusted in paragraph (i) 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. Thus, 

the QBI component of B and C’s section 199A 

deduction is equal to $14,400, 20% of B’s 

share M’s QBI of $24,000, reduced by $9,600. 

B and C’s section 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 × 20% = 

$75,000). Therefore, B and C’s section 199A 

deduction is $14,400 for 2018. 

Example 7 to paragraph (d)(4). (i) F, an 

unmarried individual, owns as a sole 

proprietor 100 percent of three trades or 

businesses, Business X, Business Y, and 

Business Z. None of the businesses hold 

qualified property. F does not aggregate the 

trades or businesses under § 1.199A–4. For 

taxable year 2018, Business X generates $1 

million of QBI and pays $500,000 of W–2 

wages with respect to the business. Business 

Y also generates $1 million of QBI but pays 

no wages. Business Z generates $2,000 of QBI 

and pays $500,000 of W–2 wages with 

respect to the business. F also has $750,000 

of wage income from employment with an 

unrelated company. After allowable 

deductions unrelated to the businesses, F’s 

taxable income is $2,722,000. 

(ii) Because F’s taxable income is above the 

threshold amount, the QBI component of F’s 

section 199A deduction is subject to the W– 

2 wage and UBIA of qualified property 

limitations. These limitations must be 

applied on a business-by-business basis. 

None of the businesses hold qualified 

property, therefore only the 50% of W–2 

wage limitation must be calculated. Because 

QBI from each business is positive, F applies 

the limitation by determining the lesser of 

20% of QBI and 50% of W–2 wages for each 

business. For Business X, the lesser of 20% 

of QBI ($1,000,000 × 20 percent = $200,000) 

and 50% of Business X’s W–2 wages 

($500,000 × 50% = $250,000) is $200,000. 

Business Y pays no W–2 wages. The lesser 

of 20% of Business Y’s QBI ($1,000,000 × 

20% = $200,000) and 50% of its W–2 wages 

(zero) is zero. For Business Z, the lesser of 

20% of QBI ($2,000 × 20% = $400) and 50% 

of W–2 wages ($500,000 × 50% = $250,000) 

is $400. 

(iii) Next, F must then combine the 

amounts determined in paragraph (ii) of this 

example and compare that sum to 20% of F’s 

taxable income. The lesser of these two 

amounts equals F’s section 199A deduction. 

The total of the combined amounts in 

paragraph (ii) is $200,400 ($200,000 + 0 + 

400). Twenty percent of F’s taxable income 

is $544,400 ($2,722,000 × 20%). Thus, F’s 

section 199A deduction for 2018 is $200,400. 

Example 8 to paragraph (d)(4). (i) Assume 

the same facts as in Example 7 of this 

paragraph (d)(4), except that F aggregates 

Business X, Business Y, and Business Z 

under the rules of § 1.199A–4. 

(ii) Because F’s taxable income is above the 

threshold amount, the QBI component of F’s 

section 199A deduction is subject to the W– 

2 wage and UBIA of qualified property 

limitations. Because the businesses are 

aggregated, these limitations are applied on 

an aggregated basis. None of the businesses 

holds qualified property, therefore only the 

W–2 wage limitation must be calculated. F 

applies the limitation by determining the 

lesser of 20% of the QBI from the aggregated 

businesses, which is $400,400 ($2,002,000 × 

20%) and 50% of W–2 wages from the 

aggregated businesses, which is $500,000 

($1,000,000 × 50%). F’s section 199A 

deduction is equal to the lesser of $400,400 

and 20% of F’s taxable income ($2,722,000 

× 20% = $544,400). Thus, F’s section 199A 

deduction for 2018 is $400,400. 

Example 9 to paragraph (d)(4). (i) Assume 

the same facts as in Example 7 of this 

paragraph (d)(4), except that for taxable year 

2018, Business Z generates a loss that results 

in ($600,000) of negative QBI and pays 

$500,000 of W–2 wages. After allowable 

deductions unrelated to the businesses, F’s 

taxable income is $2,120,000. Because 

Business Z had negative QBI, F must offset 

the positive QBI from Business X and 

Business Y with the negative QBI from 

Business Z in proportion to the relative 

amounts of positive QBI from Business X and 

Business Y. Because Business X and Business 

Y produced the same amount of positive QBI, 

the negative QBI from Business Z is 

apportioned equally among Business X and 

Business Y. Therefore, the adjusted QBI for 

each of Business X and Business Y is 

$700,000 ($1 million plus 50% of the 

negative QBI of $600,000). The adjusted QBI 

in Business Z is $0, because its negative QBI 

has been fully apportioned to Business X and 

Business Y. 

(ii) Because F’s taxable income is above the 

threshold amount, the QBI component of F’s 

section 199A deduction is subject to the W– 

2 wage and UBIA of qualified property 

limitations. These limitations must be 

applied on a business-by-business basis. 

None of the businesses hold qualified 

property, therefore only the 50% of W–2 

wage limitation must be calculated. For 

Business X, the lesser of 20% of QBI 

($700,000 × 20% = $140,000) and 50% of W– 

2 wages ($500,000 × 50% = $250,000) is 

$140,000. Business Y pays no W–2 wages. 

The lesser of 20% of Business Y’s QBI 

($700,000 × 20% = $140,000) and 50% of its 

W–2 wages (zero) is zero. 

(iii) F must combine the amounts 

determined in paragraph (ii) of this example 

and compare the sum to 20% of taxable 

income. F’s section 199A deduction equals 

the lesser of these two amounts. The 

combined amount from paragraph (ii) of this 

example is $140,000 ($140,000 + $0) and 

20% of F’s taxable income is $424,000 

($2,120,000 × 20%). Thus, F’s section 199A 

deduction for 2018 is $140,000. There is no 

carryover of any loss into the following 

taxable year for purposes of section 199A. 

Example 10 to paragraph (d)(4). (i) Assume 

the same facts as in Example 9 of this 

paragraph (d)(4), except that F aggregates 

Business X, Business Y, and Business Z 

under the rules of § 1.199A–4. 

(ii) Because F’s taxable income is above the 

threshold amount, the QBI component of F’s 

section 199A deduction is subject to the W– 

2 wage and UBIA of qualified property 

limitations. Because the businesses are 

aggregated, these limitations are applied on 

an aggregated basis. None of the businesses 

holds qualified property, therefore only the 

W–2 wage limitation must be calculated. F 

applies the limitation by determining the 

lesser of 20% of the QBI from the aggregated 

businesses ($1,400,000 × 20% = $280,000) 


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and 50% of W–2 wages from the aggregated 

businesses ($1,000,000 × 50% = $500,000), or 

$280,000. F’s section 199A deduction is 

equal to the lesser of $280,000 and 20% of 

F’s taxable income ($2,120,000 × 20% = 

$424,000). Thus, F’s section 199A deduction 

for 2018 is $280,000. There is no carryover 

of any loss into the following taxable year for 

purposes of section 199A. 

Example 11 to paragraph (d)(4). (i) Assume 

the same facts as in Example 7 of this 

paragraph (d)(4), except that Business Z 

generates a loss that results in ($2,150,000) of 

negative QBI and pays $500,000 of W–2 

wages with respect to the business in 2018. 

Thus, F has a negative combined QBI of 

($150,000) when the QBI from all of the 

businesses are added together ($1 million 

plus $1 million minus the loss of 

($2,150,000)). Because F has a negative 

combined QBI for 2018, F has no section 

199A deduction with respect to any trade or 

business for 2018. Instead, the negative 

combined QBI of ($150,000) carries forward 

and will be treated as negative QBI from a 

separate trade or business for purposes of 

computing the section 199A deduction in the 

next taxable year. None of the W–2 wages 

carry forward. However, for income tax 

purposes, the $150,000 loss may offset F’s 

$750,000 of wage income (assuming the loss 

is otherwise allowable under the Code). 

(ii) In taxable year 2019, Business X 

generates $200,000 of net QBI and pays 

$100,000 of W–2 wages with respect to the 

business. Business Y generates $150,000 of 

net QBI but pays no wages. Business Z 

generates a loss that results in ($120,000) of 

negative QBI and pays $500 of W–2 wages 

with respect to the business. F also has 

$750,000 of wage income from employment 

with an unrelated company. After allowable 

deductions unrelated to the businesses, F’s 

taxable income is $960,000. Pursuant to 

paragraph (d)(2)(iii)(B) of this section, the 

($150,000) of negative QBI from 2018 is 

treated as arising in 2019 from a separate 

trade or business. Thus, F has overall net QBI 

of $80,000 when all trades or businesses are 

taken together ($200,000 plus $150,000 

minus $120,000 minus the carryover loss of 

$150,000). Because Business Z had negative 

QBI and F also has a negative QBI carryover 

amount, F must offset the positive QBI from 

Business X and Business Y with the negative 

QBI from Business Z and the carryover 

amount in proportion to the relative amounts 

of positive QBI from Business X and Business 

Y. Because Business X produced 57.14% of 

the total QBI from Business X and Business 

Y, 57.14% of the negative QBI from Business 

Z and the negative QBI carryforward must be 

apportioned to Business X, and the 

remaining 42.86% allocated to Business Y. 

Therefore, the adjusted QBI in Business X is 

$45,722 ($200,000 minus 57.14% of the loss 

from Business Z ($68,568), minus 57.14% of 

the carryover loss ($85,710)). The adjusted 

QBI in Business Y is $34,278 ($150,000, 

minus 42.86% of the loss from Business Z 

($51,432) minus one third of the carryover 

loss ($64,290)). The adjusted QBI in Business 

Z is $0, because its negative QBI has been 

apportioned to Business X and Business Y. 

(iii) Because F’s taxable income is above 

the threshold amount, the QBI component of 

F’s section 199A deduction is subject to the 

W–2 wage and UBIA of qualified property 

limitations. These limitations must be 

applied on a business-by-business basis. 

None of the businesses hold qualified 

property, therefore only the 50% of W–2 

wage limitation must be calculated. For 

Business X, 20% of QBI is $9,144 ($45,722 

× 20%) and 50% of W–2 wages is $50,000 

($100,000 × 50%), so the lesser amount is 

$9,144. Business Y pays no W–2 wages. 

Twenty percent of Business Y’s QBI is $6,856 

($34,278 × 20%) and 50% of its W–2 wages 

(zero) is zero, so the lesser amount is zero. 

(iv) F must then compare the combined 

amounts determined in paragraph (iii) of this 

example to 20% of F’s taxable income. The 

section 199A deduction equals the lesser of 

these amounts. F’s combined amount from 

paragraph (iii) of this example is $9,144 

($9,144 plus zero) and 20% of F’s taxable 

income is $192,000 ($960,000 × 20%) Thus, 

F’s section 199A deduction for 2019 is 

$9,144. There is no carryover of any negative 

QBI into the following taxable year for 

purposes of section 199A. 

Example 12 to paragraph (d)(4). (i) Assume 

the same facts as in Example 11 of this 

paragraph (d)(4), except that F aggregates 

Business X, Business Y, and Business Z 

under the rules of § 1.199A–4. For 2018, F’s 

QBI from the aggregated trade or business is 

($150,000). Because F has a combined 

negative QBI for 2018, F has no section 199A 

deduction with respect to any trade or 

business for 2018. Instead, the negative 

combined QBI of ($150,000) carries forward 

and will be treated as negative QBI from a 

separate trade or business for purposes of 

computing the section 199A deduction in the 

next taxable year. However, for income tax 

purposes, the $150,000 loss may offset 

taxpayer’s $750,000 of wage income 

(assuming the loss is otherwise allowable 

under the Code). 

(ii) In taxable year 2019, F will have QBI 

of $230,000 and W–2 wages of $100,500 from 

the aggregated trade or business. F also has 

$750,000 of wage income from employment 

with an unrelated company. After allowable 

deductions unrelated to the businesses, F’s 

taxable income is $960,000. F must treat the 

negative QBI carryover loss ($150,000) from 

2018 as a loss from a separate trade or 

business for purposes of section 199A. This 

loss will offset the positive QBI from the 

aggregated trade or business, resulting in an 

adjusted QBI of $80,000 ($230,000 ¥ 

$150,000). 

(iii) Because F’s taxable income is above 

the threshold amount, the QBI component of 

F’s section 199A deduction is subject to the 

W–2 wage and UBIA of qualified property 

limitations. These limitations must be 

applied on a business-by-business basis. 

None of the businesses hold qualified 

property, therefore only the 50% of W–2 

wage limitation must be calculated. For the 

aggregated trade or business, the lesser of 

20% of QBI ($80,000 × 20% = $16,000) and 

50% of W–2 wages ($100,500 × 50% = 

$50,250) is $16,000. F’s section 199A 

deduction equals the lesser of these amounts 

($16,000) and 20% of F’s taxable income 

($960,000 × 20% = $192,000). Thus, F’s 

section 199A deduction for 2019 is $16,000. 

There is no carryover of any negative QBI 

into the following taxable year for purposes 

of section 199A. 

(e) Special rules—(1) Effect of 

deduction. In the case of a partnership 

or S corporation, section 199A is 

applied at the partner or shareholder 

level. The section 199A deduction has 

no effect on the adjusted basis of a 

partner’s interest in the partnership, the 

adjusted basis of a shareholder’s stock 

in an S corporation, or an S 

corporation’s accumulated adjustments 

account. 

(2) Self-employment tax and net 

investment income tax. The deduction 

under section 199A does not reduce net 

earnings from self-employment under 

section 1402 or net investment income 

under section 1411. 

(3) Commonwealth of Puerto Rico. If 

all of an individual’s QBI from sources 

within the Commonwealth of Puerto 

Rico is taxable under section 1 of the 

Code for a taxable year, then for 

purposes of determining the QBI of such 

individual for such taxable year, the 

term ‘‘United States’’ includes the 

Commonwealth of Puerto Rico. 

(4) Coordination with alternative 

minimum tax. For purposes of 

determining alternative minimum 

taxable income under section 55, the 

deduction allowed under section 

199A(a) for a taxable year is equal in 

amount to the deduction allowed under 

section 199A(a) in determining taxable 

income for that taxable year (that is, 

without regard to any adjustments 

under sections 56 through 59). 

(5) Imposition of accuracy-related 

penalty on underpayments. For rules 

related to the imposition of the 

accuracy-related penalty on 

underpayments for taxpayers who claim 

the deduction allowed under section 

199A, see section 6662(d)(1)(C). 

(6) Reduction for income received 

from cooperatives. In the case of any 

trade or business of a patron of a 

specified agricultural or horticultural 

cooperative, as defined in section 

199A(g)(4), the amount of section 199A 

deduction determined under paragraphs 

(c) or (d) of this section with respect to 

such trade or business must be reduced 

by the lesser of: 

(i) Nine percent of the QBI with 

respect to such trade or business as is 

properly allocable to qualified payments 

received from such cooperative, or 

(ii) 50 percent of the W–2 wages with 

respect to such trade or business as are 

so allocable as determined under 

§ 1.199A–2. 

(f) Effective/applicability date—(1) 

General rule. Except as provided in 

paragraph (f)(2) of this section, the 

provisions of this section apply to 


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taxable years ending after the date the 

Treasury decision adopting these 

regulations as final regulations is 

published in the Federal Register. 

However, taxpayers may rely on the 

rules of this section until the date the 

Treasury decision adopting these 

regulations as final regulations is 

published in the Federal Register. 

(2) Exception for non-calendar year 

RPE. For purposes of determining QBI, 

W–2 wages, and UBIA of qualified 

property, if an individual receives any 

of these items from an RPE with a 

taxable year that begins before January 

1, 2018 and ends after December 31, 

2017, such items are treated as having 

been incurred by the individual during 

the individual’s taxable year in which or 

with which such RPE taxable year ends. 

■ Par. 4. Section 1.199A–2 is added to 

read as follows: 

§ 1.199A–2 Determination of W–2 wages 

and unadjusted basis immediately after 

acquisition of qualified property. 

(a) Scope—(1) In general. This section 

provides guidance on calculating a trade 

or business’s W–2 wages properly 

allocable to QBI (W–2 wages) and the 

trade or business’s unadjusted basis 

immediately after acquisition of all 

qualified property (UBIA of qualified 

property). The provisions of this section 

apply solely for purposes of section 

199A of the Internal Revenue Code 

(Code). 

(2) W–2 wages. Paragraph (b) of this 

section provides guidance on the 

determination of W–2 wages. The 

determination of W–2 wages must be 

made for each trade or business by the 

individual or RPE that directly conducts 

the trade or business before applying the 

aggregation rules of § 1.199A–4. In the 

case of W–2 wages paid by an RPE, the 

RPE must determine and report W–2 

wages for each trade or business 

conducted by the RPE. W–2 wages are 

presumed to be zero if not determined 

and reported for each trade or business. 

(3) UBIA of qualified property. 

Paragraph (c) of this section provides 

guidance on the determination of the 

UBIA of qualified property. The 

determination of the UBIA of qualified 

property must be made for each trade or 

business by the individual or RPE that 

directly conducts the trade or business 

before applying the aggregation rules of 

§ 1.199A–4. In the case of qualified 

property held by an RPE, each partner’s 

or shareholder’s share of the UBIA of 

qualified property is an amount which 

bears the same proportion to the total 

UBIA of qualified property as the 

partner’s or shareholder’s share of tax 

depreciation bears to the RPE’s total tax 

depreciation with respect to the 

property for the year. In the case of 

qualified property held by a partnership 

which does not produce tax 

depreciation during the year (for 

example, property that has been held for 

less than 10 years but whose recovery 

period has ended), each partner’s share 

of the UBIA of qualified property is 

based on how gain would be allocated 

to the partners pursuant to sections 

704(b) and 704(c) if the qualified 

property were sold in a hypothetical 

transaction for cash equal to the fair 

market value of the qualified property. 

In the case of qualified property held by 

an S corporation which does not 

produce tax depreciation during the 

year, each shareholder’s share of the 

UBIA of qualified property is a share of 

the unadjusted basis proportionate to 

the ratio of shares in the S corporation 

held by the shareholder over the total 

shares of the S corporation. The UBIA 

of qualified property is presumed to be 

zero if not determined and reported for 

each trade or business. 

(b) W–2 wages—(1) In general. Section 

199A(b)(2)(B) provides limitations on 

the section 199A deduction based on 

the W–2 wages paid with respect each 

trade or business. Section 199A(b)(4)(B) 

provides that W–2 wages do not include 

any amount which is not properly 

allocable to QBI for purposes of section 

199A(c)(1). This section provides a three 

step process for determining the W–2 

wages paid with respect to a trade or 

business that are properly allocable to 

QBI. First, each individual or RPE must 

determine its total W–2 wages paid for 

the taxable year under the rules in 

paragraph (b)(2) of this section. Second, 

each individual or RPE must allocate its 

W–2 wages between or among one or 

more trades or businesses under the 

rules in paragraph (b)(3) of this section. 

Third, each individual or RPE must 

determine the amount of such wages 

with respect to each trade or business 

that are allocable to the QBI of the trade 

or business under the rules in paragraph 

(b)(4) of this section. 

(2) Definition of W–2 wages—(i) In 

general. Section 199A(b)(4)(A) provides 

that the term W–2 wages means with 

respect to any person for any taxable 

year of such person, the amounts 

described in section 6051(a)(3) and (8) 

paid by such person with respect to 

employment of employees by such 

person during the calendar year ending 

during such taxable year. Thus, the term 

W–2 wages includes the total amount of 

wages as defined in section 3401(a) plus 

the total amount of elective deferrals 

(within the meaning of section 

402(g)(3)), the compensation deferred 

under section 457, and the amount of 

designated Roth contributions (as 

defined in section 402A). For this 

purpose, except as provided in 

paragraphs (b)(2)(iv)(C)(2) and 

(b)(2)(iv)(D) of this section, the Forms 

W–2, ‘‘Wage and Tax Statement,’’ or any 

subsequent form or document used in 

determining the amount of W–2 wages 

are those issued for the calendar year 

ending during the individual’s or RPE’s 

taxable year for wages paid to 

employees (or former employees) of the 

individual or RPE for employment by 

the individual or RPE. For purposes of 

this section, employees of the 

individual or RPE are limited to 

employees of the individual or RPE as 

defined in section 3121(d)(1) and (2). 

(For purposes of section 199A, this 

includes officers of an S corporation and 

employees of an individual or RPE 

under common law.) 

(ii) Wages paid by a person other than 

a common law employer. In determining 

W–2 wages, an individual or RPE may 

take into account any W–2 wages paid 

by another person and reported by the 

other person on Forms W–2 with the 

other person as the employer listed in 

Box c of the Forms W–2, provided that 

the W–2 wages were paid to common 

law employees or officers of the 

individual or RPE for employment by 

the individual or RPE. In such cases, the 

person paying the W–2 wages and 

reporting the W–2 wages on Forms W– 

2 is precluded from taking into account 

such wages for purposes of determining 

W–2 wages with respect to that person. 

For purposes of this paragraph, persons 

that pay and report W–2 wages on 

behalf of or with respect to others can 

include certified professional employer 

organizations under section 7705, 

statutory employers under section 

3401(d)(1), and agents under section 

3504. 

(iii) Requirement that wages must be 

reported on return filed with the Social 

Security Administration (SSA)—(A) In 

general. Pursuant to section 

199A(b)(4)(C), the term W–2 wages does 

not include any amount that is not 

properly included in a return filed with 

SSA on or before the 60th day after the 

due date (including extensions) for such 

return. Under § 31.6051–2 of this 

chapter, each Form W–2 and the 

transmittal Form W–3, ‘‘Transmittal of 

Wage and Tax Statements,’’ together 

constitute an information return to be 

filed with SSA. Similarly, each Form 

W–2c, ‘‘Corrected Wage and Tax 

Statement,’’ and the transmittal Form 

W–3 or W–3c, ‘‘Transmittal of Corrected 

Wage and Tax Statements,’’ together 

constitute an information return to be 

filed with SSA. In determining whether 

any amount has been properly included 

in a return filed with SSA on or before 


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the 60th day after the due date 

(including extensions) for such return, 

each Form W–2 together with its 

accompanying Form W–3 will be 

considered a separate information 

return and each Form W–2c together 

with its accompanying Form W–3 or 

Form W–3c will be considered a 

separate information return. Section 

6071(c) provides that Forms W–2 and 

W–3 must be filed on or before January 

31 of the year following the calendar 

year to which such returns relate (but 

see the special rule in § 31.6071(a)– 

1T(a)(3)(1) of this chapter for monthly 

returns filed under § 31.6011(a)–5(a) of 

this chapter). Corrected Forms W–2 are 

required to be filed with SSA on or 

before January 31 of the year following 

the year in which the correction is 

made. 

(B) Corrected return filed to correct a 

return that was filed within 60 days of 

the due date. If a corrected information 

return (Return B) is filed with SSA on 

or before the 60th day after the due date 

(including extensions) of Return B to 

correct an information return (Return A) 

that was filed with SSA on or before the 

60th day after the due date (including 

extensions) of the information return 

(Return A) and paragraph (b)(2)(iii)(C) of 

this section does not apply, then the 

wage information on Return B must be 

included in determining W–2 wages. If 

a corrected information return (Return 

D) is filed with SSA later than the 60th 

day after the due date (including 

extensions) of Return D to correct an 

information return (Return C) that was 

filed with SSA on or before the 60th day 

after the due date (including extensions) 

of the information return (Return C), 

and if Return D reports an increase (or 

increases) in wages included in 

determining W–2 wages from the wage 

amounts reported on Return C, then 

such increase (or increases) on Return D 

will be disregarded in determining W– 

2 wages (and only the wage amounts on 

Return C may be included in 

determining W–2 wages). If Return D 

reports a decrease (or decreases) in 

wages included in determining W–2 

wages from the amounts reported on 

Return C, then, in determining W–2 

wages, the wages reported on Return C 

must be reduced by the decrease (or 

decreases) reflected on Return D. 

(C) Corrected return filed to correct a 

return that was filed later than 60 days 

after the due date. If an information 

return (Return F) is filed to correct an 

information return (Return E) that was 

not filed with SSA on or before the 60th 

day after the due date (including 

extensions) of Return E, then Return F 

(and any subsequent information 

returns filed with respect to Return E) 

will not be considered filed on or before 

the 60th day after the due date 

(including extensions) of Return F (or 

the subsequent corrected information 

return). Thus, if a Form W–2c (or 

corrected Form W–2) is filed to correct 

a Form W–2 that was not filed with SSA 

on or before the 60th day after the due 

date (including extensions) of the 

information return including the Form 

W–2 (or to correct a Form W–2c relating 

to an information return including a 

Form W–2 that had not been filed with 

SSA on or before the 60th day after the 

due date (including extensions) of the 

information return including the Form 

W–2), then the information return 

including this Form W–2c (or corrected 

Form W–2) will not be considered to 

have been filed with SSA on or before 

the 60th day after the due date 

(including extensions) for this 

information return including the Form 

W–2c (or corrected Form W–2), 

regardless of when the information 

return including the Form W–2c (or 

corrected Form W–2) is filed. 

(iv) Methods for calculating W–2 

wages—(A) In general. The Secretary 

may provide for methods to be used in 

calculating W–2 wages, including W–2 

wages for short taxable years by 

publication in the Internal Revenue 

Bulletin (see § 601.601(d)(2)(ii)(b) of this 

chapter). 

(B) Acquisition or disposition of a 

trade or business—(1) In general. In the 

case of an acquisition or disposition of 

a trade or business, the major portion of 

a trade or business, or the major portion 

of a separate unit of a trade or business 

that causes more than one individual or 

entity to be an employer of the 

employees of the acquired or disposed 

of trade or business during the calendar 

year, the W–2 wages of the individual 

or entity for the calendar year of the 

acquisition or disposition are allocated 

between each individual or entity based 

on the period during which the 

employees of the acquired or disposed 

of trade or business were employed by 

the individual or entity, regardless of 

which permissible method is used for 

reporting predecessor and successor 

wages on Form W–2, ‘‘Wage and Tax 

Statement.’’ For this purpose, the period 

of employment is determined 

consistently with the principles for 

determining whether an individual is an 

employee described in § 1.199A–2(b). 

(2) Acquisition or disposition. For 

purposes of this paragraph (b)(2)(iv)(B), 

the term acquisition or disposition 

includes an incorporation, a formation, 

a liquidation, a reorganization, or a 

purchase or sale of assets. 

(C) Application in the case of a person 

with a short taxable year—(1) In 

general. In the case of an individual or 

RPE with a short taxable year, subject to 

the rules of paragraph (b)(2) of this 

section, the W–2 wages of the 

individual or RPE for the short taxable 

year include only those wages paid 

during the short taxable year to 

employees of the individuals or RPE, 

only those elective deferrals (within the 

meaning of section 402(g)(3)) made 

during the short taxable year by 

employees of the individual or RPE and 

only compensation actually deferred 

under section 457 during the short 

taxable year with respect to employees 

of the individual or RPE. 

(2) Short taxable year that does not 

include December 31. If an individual or 

RPE has a short taxable year that does 

not contain a calendar year ending 

during such short taxable year, wages 

paid to employees for employment by 

such individual or RPE during the short 

taxable year are treated as W–2 wages 

for such short taxable year for purposes 

of paragraph (b) of this section (if the 

wages would otherwise meet the 

requirements to be W–2 wages under 

this section but for the requirement that 

a calendar year must end during the 

short taxable year). 

(D) Remuneration paid for services 

performed in the Commonwealth of 

Puerto Rico. In the case of an individual 

or RPE that conducts a trade or business 

in the Commonwealth of Puerto Rico, 

the determination of W–2 wages of such 

individual or RPE will be made without 

regard to any exclusion under section 

3401(a)(8) for remuneration paid for 

services performed in the 

Commonwealth of Puerto Rico. The 

individual or RPE must maintain 

sufficient documentation (for example, 

Forms 499R–2/W–2PR) to substantiate 

the amount of remuneration paid for 

services performed in the 

Commonwealth of Puerto Rico that is 

used in determining the W–2 wages of 

such individual or RPE with respect to 

any trade or business conducted in the 

Commonwealth of Puerto Rico. 

(3) Allocation of wages to trades or 

businesses. 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. 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). 


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(4) Allocation of wages to QBI. Once 

W–2 wages for each trade or business 

have been determined, each individual 

or RPE must identify the amount of W– 

2 wages properly allocable to QBI for 

each trade or business. W–2 wages are 

properly allocable to QBI if the 

associated wage expense is taken into 

account in computing QBI under 

§ 1.199A–3. In the case of an RPE, the 

wage expense must be allocated and 

reported to the partners or shareholders 

of the RPE as required by the Code, 

including subchapters K and S. The RPE 

must also identify and report the 

associated W–2 wages to its partners or 

shareholders. 

(5) Non-duplication rule. 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. 

(c) UBIA of qualified property—(1) 

Qualified property—(i) In general. The 

term qualified property means, with 

respect to any 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 at the 

close of the taxable year, 

(B) Which is used at any point during 

the taxable year in the 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. 

(ii) 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 for 

purposes of paragraph (c)(2) of this 

section. 

(iii) Adjustments under sections 

734(b) and 743(b). Basis adjustments 

under sections 734(b) and 743(b) are not 

treated as qualified property. 

(iv) 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 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 section 199A deduction. 

(2) Depreciable period—(i) In general. 

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). 

(ii) Additional first-year depreciation 

under section 168. The additional firstyear depreciation deduction allowable 

under section 168 (for example, under 

section 168(k) or (m)) does not affect the 

applicable recovery period under this 

paragraph for the qualified property. 

(iii) Qualified property acquired in 

transactions subject to section 1031 or 

section 1033. For purposes of paragraph 

(c)(2)(i) of this section, qualified 

property that is acquired in a like-kind 

exchange, as defined in § 1.168(i)– 

6(b)(11), or in an involuntary 

conversion, as defined in § 1.168(i)– 

6(b)(12), is treated as replacement 

MACRS property as defined in 

§ 1.168(i)–6(b)(1). For purposes of 

paragraph (c)(2)(i) of this section, the 

date on which the replacement MACRS 

property was first placed in service by 

the individual or RPE is determined as 

follows— 

(A) Except as provided in paragraph 

(c)(2)(iii)(C) of this section, the date the 

exchanged basis, as defined in 

§ 1.168(i)–6(b)(7), in the replacement 

MACRS property was first placed in 

service by the trade or business is the 

date on which the relinquished property 

was first placed in service by the 

individual or RPE; and 

(B) Except as provided in paragraph 

(c)(2)(iii)(C) of this section, the date the 

excess basis, as defined in 

§ 1.168(i) 6(b)(8), in the replacement 

MACRS property was first placed in 

service by the individual or RPE is the 

date on which the replacement MACRS 

property was first placed in service by 

the individual or RPE; or 

(C) If the individual or RPE makes an 

election under § 1.168(i)–096(i)(1) (the 

election not to apply § 1.168(i)–096)), 

the date the exchanged basis and excess 

basis in the replacement MACRS 

property was first placed in service by 

the trade or business is the date on 

which the replacement MACRS 

property was first placed in service by 

the individual or RPE. 

(iv) Qualified property acquired in 

transactions subject to section 168(i)(7). 

If an individual or RPE acquires 

qualified property in a transaction 

described in section 168(i)(7)(B) 

(pertaining to treatment of transferees in 

certain nonrecognition transactions), the 

individual or RPE must determine the 

date on which the qualified property 

was first placed in service for purposes 

of paragraph (c)(2)(i) of this section as 

follows— 

(A) For the portion of the transferee’s 

unadjusted basis in the qualified 

property that does not exceed the 

transferor’s unadjusted basis in such 

property, the date such portion was first 

placed in service by the transferee is the 

date on which the transferor first placed 

the qualified property in service; and 

(B) For the portion of the transferee’s 

unadjusted basis in the qualified 

property that exceeds the transferor’s 

unadjusted basis in such property, such 

portion is treated as separate qualified 

property that the transferee first placed 

in service on the date of the transfer. 

(3) Unadjusted basis immediately 

after acquisition. The term unadjusted 

basis immediately after acquisition 

(UBIA) means the basis on the placed in 

service date of the property as 

determined under section 1012 or other 

applicable sections of Chapter 1, 

including subchapters O (relating to 

gain or loss on dispositions of property), 

C (relating to corporate distributions 

and adjustments), K (relating to partners 

and partnerships), and P (relating to 

capital gains and losses). UBIA is 

determined without regard to any 

adjustments described in section 

1016(a)(2) or (3), to any adjustments for 

tax credits claimed by the individual or 

RPE (for example, under section 50(c)), 

or to any adjustments for any portion of 

the basis for which the individual or 

RPE has elected to treat as an expense 

(for example, under sections 179, 179B, 

or 179C). However, UBIA does reflect 

the reduction in basis for the percentage 

of the individual’s or RPE’s use of 

property for the taxable year other than 

in the trade or business. 

(4) Examples. The provisions of this 

paragraph (c) are illustrated by the 

following examples: 

Example 1 to paragraph (c)(4). (i) On 

January 5, 2012, A purchases for $1 million 

and places in service Real Property X in A’s 

trade or business. A’s trade or business is not 

an SSTB. A’s basis in Real Property X under 

section 1012 is $1 million. Real Property X 

is qualified property within the meaning of 

section 199A(b)(6). As of December 31, 2018, 

A’s basis in Real Property X, as adjusted 

under section 1016(a)(2) for depreciation 

deductions under section 168(a), is $821,550. 

(ii) For purposes of section 

199A(b)(2)(B)(ii) and this section, A’s UBIA 

of Real Property X is its $1 million cost basis 

under section 1012, regardless of any later 

depreciation deductions under section 168(a) 

and resulting basis adjustments under section 

1016(a)(2). 


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Example 2 to paragraph (c)(4). The facts 

are the same as in Example 1 of this 

paragraph (c)(4), except that on January 15, 

2019, A enters into a like-kind exchange 

under section 1031 in which A exchanges 

Real Property X for Real Property Y. Real 

Property Y has a value of $1 million. No cash 

or other property is involved in the exchange. 

As of January 15, 2019, A’s basis in Real 

Property X, as adjusted under section 

1016(a)(2) for depreciation deductions under 

section 168(a), is $820,482. A’s UBIA in Real 

Property Y is $820,482 as determined under 

section 1031(d) (A’s adjusted basis in Real 

Property X carried over to Real Property Y). 

Pursuant to paragraph (c)(2)(iii)(A) of this 

section, Real Property Y is first placed in 

service by A on January 5, 2012, which is the 

date on which Property X was first placed in 

service by A. 

Example 3 to paragraph (c)(4). (i) C 

operates a trade or business that is not an 

SSTB as a sole proprietorship. On January 5, 

2011, C purchases for $10,000 and places in 

service Machinery Y in C’s trade or business. 

C’s basis in Machinery Y under section 1012 

is $10,000. Machinery Y is qualified property 

within the meaning of section 199A(b)(6). 

Assume that Machinery Y’s recovery period 

under section 168(c) is 10 years, and C 

depreciates Machinery Y under the general 

depreciation system by using the straight-line 

depreciation method, a 10-year recovery 

period, and the half-year convention. As of 

December 31, 2018, C’s basis in Machinery Y, 

as adjusted under section 1016(a)(2) for 

depreciation deductions under section 

168(a), is $2,500. On January 1, 2019, C 

incorporates the sole proprietorship and 

elects to treat the newly formed entity as an 

S corporation for Federal income tax 

purposes. C contributes Machinery Y and all 

other assets of the trade or business to the S 

corporation in a non-recognition transaction 

under section 351. The S corporation 

immediately places all the assets in service. 

(ii) For purposes of section 

199A(b)(2)(B)(ii) and this section, C’s UBIA 

of Machinery Y from 2011 through 2018 is 

its $10,000 cost basis under section 1012, 

regardless of any later depreciation 

deductions under section 168(a) and 

resulting basis adjustments under section 

1016(a)(2). Pursuant to paragraph (c)(3) of 

this section, S corporation’s UBIA of 

Machinery Y is determined under the 

applicable rules of subchapter C as of date 

the S corporation places it in service. 

Therefore, the S corporation’s UBIA of 

Machinery Y is $2,500, the basis of the 

property under section 362 at the time the S 

corporation places the property in service. 

Pursuant to paragraph (c)(2)(iv)(A) of this 

section, for purposes of determining the 

depreciable period of Machinery Y, the S 

corporation’s placed in service date will be 

the date C originally placed the property in 

service in 2011. Therefore, Machinery Y may 

be qualified property of the S corporation 

(assuming it continues to be used in the 

business) for 2019 and 2020 and will not be 

qualified property of the S corporation after 

2020, because its depreciable period will 

have expired. 

(d) Effective/applicability date—(1) 

General rule. Except as provided in 

paragraph (d)(2) of this section, the 

provisions of this section apply to 

taxable years ending after the date the 

Treasury decision adopting these 

regulations as final regulations is 

published in the Federal Register. 

However, taxpayers may rely on the 

rules of this section until the date the 

Treasury decision adopting these 

regulations as final regulations is 

published in the Federal Register. 

(2) Exceptions–(i) Anti-abuse rules. 

The provisions of paragraph (c)(1)(iv) of 

this section apply to taxable years 

ending after December 22, 2017. 

(ii) Non-calendar year RPE. For 

purposes of determining QBI, W–2 

wages, and UBIA of qualified property, 

if an individual receives any of these 

items from an RPE with a taxable year 

that begins before January 1, 2018 and 

ends after December 31, 2017, such 

items are treated as having been 

incurred by the individual during the 

individual’s taxable year in which or 

with which such RPE taxable year ends. 

■ Par. 5. Section 1.199A–3 is added to 

read as follows: 

§ 1.199A–3 Qualified business income, 

qualified REIT dividends, and qualified PTP 

income. 

(a) In general. This section provides 

rules on the determination of a trade or 

business’s QBI, as well as the 

determination of qualified REIT 

dividends and qualified PTP income. 

The provisions of this section apply 

solely for purposes of section 199A of 

the Internal Revenue Code (Code). 

Paragraph (b) of this section provides 

rules for the determination of QBI. 

Paragraph (c) of this section provides 

rules for the determination of qualified 

REIT dividends and qualified PTP 

income. QBI must be determined and 

reported for each trade or business by 

the individual or RPE that directly 

conducts the trade or business before 

applying the aggregation rules of 

§ 1.199A–4. 

(b) Definition of qualified business 

income—(1) In general. For purposes of 

this section, the term qualified business 

income (QBI) means, for any taxable 

year, the net amount of qualified items 

of income, gain, deduction, and loss 

with respect to any trade or business of 

the taxpayer as described in paragraph 

(b)(2) of this section, provided the other 

requirements of this section and section 

199A are satisfied (including, for 

example, the exclusion of income not 

effectively connected with a United 

States trade or business). 

(i) Section 751 gain. With respect to 

a partnership, if section 751(a) or (b) 

applies, then gain or loss attributable to 

assets of the partnership giving rise to 

ordinary income under section 751(a) or 

(b) is considered attributable to the 

trades or businesses conducted by the 

partnership, and is taken into account 

for purposes of computing QBI. 

(ii) Guaranteed payments for the use 

of capital. Income attributable to a 

guaranteed payment for the use of 

capital is not considered to be 

attributable to a trade or business, and 

thus is not taken into account for 

purposes of computing QBI; however, 

the partnership’s deduction associated 

with the guaranteed payment will be 

taken into account for purposes of 

computing QBI if such deduction is 

properly allocable to the trade or 

business and is otherwise deductible for 

Federal income tax purposes. 

(iii) Section 481 adjustments. Section 

481 adjustments (whether positive or 

negative) are taken into account for 

purposes of computing QBI to the extent 

that the requirements of this section and 

section 199A are otherwise satisfied, but 

only if the adjustment arises in taxable 

years ending after December 31, 2017. 

(iv) Previously disallowed losses. 

Generally, previously disallowed losses 

or deductions (including under sections 

465, 469, 704(d), and 1366(d)) allowed 

in the taxable year are taken into 

account for purposes of computing QBI. 

However, losses or deductions that were 

disallowed, suspended, limited, or 

carried over from taxable years ending 

before January 1, 2018 (including under 

sections 465, 469, 704(d), and 1366(d)), 

are not taken into account in a later 

taxable year for purposes of computing 

QBI. 

(v) Net operating losses. Generally, a 

deduction under section 172 for a net 

operating loss is not considered with 

respect to a trade or business and 

therefore, is not taken into account in 

computing QBI. However, to the extent 

that the net operating loss is disallowed 

under section 461(l), the net operating 

loss is taken into account for purposes 

of computing QBI. 

(2) Qualified items of income, gain, 

deduction, and loss—(i) In general. The 

term qualified items of income, gain, 

deduction, and loss means items of 

gross income, gain, deduction, and loss 

to the extent such items are— 

(A) Effectively connected with the 

conduct of a trade or business within 

the United States (within the meaning of 

section 864(c), determined by 

substituting ‘‘trade or business (within 

the meaning of section 199A)’’ for 

‘‘nonresident alien individual or a 

foreign corporation’’ or for ‘‘a foreign 

corporation’’ each place it appears), and 

(B) Included or allowed in 

determining taxable income for the 

taxable year. 


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(ii) Items not taken into account. 

Notwithstanding paragraph (b)(2)(i) of 

this section and in accordance with 

section 199A(c)(3)(B), the following 

items are not 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, long-term capital loss, 

including any item treated as one of 

such items, such as gains or losses 

under section 1231 which are treated as 

capital gains or losses. 

(B) Any dividend, income equivalent 

to a dividend, or payment in lieu of 

dividends described in section 

954(c)(1)(G). Any amount described in 

section 1385(a)(1) is not treated as 

described in this clause. 

(C) Any interest income other than 

interest income which is properly 

allocable to a trade or business. For 

purposes of section 199A and this 

section, interest income attributable to 

an investment of working capital, 

reserves, or similar accounts is not 

properly allocable to a trade or business. 

(D) Any item of gain or loss described 

in section 954(c)(1)(C) (transactions in 

commodities) or section 954(c)(1)(D) 

(excess foreign currency gains) applied 

in each case by substituting ‘‘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) (income from 

notional principal contracts) determined 

without regard to section 954(c)(1)(F)(ii) 

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 qualified REIT dividends as 

defined in paragraph (c)(2) of this 

section or qualified PTP income as 

defined in paragraph (c)(3) of this 

section. 

(H) Reasonable compensation 

received by a shareholder from an S 

corporation. However, the S 

corporation’s deduction for such 

reasonable compensation will reduce 

QBI if such deduction is properly 

allocable to the trade or business and is 

otherwise deductible for Federal income 

tax purposes. 

(I) Any guaranteed payment described 

in section 707(c) received by a partner 

for services rendered with respect to the 

trade or business, regardless of whether 

the partner is an individual or an RPE. 

However, the partnership’s deduction 

for such guaranteed payment will 

reduce QBI if such deduction is 

properly allocable to the trade or 

business and is otherwise deductible for 

Federal income tax purposes. 

(J) Any payment described in section 

707(a) received by a partner for services 

rendered with respect to the trade or 

business, regardless of whether the 

partner is an individual or an RPE. 

However, the partnership’s deduction 

for such payment will reduce QBI if 

such deduction is properly allocable to 

the trade or business and is otherwise 

deductible for Federal income tax 

purposes. 

(3) Commonwealth of Puerto Rico. For 

the purposes of determining QBI, the 

term United States includes the 

Commonwealth of Puerto Rico in the 

case of any taxpayer with QBI for any 

taxable year from sources within the 

Commonwealth of Puerto Rico, if all of 

such receipts are taxable under section 

1 for such taxable year. This paragraph 

only applies as provided in section 

199A(f)(1)(C). 

(4) Wages. Expenses for all wages paid 

(or incurred in the case of an accrual 

method taxpayer) must to be taken into 

account in computing QBI (if the 

requirements of this section and section 

199A are satisfied) regardless of the 

application of the W–2 wage limitation 

described in § 1.199A–1(d)(2)(iv). 

(5) Allocation of items among 

directly-conducted trades or 

businesses— If an individual or an RPE 

directly conducts multiple trades or 

businesses, and has items of QBI which 

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. The individual or 

RPE may use a different reasonable 

method for different items of income, 

gain, deduction, and loss. 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. 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. 

(c) Qualified REIT Dividends and 

Qualified PTP Income—(1) In general. 

Qualified REIT dividends and qualified 

PTP income are the sum of qualified 

REIT dividends as defined in § 1.199A– 

3(c)(2) earned directly or through an 

RPE and the net amount of qualified 

PTP income as defined in § 1.199A– 

3(c)(3) earned directly or through an 

RPE. 

(2) Qualified REIT dividend—(i) The 

term qualified REIT dividend means any 

dividend from a REIT received during 

the taxable year which— 

(A) Is not a capital gain dividend, as 

defined in section 857(b)(3), and 

(B) Is not qualified dividend income, 

as defined in section 1(h)(11). 

(ii) 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, taking into account the 

principles of section 246(c)(3) and (4). 

(3) Qualified PTP income—(i) In 

general. The term qualified PTP income 

means the sum of— 

(A) The net amount of such taxpayer’s 

allocable share of income, gain, 

deduction, and loss from a PTP as 

defined in section 7704(b) that is not 

taxed as a corporation under section 

7704(a), plus 

(B) Any gain or loss attributable to 

assets of the PTP giving rise to ordinary 

income under section 751(a) or (b) that 

is considered attributable to the trades 

or businesses conducted by the 

partnership. 

(ii) Special rules. The rules applicable 

to the determination of QBI described in 

paragraph (b) of this section also apply 

to the determination of a taxpayer’s 

allocable share of income, gain, 

deduction, and loss from a PTP. An 

individual’s allocable share of income 

from a PTP, and any section 751 gain or 

loss is qualified PTP income only to the 

extent the items meet the qualifications 

of section 199A and this section 

including the requirement that the item 

is included or allowed in determining 

taxable income for the taxable year, and 

the requirement that the item be 

effectively connected with the conduct 

of a trade or business within the United 

States. For example, if an individual 

owns an interest in a PTP, and for the 

taxable year is allocated a distributive 

share of net loss which is disallowed 

under the passive activity rules of 

section 469, such loss is not taken into 

account for purposes of section 199A. 

Furthermore, each PTP is required to 

determine its qualified PTP income for 

each trade or business and report that 

information to its owners as described 

in § 1.199A–6(b)(3). 

(d) Effective/applicability date—(1) 

General rule. Except as provided in 

paragraph (d)(2) of this section, the 

provisions of this section apply to 

taxable years ending after the date the 

Treasury decision adopting these 

regulations as final regulations is 

published in the Federal Register. 

However, taxpayers may rely on the 

rules of this section until the date the 

Treasury decision adopting these 


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regulations as final regulations is 

published in the Federal Register. 

(2) Exceptions—(i) Anti-abuse rules. 

The provisions of paragraph (c)(2)(ii) of 

this section apply to taxable years 

ending after December 22, 2017. 

(ii) Non-calendar year RPE. For 

purposes of determining QBI, W–2 

wages, and UBIA of qualified property, 

if an individual receives any of these 

items from an RPE with a taxable year 

that begins before January 1, 2018 and 

ends after December 31, 2017, such 

items are treated as having been 

incurred by the individual during the 

individual’s taxable year in which or 

with which such RPE taxable year ends. 

■ Par. 6. Section 1.199A–4 is added to 

read as follows: 

§ 1.199A–4 Aggregation. 

(a) Scope and purpose. 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 limitations described in 

§ 1.199A–1(d)(2)(iv). 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 

limitations described in § 1.199A– 

1(d)(2)(iv). 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. Except as provided in paragraph 

(b)(3) of this section, trades or 

businesses may be aggregated only if an 

individual can demonstrate that— 

(i) 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 trades or businesses owned by 

a partnership, 50 percent or more of the 

capital or profits in the partnership; 

(ii) The ownership described in 

paragraph (b)(1)(i) 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; 

(iii) 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; 

(iv) None of the trades or businesses 

to be aggregated is a specified service 

trade or business (SSTB) as defined in 

§ 1.199A–5; and 

(v) The trades or businesses to be 

aggregated satisfy at least two of the 

following factors (based on all of the 

facts and circumstances): 

(A) The trades or businesses provide 

products and services that are the same 

or customarily offered together. 

(B) 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. 

(C) 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. 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. 

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. 

If an individual aggregates multiple 

trades or businesses under paragraph 

(b)(1) of this section, 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 

described in § 1.199A–1(d)(2)(iv). 

(3) Family attribution. For purposes of 

determining ownership under paragraph 

(b)(1)(i) of this section an individual is 

considered as owning the interest in 

each trade or business owned, directly 

or indirectly, by or for— 

(i) The individual’s spouse (other than 

a spouse who is legally separated from 

the individual under a decree of divorce 

or separate maintenance), and 

(ii) The individual’s children, 

grandchildren, and parents. 

(c) Reporting and consistency—(1) In 

general. Once an individual chooses to 

aggregate two or more trades or 

businesses, the individual must 

consistently report the aggregated trades 

or businesses in all subsequent taxable 

years. However, an individual may add 

a newly created or newly acquired 

(including through non-recognition 

transfers) trade or business to an 

existing aggregated trade or business if 

the requirements of paragraph (b)(1) of 

this section are satisfied. In a 

subsequent year, if there is a change in 

facts and circumstances such that an 

individual’s prior aggregation of trades 

or businesses no longer qualifies for 

aggregation under the rules of this 

section, then the trades or businesses 

will no longer be aggregated within the 

meaning of this section, and the 

individual must reapply the rules in 

paragraph (b)(1) of this section to 

determine a new permissible 

aggregation (if any). 

(2) Individual disclosure—(i) Required 

annual disclosure. For each taxable 

year, individuals must attach a 

statement to their returns identifying 

each trade or business aggregated under 

paragraph (b)(1) of this section. The 

statement must contain— 

(A) A description of each trade or 

business; 

(B) The name and EIN of each entity 

in which a trade or business is operated; 

(C) Information identifying any trade 

or business that was formed, ceased 

operations, was acquired, or was 

disposed of during the taxable year; and 

(D) Such other information as the 

Commissioner may require in forms, 

instructions, or other published 

guidance. 

(ii) Failure to disclose. If an 

individual fails to attach the statement 

required in paragraph (c)(2)(i) of this 

section, the Commissioner may 

disaggregate the individual’s trades or 

businesses. 

(d) Examples. The following examples 

illustrate the principles of this section. 

For purposes of these examples, assume 

the taxpayer is a United States citizen, 

all individuals and RPEs use a calendar 

taxable year, there are no ownership 

changes during the taxable year, all 

trades or businesses satisfy the 

requirements under section 162, all tax 

items are effectively connected to a 

trade or business within the United 

States within the meaning of section 

864(c), and none of the trades or 

businesses is an SSTB within the 

meaning of § 1.199A–5. Except as 

otherwise specified, a single letter 

denotes an individual taxpayer. 

Example 1 to paragraph (d). (i) Facts. A 

wholly owns and operates a catering business 

and a restaurant through separate disregarded 

entities. The catering business and the 

restaurant share centralized purchasing to 

obtain volume discounts and a centralized 

accounting office that performs all of the 

bookkeeping, tracks and issues statements on 

all of the receivables, and prepares the 

payroll for each business. A maintains a 

website and print advertising materials that 

reference both the catering business and the 

restaurant. A uses the restaurant kitchen to 

prepare food for the catering business. The 

catering business employs its own staff and 

owns equipment and trucks that are not used 

or associated with the restaurant. 

(ii) Analysis. Because the restaurant and 

catering business are held in disregarded 


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entities, A will be treated as operating each 

of these businesses directly and thereby 

satisfies paragraph (b)(1)(i) of this section. 

Under paragraph (b)(1)(v) of this section, A 

satisfies the following factors: Paragraph 

(b)(1)(v)(A) is met as both businesses offer 

prepared food to customers; and paragraph 

(b)(1)(v)(B) of this section is met because the 

two businesses share the same kitchen 

facilities in addition to centralized 

purchasing, marketing, and accounting. 

Having satisfied paragraph (b)(1)(i) 

through(v) of this section, A may treat the 

catering business and the restaurant as a 

single trade or business for purposes of 

applying § 199A–1(d). 

Example 2 to paragraph (d). (i) Facts. 

Assume the same facts as in Example 1 of 

this paragraph, but the catering and 

restaurant businesses are owned in separate 

partnerships and A, B, C, and D each own a 

25% interest in the capital and profits of each 

of the two partnerships. A, B, C, and D are 

unrelated. 

(ii) Analysis. Because under paragraph 

(b)(1)(i) of this section A, B, C, and D together 

own more than 50% of the capital and profits 

in each of the two partnerships, they may 

each treat the catering business and the 

restaurant as a single trade or business for 

purposes of applying § 1.199A–1(d). 

Example 3 to paragraph (d). (i) Facts. W 

owns a 75% interest in S1, an S corporation, 

and a 75% interest in the capital and profits 

of PRS, a partnership. S1 manufactures 

clothing and PRS is a retail pet food store. 

W manages S1 and PRS. 

(ii) Analysis. W owns more than 50% of 

the stock of S1 and more than 50% of the 

capital and profits of PRS thereby satisfying 

paragraph (b)(1)(i) of this section. Although 

W manages both S1 and PRS, W is not able 

to satisfy the requirements of paragraph 

(b)(1)(v) of this section as the two businesses 

do not provide goods or services that are the 

same or customarily offered together; there 

are no significant centralized business 

elements; and no facts indicate that the 

businesses are operated in coordination with, 

or reliance upon, one another. W must treat 

S1 and PRS as separate trades or businesses 

for purposes of applying § 1.199A–1(d). 

Example 4 to paragraph (d). (i) Facts. E 

owns a 60% interest in the capital and profits 

of each of four partnerships (PRS1, PRS2, 

PRS3, and PRS4). Each partnership operates 

a hardware store. A team of executives 

oversees the operations of all four of the 

businesses and controls the policy decisions 

involving the business as a whole. Human 

resources and accounting are centralized for 

the four businesses. E reports PRS1, PRS3, 

and PRS4 as an aggregated trade or business 

under paragraph (b)(1) of this section and 

reports PRS2 as a separate trade or business. 

Only PRS2 generates a net taxable loss. 

(ii) Analysis. E owns more than 50% of the 

capital and profits of each partnership 

thereby satisfying paragraph (b)(1)(i) of this 

section. Under paragraph (b)(1)(v) of this 

section, the following factors are satisfied: 

Paragraph (b)(1)(v)(A) of this section because 

each partnership operates a hardware store; 

and paragraph (b)(1)(v)(B) of this section 

because the businesses share accounting and 

human resource functions. E’s decision to 

aggregate only PRS1, PRS3, and PRS4 into a 

single trade or business for purposes of 

applying § 1.199A–1(d) is permissible. The 

loss from PRS2 will be netted against the 

aggregate profits of PRS1, PRS3 and PRS4 

pursuant to § 1.199A–1(d)(2)(iii). 

Example 5 to paragraph (d). (i) Facts. 

Assume the same facts as Example 4 of this 

paragraph, and that F owns a 10% interest 

in the capital and profits of PRS1, PRS2, 

PRS3, and PRS4. 

(ii) Analysis. Because under paragraph 

(b)(1)(i) of this section E owns more than 

50% of the capital and profits in the four 

partnerships, F may aggregate PRS 1, PRS2, 

PRS3, and PRS4 as a single trade or business 

for purposes of applying § 1.199A–1(d), 

provided that F can demonstrate that the 

ownership test is met by E. 

Example 6 to paragraph (d). (i) Facts. D 

owns 75% of the stock of S1, S2, and S3, 

each of which is an S corporation. Each S 

corporation operates a grocery store in a 

separate state. S1 and S2 share centralized 

purchasing functions to obtain volume 

discounts and a centralized accounting office 

that performs all of the bookkeeping, tracks 

and issues statements on all of the 

receivables, and prepares the payroll for each 

business. S3 is operated independently from 

the other businesses. 

(ii) Analysis. D owns more than 50% of the 

stock of each S corporation thereby satisfying 

paragraph (b)(1)(i) of this section. Under 

paragraph (b)(1)(v) of this section, the grocery 

stores satisfy paragraph (b)(1)(v)(A) of this 

section because they are in the same trade or 

business. Only S1 and S2 satisfy paragraph 

(b)(1)(v)(B) of this section because of their 

centralized purchasing and accounting 

offices. D is only able to show that the 

requirements of paragraph (b)(1)(v)(B) of this 

section are satisfied for S1 and S2; therefore, 

D only may aggregate S1 and S2 into a single 

trade or business for purposes of § 1.199A– 

1(d). D must report S3 as a separate trade or 

business for purposes of applying § 1.199A– 

1(d). 

Example 7 to paragraph (d). (i) Facts. 

Assume the same facts as Example 6 of this 

paragraph except each store is independently 

operated and S1 and S2 do not have 

centralized purchasing or accounting 

functions. 

(ii) Analysis. Although the stores provide 

the same products and services within the 

meaning of paragraph (b)(1)(v)(A) of this 

section, D cannot show that another factor 

under paragraph (b)(1)(v) of this section is 

present. Therefore, D must report S1, S2, and 

S3 as separate trades or businesses for 

purposes of applying § 1.199A–1(d). 

Example 8 to paragraph (d). (i) Facts. G 

owns 80% of the stock in S1, an S 

corporation and 80% of the capital and 

profits in LLC1 and LLC2, each of which is 

a partnership for Federal tax purposes. LLC1 

manufactures and supplies all of the widgets 

sold by LLC2. LLC2 operates a retail store 

that sells LLC1’s widgets. S1 owns the real 

property leased to LLC1 and LLC2 for use by 

the factory and retail store. The entities share 

common advertising and management. 

(ii) Analysis. G owns more than 50% of the 

stock of S1 and more than 50% of the capital 

and profits in LLC1 and LLC2 thus satisfying 

paragraph (b)(1)(i) of this section. LLC1, 

LLC2, and S1 share significant centralized 

business elements and are operated in 

coordination with, or in reliance upon, one 

or more of the businesses in the aggregated 

group. G can treat the business operations of 

LLC1 and LLC2 as a single trade or business 

for purposes of applying § 1.199A–1(d). S1 is 

eligible to be included in the aggregated 

group because it leases property to a trade or 

business within the aggregated trade or 

business as described in § 1.199A–1(b)(13) 

and meets the requirements of paragraph 

(b)(1) of this section. 

Example 9 to paragraph (d). (i) Facts. 

Same facts as Example 8 of this paragraph, 

except G owns 80% of the stock in S1 and 

20% of the capital and profits in each of 

LLC1 and LLC2. B, G’s son, owns a majority 

interest in LLC2, and M, G’s mother, owns a 

majority interest in LLC1. B does not own an 

interest in S1 or LLC1, and M does not own 

an interest in S1 or LLC2. 

(ii) Analysis. Under the rules in paragraph 

(b)(3) of this section, B and M’s interest in 

LLC2 and LLC1, respectively, are attributable 

to G and G is treated as owning a majority 

interest in LLC2 and LLC; G thus satisfies 

paragraph (b)(1)(i) of this section. G may 

aggregate his interests in LLC1, LLC2, and S1 

as a single trade or business for purposes of 

applying § 1.199A–1(d). Under paragraph 

(b)(3) of this section, S1 is eligible to be 

included in the aggregated group because it 

leases property to a trade or business within 

the aggregated trade or business as described 

in § 1.199A–1(b)(13) and meets the 

requirements of paragraph (b)(1) of this 

section. 

Example 10 to paragraph (d). (i) Facts. F 

owns a 75% interest and G owns a 5% 

interest in the capital and profits of five 

partnerships (PRS1–PRS5). H owns a 10% 

interest in the capital and profits of PRS1 and 

PRS2. Each partnership operates a restaurant 

and each restaurant separately constitutes a 

trade or business for purposes of section 162. 

G is the executive chef of all of the 

restaurants and as such he creates the menus 

and orders the food supplies. 

(ii) Analysis. F owns more than 50% of 

capital and profits in the partnerships 

thereby satisfying paragraph (b)(1)(i) of this 

section. Under paragraph (b)(1)(v) of this 

section, the restaurants satisfy paragraph 

(b)(1)(v)(A) of this section because they are in 

the same trade or business, and paragraph 

(b)(1)(v)(B) of this section is satisfied as G is 

the executive chef of all of the restaurants 

and the businesses share a centralized 

function for ordering food and supplies. F 

can show the requirements under paragraph 

(b)(1) of this section are satisfied as to all of 

the restaurants. Because F owns a majority 

interest in each of the partnerships, G can 

demonstrate that paragraph (b)(1)(i) of this 

section is satisfied. G can also aggregate all 

five restaurants into a single trade or business 

for purposes of applying § 1.199A–1(d). H, 

however, only owns an interest in PRS1 and 

PRS2. Like G, H satisfies paragraph (b)(1)(i) 

of this section because F owns a majority 

interest. H can, therefore, aggregate PRS1 and 

PRS2 into a single trade or business for 

purposes of applying § 1.199A–1(d). 

Example 11 to paragraph (d). (i) Facts. H, 

J, K, and L own interests in PRS1 and PRS2, 


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each a partnership, and S1 and S2, each an 

S corporation. H, J, K and L also own 

interests in C, an entity taxable as a C 

corporation. H owns 30%, J owns 20%, K 

owns 5%, L owns 45% of each of the five 

entities. All of the entities satisfy 2 of the 3 

factors under paragraph (b)(1)(v) of this 

section. For purposes of section 199A the 

taxpayers report the following aggregated 

trades or businesses: H aggregates PRS1 and 

S1 together and aggregates PRS2 and S2 

together; J aggregates PRS1, S1 and S2 

together and reports PRS2 separately; K 

aggregates PRS1 and PRS2 together and 

aggregates S1 and S2 together; and L 

aggregates S1, S2, and PRS2 together and 

reports PRS1 separately. C cannot be 

aggregated. 

(ii) Analysis. Under paragraph (b)(1)(i) of 

this section, because H, J, and K together own 

a majority interest in PRS1, PRS2, S1, and S2, 

H, J, K, and L are permitted to aggregate 

under paragraph (b)(1). Further, the 

aggregations reported by the taxpayers are 

permitted, but not required for each of H, J, 

K, and L. C’s income is not eligible for the 

section 199A deduction and it cannot be 

aggregated for purposes of applying 

§ 1.199A–1(d). 

Example 12 to paragraph (d). (i) Facts. L 

owns 60% of the profits and capital interests 

in PRS1, a partnership, a business that sells 

non-food items to grocery stores. L also owns 

55% of the profits and capital interests in 

PRS2, a partnership, which owns and 

operates a distribution trucking business. The 

predominant portion of PRS2’s business is 

transporting goods for PRS1. 

(ii) Analysis. L is able to meet (b)(1)(i) as 

the majority owner of PRS1 and PRS2. Under 

paragraph (b)(1)(v) of this section, L is only 

able to show the operations of PRS1 and 

PRS2 are operated in reliance of one another 

under paragraph (b)(1)(v)(C) of this section. 

For purposes of applying § 1.199A–1(d), L 

must treat PRS1 and PRS2 as separate trades 

or businesses. 

Example 13 to paragraph (d). (i) Facts. C 

owns a majority interest in a sailboat racing 

team and also owns an interest in PRS1 

which operates a marina. PRS1 is a trade or 

business under section 162, but the sailboat 

racing team is not a trade or business within 

the meaning of section 162. 

(ii) Analysis. C has only one trade or 

business for purposes of section 199A and, 

therefore, cannot aggregate the interest in the 

racing team with PRS1 under paragraph 

(b)(1) of this section. 

Example 14 to paragraph (d). (i) Facts. 

Trust wholly owns LLC1, LLC2, and LLC3. 

LLC1 operates a trucking company that 

delivers lumber and other supplies sold by 

LLC2. LLC2 operates a lumber yard and 

supplies LLC3 with building materials. LLC3 

operates a construction business. LLC1, 

LLC2, and LLC3 have a centralized human 

resources department, payroll, and 

accounting department. 

(ii) Analysis. Because Trust owns 100% of 

the interests in LLC1, LLC2, and LLC3, Trust 

satisfies paragraph (b)(1)(i) of this section. 

Trust can also show that it satisfies paragraph 

(b)(1)(v)(B) of this section as the trades or 

businesses have a centralized human 

resources department, payroll, and 

accounting department. Trust also can show 

is meets paragraph (b)(1)(v)(C) of this section 

as the trades or businesses are operated in 

coordination, or reliance upon, one or more 

in the aggregated group. Trust can aggregate 

LLC1, LLC2, and LLC3 for purposes of 

applying § 1.199A–1(d). 

(e) Effective/applicability date—(1) 

General rule. Except as provided in 

paragraph (e)(2) of this section, the 

provisions of this section apply to 

taxable years ending after the date the 

Treasury decision adopting these 

regulations as final regulations is 

published in the Federal Register. 

However, taxpayers may rely on the 

rules of this section until the date the 

Treasury decision adopting these 

regulations as final regulations is 

published in the Federal Register. 

(2) Exception for non-calendar year 

RPE. For purposes of determining QBI, 

W–2 wages, and UBIA of qualified 

property, if an individual receives any 

of these items from an RPE with a 

taxable year that begins before January 

1, 2018 and ends after December 31, 

2017, such items are treated as having 

been incurred by the individual during 

the individual’s taxable year in which or 

with which such RPE taxable year ends. 

■ Par. 7. Section 1.199A–5 is added to 

read as follows: 

§ 1.199A–5 Specified service trades or 

businesses and the trade or business of 

performing services as an employee. 

(a) Scope and Effect—(1) Scope. This 

section provides guidance on specified 

service trades or businesses (SSTBs) and 

the trade or business of performing 

services as an employee. This paragraph 

(a) describes the effect of being an SSTB 

or the trade or business of performing 

services as an employee. Paragraph (b) 

of this section provides definitional 

guidance on SSTBs. Paragraph (c) of this 

section provides special rules related to 

SSTBs. Paragraph (d) of this section 

provides guidance on the trade or 

business of performing services as an 

employee. The provisions of this section 

apply solely for purposes of section 

199A of the Internal Revenue Code 

(Code). 

(2) Effect of being an SSTB. 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 as defined in § 1.199A–1(b)(3), 

even if the item is derived from an 

activity that is not itself a specified 

service activity. 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. However, the SSTB 

limitation does not apply to individuals 

with taxable income below the 

threshold amount as defined in 

§ 1.199A–1(b)(11). A phase-in rule, 

provided in § 1.199A–1(d)(2), 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. 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 section 

199A and this section, regardless of 

whether the owner is passive or 

participated in the specified service 

activity. 

(3) Trade or business of performing 

services as an employee. The trade or 

business of performing services as an 

employee is not a trade or business for 

purposes of section 199A and the 

regulations thereunder. Therefore, no 

items of income, gain, loss, or deduction 

from the trade or business of performing 

services as an employee constitute QBI 

within the meaning of section 199A and 

§ 1.199A–3. No taxpayer may claim a 

section 199A deduction for wage 

income, regardless of the amount of 

taxable income. 

(b) Definition of specified service 

trade or business. Except as provided in 

paragraph (c)(1) of this section, the term 

specified service trade or business 

(SSTB) means any of the following: 

(1) Listed SSTBs. Any trade or 

business involving the performance of 

services in one or more of the following 

fields: 

(i) Health as described in paragraph 

(b)(2)(ii) of this section; 

(ii) Law as described in paragraph 

(b)(2)(iii) of this section; 

(iii) Accounting as described in 

paragraph (b)(2)(iv) of this section; 

(iv) Actuarial science as described in 

paragraph (b)(2)(v) of this section; 

(v) Performing arts as described in 

paragraph (b)(2)(vi) of this section; 

(vi) Consulting as described in 

paragraph (b)(2)(vii) of this section; 

(vii) Athletics as described in 

paragraph (b)(2)(viii) of this section; 

(viii) Financial services as described 

in paragraph (b)(2)(ix) of this section; 

(ix) Brokerage services as described in 

paragraph (b)(2)(x) of this section; 

(x) Investing and investment 

management as described in paragraph 

(b)(2)(xi) of this section; 

(xi) Trading as described in paragraph 

(b)(2)(xii) of this section; 


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(xii) Dealing in securities (as defined 

in section 475(c)(2)), partnership 

interests, or commodities (as defined in 

section 475(e)(2)) as described in 

paragraph (b)(2)(xiii) of this section; 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 as defined in 

paragraph (b)(2)(xiv) of this section. 

(2) Additional rules for applying 

section 199A(d)(2) and paragraph (b) of 

this section—(i) In general. This 

paragraph (b)(2) provides additional 

rules for determining whether a 

business is an SSTB within the meaning 

of section 199A(d)(2) and paragraph (b) 

of this section only. The rules of this 

paragraph (b)(2) may not be taken into 

account for purposes of applying any 

provision of law or regulation other than 

section 199A and the regulations 

thereunder except to the extent such 

provision expressly refers to section 

199A(d) or this section. 

(ii) Meaning of services performed in 

the field of health. For purposes of 

section 199A(d)(2) and paragraph 

(b)(1)(i) of this section only, 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. 

(iii) Meaning of services performed in 

the field of law. For purposes of section 

199A(d)(2) and paragraph (b)(1)(ii) of 

this section only, 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. 

(iv) Meaning of services performed in 

the field of accounting. For purposes of 

section 199A(d)(2) and paragraph 

(b)(1)(iii) of this section only, the 

performance of services in the field of 

accounting means the provision of 

services by individuals such as 

accountants, enrolled agents, return 

preparers, financial auditors, and 

similar professionals performing 

services in their capacity as such. 

(v) Meaning of services performed in 

the field of actuarial science. For 

purposes of section 199A(d)(2) and 

paragraph (b)(1)(iv) of this section only, 

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. 

(vi) Meaning of services performed in 

the field of performing arts. For 

purposes of section 199A(d)(2) and 

paragraph (b)(1)(v) of this section only, 

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. 

(vii) Meaning of services performed in 

the field of consulting. For purposes of 

section 199A(d)(2) and paragraph 

(b)(1)(vi) of this section only, 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 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. 

(viii) Meaning of services performed 

in the field of athletics. For purposes of 

section 199A(d)(2) and paragraph 

(b)(1)(vii) of this section only, 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. 

(ix) Meaning of services performed in 

the field of financial services. For 

purposes of section 199A(d)(2) and 

paragraph (b)(1)(viii) of this section 

only, 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 

(including in title 11 or similar cases), 

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, 


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and retirement advisors and other 

similar professionals performing 

services in their capacity as such. 

(x) Meaning of services performed in 

the field of brokerage services. For 

purposes of section 199A(d)(2) and 

paragraph (b)(1)(ix) of this section only, 

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 (as defined in 

section 475(c)(2)) 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. 

(xi) Meaning of the provision of 

services in investing and investment 

management. For purposes of section 

199A(d)(2) and paragraph (b)(1)(x) of 

this section only, the performance of 

services that consist of investing and 

investment management refers to a trade 

or business 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. 

(xii) Meaning of the provision of 

services in trading. For purposes of 

section 199A(d)(2) and paragraph 

(b)(1)(xi) of this section only, the 

performance of services that consist of 

trading means a trade or business of 

trading in securities (as defined in 

section 475(c)(2)), commodities (as 

defined in section 475(e)(2)), 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. 

(xiii) Meaning of the provision of 

services in dealing—(A) Dealing in 

securities. For purposes of section 

199A(d)(2) and paragraph (b)(1)(xii) of 

this section only, the performance of 

services that consist of dealing in 

securities (as defined in section 

475(c)(2)) 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 section 

199A(d)(2) and this section. See 

§ 1.475(c)–1(c)(2) and (4) for the 

definition of negligible sales. 

(B) Dealing in commodities. For 

purposes of section 199A(d)(2) and 

paragraph (b)(1)(xii) of this section only, 

the performance of services that consist 

of dealing in commodities (as defined in 

section 475(e)(2)) 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. 

For purposes of section 199A(d)(2) and 

paragraph (b)(1)(xii) of this section only, 

the performance of services that consist 

of dealing in partnership interests 

means 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. 

(xiv) 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. For 

purposes of section 199A(d)(2) and 

paragraph (b)(1)(xiii) of this section 

only, 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 

(b)(2)(xiv)(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. 

(3) Examples. The following examples 

illustrate the rules in paragraphs (a) and 

(b) of this section. The examples do not 

address all types of services that may or 

may not qualify as specified services. 

Unless otherwise provided, the 

individual in each example has taxable 

income in excess of the threshold 

amount. 

Example 1 to paragraph (b)(3). A, a singer, 

records a song. A is paid a mechanical 

royalty when the song is licensed or 

streamed. A is also paid a performance 

royalty when the recorded song is played 

publicly. A is engaged in the performance of 

services in an SSTB in the field of performing 

arts within the meaning of paragraphs 

(b)(1)(v) and (b)(2)(vi) of this section. The 

royalties that A receives for the song are not 

eligible for a deduction under section 199A. 

Example 2 to paragraph (b)(3). B is a 

partner in Partnership, which solely owns 

and operates a professional sports team. 

Partnership employs athletes and sells tickets 

to the public to attend games in which the 

sports team competes. Therefore, Partnership 

is engaged in the performance of services in 

an SSTB in the field of athletics within the 

meaning of paragraphs (b)(1)(vii) and 

(b)(2)(viii) of this section. B is a passive 

owner in Partnership and B does not provide 

any services with respect to Partnership or 

the sports team. However, because 

Partnership is engaged in an SSTB in the 

field of athletics, B’s distributive share of the 

income, gain, loss, and deduction with 

respect to Partnership is not eligible for a 

deduction under section 199A. 

Example 3 to paragraph (b)(3). C is in the 

business of providing services that assist 

unrelated entities in making their personnel 

structures more efficient. C studies its client’s 

organization and structure and compares it to 

peers in its industry. C then makes 

recommendations and provides advice to its 

client regarding possible changes in the 

client’s personnel structure, including the 

use of temporary workers. C is engaged in the 

performance of services in an SSTB in the 

field of consulting within the meaning of 

paragraphs (b)(1)(vi) and (b)(2)(vii) of this 

section. 

Example 4 to paragraph (b)(3). D is in the 

business of licensing software to customers. 

D discusses and evaluates the customer’s 

software needs with the customer. The 

taxpayer advises the customer on the 

particular software products it licenses. D is 


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paid a flat price for the software license. 

After the customer licenses the software, D 

helps to implement the software. D is 

engaged in the trade or business of licensing 

software and not engaged in an SSTB in the 

field of consulting within the meaning of 

paragraphs (b)(1)(vi) and (b)(2)(vii) of this 

section. 

Example 5 to paragraph (b)(3). E is in the 

business of providing services to assist 

clients with their finances. E will study a 

particular client’s financial situation, 

including, the client’s present income, 

savings and investments, and anticipated 

future economic and financial needs. Based 

on this study, E will then assist the client in 

making decisions and plans regarding the 

client’s financial activities. Such financial 

planning includes the design of a personal 

budget to assist the client in monitoring the 

client’s financial situation, the adoption of 

investment strategies tailored to the client’s 

needs, and other similar services. E is 

engaged in the performance of services in an 

SSTB in the field of financial services within 

the meaning of paragraphs (b)(1)(viii) and 

(b)(2)(ix) of this section. 

Example 6 to paragraph (b)(3). F is in the 

business of executing transactions for 

customers involving various types of 

securities or commodities generally traded 

through organized exchanges or other similar 

networks. Customers place orders with F to 

trade securities or commodities based on the 

taxpayer’s recommendations. F’s 

compensation for its services typically is 

based on completion of the trade orders. F is 

engaged in an SSTB in the field of brokerage 

services within the meaning of paragraphs 

(b)(1)(ix) and (b)(2)(x) of this section. 

Example 7 to paragraph (b)(3). G owns 

100% of Corp, an S corporation, which 

operates a bicycle sales and repair business. 

Corp has 8 employees, including G. Half of 

Corp’s net income is generated from sales of 

new and used bicycles and related goods, 

such as helmets, and bicycle-related 

equipment. The other half of Corp’s net 

income is generated from bicycle repair 

services performed by G and Corp’s other 

employees. Corp’s assets consist of inventory, 

fixtures, bicycle repair equipment, and a 

leasehold on its retail location. Several of the 

employees and G have worked in the bicycle 

business for many years, and have acquired 

substantial skill and reputation in the field. 

Customers often consult with the employees 

on the best bicycle for purchase. G is in the 

business of sales and repairs of bicycles and 

is not engaged in an SSTB within the 

meaning of paragraphs (b)(1)(xiii) and 

(b)(2)(xiv) of this section. 

Example 8 to paragraph (b)(3). H is a wellknown chef and the sole owner of multiple 

restaurants each of which is owned in a 

disregarded entity. Due to H’s skill and 

reputation as a chef, H receives an 

endorsement fee of $500,000 for the use of 

H’s name on a line of cooking utensils and 

cookware. H is in the trade or business of 

being a chef and owning restaurants and such 

trade or business is not an SSTB. However, 

H is also in the trade or business of receiving 

endorsement income. H’s trade or business 

consisting of the receipt of the endorsement 

fee for H’s skill and/or reputation is an SSTB 

within the meaning of paragraphs (b)(1)(xiii) 

and (b)(2)(xiv) of this section. 

Example 9 to paragraph (b)(3). J is a wellknown actor. J entered into a partnership 

with Shoe Company, in which J contributed 

her likeness and the use of her name to the 

partnership in exchange for a 50% interest in 

the capital and profits of the partnership and 

a guaranteed payment. J’s trade or business 

consisting of the receipt of the partnership 

interest and the corresponding distributive 

share with respect to the partnership interest 

for J’s likeness and the use of her name is an 

SSTB within the meaning of paragraphs 

(b)(1)(xiii) and (b)(2)(xiv) of this section. 

(c) Special rules. (1) De minimis 

rule.—(i) Gross receipts of $25 million 

or less. For a trade or business with 

gross receipts of $25 million dollars or 

less for the taxable year, a trade or 

business is not an SSTB if less than 10 

percent of the gross receipts of the trade 

or business are attributable to the 

performance of services in a field 

described in paragraph (b) of this 

section. For purposes of determining 

whether this 10 percent test is satisfied, 

the performance of any activity incident 

to the actual performance of services in 

the field is considered the performance 

of services in that field. 

(ii) Gross receipts of greater than $25 

million. For a trade or business with 

gross receipts of greater than $25 

million for the taxable year, the rules of 

paragraph (c)(1)(i) of this section are 

applied by substituting ‘‘5 percent’’ for 

‘‘10 percent’’ each place it appears. 

(2) Services or property provided to an 

SSTB—(i) 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. 

(ii) 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 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. 

(iii) 50 percent or more common 

ownership. For purposes of paragraphs 

(c)(2)(i) and (ii) of this section, 50 

percent or more common ownership 

includes direct or indirect ownership by 

related parties within the meaning of 

sections 267(b) or 707(b). 

(iv) Example. Law Firm is a partnership 

that provides legal services to clients, owns 

its own office building and employs its own 

administrative staff. Law Firm divides into 

three partnerships. Partnership 1 performs 

legal services to clients. Partnership 2 owns 

the office building and rents the entire 

building to Partnership 1. Partnership 3 

employs the administrative staff and through 

a contract with Partnership 1 provides 

administrative services to Partnership 1 in 

exchange for fees. All three of the 

partnerships are owned by the same people 

(the original owners of Law Firm). Because 

there is 50% or more common ownership of 

each of the three partnerships, Partnership 2 

provides substantially all of its property to 

Partnership 1, and Partnership 3 provides 

substantially all of its services to Partnership 

1, Partnerships 1, 2, and 3 will be treated as 

one SSTB under paragraph (a)(6) of this 

section. 

(3) Incidental to specified service 

trade or business—(i) In general. If a 

trade or business (that would not 

otherwise be treated as an SSTB) has 50 

percent or more common ownership 

with an SSTB, including related parties 

(within the meaning of sections 267(b) 

or 707(b)), and has shared expenses 

with the SSTB, including shared wage 

or overhead expenses, then such trade 

or business is treated as incidental to 

and, therefore, part of the SSTB within 

the meaning of this section if the gross 

receipts of the trade or business 

represents no more than 5 percent of the 

total combined gross receipts of the 

trade or business and the SSTB in a 

taxable year. 

(ii) Example. A, a dermatologist, provides 

medical services to patients on a regular basis 

through Dermatology LLC, a disregarded 

entity owned by A. In addition to providing 

medical services, Dermatology LLC also sells 

skin care products to A’s patients. The same 

employees and office space are used for the 

medical services and sale of skin care 

products. The gross receipts with respect to 

the skin care product sales do not exceed 5% 

of the gross receipts of Dermatology LLC. 

Accordingly, the sale of the skin care 

products is treated as incidental to A’s SSTB 

of performing services in the field of health 

(within the meaning of paragraph (b)(1)(i) 

and (b)(2)(ii) of this section) and is treated 

under paragraph (c)(3) of this section as part 

of such SSTB. 

(d) Trade or business of performing 

services as an employee—(1) In general. 

The trade or business of performing 

services as an employee is not a trade 

or business for purposes of section 199A 

and the regulations thereunder. 

Therefore, no items of income, gain, 

loss, and deduction from the trade or 

business of performing services as an 

employee constitute QBI within the 

meaning of section 199A and § 1.199A– 

3. Except as provided in paragraph 

(d)(3) of this section, income from the 

trade or business of performing services 

as an employee refers to all wages 

(within the meaning of section 3401(a)) 

and other income earned in a capacity 

as an employee, including payments 

described in § 1.6041–2(a)(1) (other than 


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payments to individuals described in 

section 3121(d)(3)) and § 1.6041–2(b)(1). 

(2) Employer’s Federal employment 

tax classification of employee 

immaterial. For purposes of determining 

whether wages are earned in a capacity 

as an employee as provided in 

paragraph (d)(1) of this section, the 

treatment of an employee by an 

employer as anything other than an 

employee for Federal employment tax 

purposes is immaterial. Thus, if a 

worker should be properly classified as 

an employee, it is of no consequence 

that the employee is treated as a nonemployee by the employer for Federal 

employment tax purposes. 

(3) Presumption that former 

employees are still employees—(i) 

Presumption. Solely for purposes of 

section 199A(d)(1)(B) and paragraph 

(d)(1) of this section, an individual that 

was properly treated as an employee for 

Federal employment tax purposes by 

the person to which he or she provided 

services and who is subsequently 

treated as other than an employee by 

such person with regard to the provision 

of substantially the same services 

directly or indirectly to the person (or 

a related person), is presumed to be in 

the trade or business of performing 

services as an employee with regard to 

such services. This presumption may be 

rebutted upon a showing by the 

individual that, under Federal tax law, 

regulations, and principles (including 

common-law employee classification 

rules), the individual is performing 

services in a capacity other than as an 

employee. This presumption applies 

regardless of whether the individual 

provides services directly or indirectly 

through an entity or entities. 

(ii) Examples. The following 

examples illustrate the provision of 

paragraph (b)(3)(i) of this section. 

Unless otherwise provided, the 

individual in each example has taxable 

income in excess of the threshold 

amount. 

Example 1 to paragraph (d)(3). A is 

employed by PRS, a partnership, as a fulltime 

employee and is treated as such for Federal 

employment tax purposes. A quits his job for 

PRS and enters into a contract with PRS 

under which A provides substantially the 

same services that A previously provided to 

PRS in A’s capacity as an employee. Because 

A was treated as an employee for services he 

provided to PRS, and now is no longer 

treated as an employee with regard to such 

services, A is presumed (solely for purposes 

of section 199A(d)(1)(B) and paragraphs (a)(3) 

and (d) of this section) to be in the trade or 

business of performing services as an 

employee with regard to his services 

performed for PRS. Unless the presumption 

is rebutted with a showing that, under 

Federal tax law, regulations, and principles 

(including the common-law employee 

classification rules), A is not an employee, 

any amounts paid by PRS to A with respect 

to such services will not be QBI for purposes 

of section 199A. The presumption would 

apply even if, instead of contracting directly 

with PRS, A formed a disregarded entity, or 

an S corporation, and the disregarded entity 

or the S corporation entered into the contract 

with PRS. 

Example 2 to paragraph (d)(3). C is an 

attorney employed as an associate in a law 

firm (Law Firm 1) and was treated as such 

for Federal employment tax purposes. C and 

the other associates in Law Firm 1 have 

taxable income below the threshold amount. 

Law Firm 1 terminates its employment 

relationship with C and its other associates. 

C and the other former associates form a new 

partnership, Law Firm 2, which contracts to 

perform legal services for Law Firm 1. 

Therefore, in form, C is now a partner in Law 

Firm 2 which earns income from providing 

legal services to Law Firm 1. C continues to 

provide substantially the same legal services 

to Law Firm 1 and its clients. Because C was 

previously treated as an employee for 

services she provided to Law Firm 1, and 

now is no longer treated as an employee with 

regard to such services, C is presumed (solely 

for purposes of section 199A(d)(1)(B) and 

paragraphs (a)(3) and (d) of this section) to 

be in the trade or business of performing 

services as an employee with respect to the 

services C provides to Law Firm 1 indirectly 

through Law Firm 2. Unless the presumption 

is rebutted with a showing that, under 

Federal tax law, regulations, and principles 

(including common-law employee 

classification rules), C’s distributive share of 

Law Firm 2 income (including any 

guaranteed payments) will not be QBI for 

purposes of section 199A. The results in this 

example would not change if, instead of 

contracting with Law Firm 1, Law Firm 2 was 

instead admitted as a partner in Law Firm 1. 

Example 3 to paragraph (d)(3). E is an 

engineer employed as a senior project 

engineer in an engineering firm, Engineering 

Firm. Engineering Firm is a partnership and 

structured such that after 10 years, senior 

project engineers are considered for partner 

if certain career milestones are met. After 10 

years, E meets those career milestones and is 

admitted as a partner in Engineering Firm. As 

a partner in Engineering Firm, E shares in the 

net profits of Engineering Firm, and also 

otherwise satisfies the requirements under 

Federal tax law, regulations, and principles 

(including common-law employee 

classification rules) to be respected as a 

partner. E is presumed (solely for purposes 

of section 199A(d)(1)(B) and paragraphs (a)(3) 

and (d) of this section) to be in the trade or 

business of performing services as an 

employee with respect to the services E 

provides to Engineering Firm. However, E is 

able to rebut the presumption by showing 

that E became a partner in Engineering Firm 

as a career milestone, shares in the overall 

net profits in Engineering Firm, and 

otherwise satisfies the requirements under 

Federal tax law, regulations, and principles 

(including common-law employee 

classification rules) to be respected as a 

partner. 

(e) Effective/applicability date—(1) 

General rule. Except as provided in 

paragraph (e)(2) of this section, the 

provisions of this section apply to 

taxable years ending after the date the 

Treasury decision adopting these 

regulations as final regulations is 

published in the Federal Register. 

However, taxpayers may rely on the 

rules of this section until the date the 

Treasury decision adopting these 

regulations as final regulations is 

published in the Federal Register. 

(2) Exceptions—(i) Anti-abuse rules. 

The provisions of paragraphs (c)(2), 

(c)(3), and (d)(3) of this section apply to 

taxable years ending after December 22, 

2017. 

(ii) Non-calendar year RPE. For 

purposes of determining QBI, W–2 

wages, and UBIA of qualified property, 

if an individual receives any of these 

items from an RPE with a taxable year 

that begins before January 1, 2018 and 

ends after December 31, 2017, such 

items are treated as having been 

incurred by the individual during the 

individual’s taxable year in which or 

with which such RPE taxable year ends. 

■ Par. 8. Section 1.199A–6 is added to 

read as follows: 

§ 1.199A–6 Relevant passthrough entities 

(RPEs), publicly traded partnerships (PTPs), 

trusts, and estates. 

(a) Overview. This section provides 

special rules for RPEs, PTPs, trusts, and 

estates necessary for the computation of 

the section 199A deduction of their 

owners or beneficiaries. Paragraph (b) of 

this section provides computational and 

reporting rules for RPEs necessary for 

individuals who own interests in RPEs 

to calculate their section 199A 

deduction. Paragraph (c) of this section 

provides computational and reporting 

rules for PTPs necessary for individuals 

who own interests in PTPs to calculate 

their section 199A deduction. Paragraph 

(d) of this section provides 

computational and reporting rules for 

trusts (other than grantor trusts) and 

estates necessary for their beneficiaries 

to calculate their section 199A 

deduction. 

(b) Computational and reporting rules 

for RPEs—(1) In general. An RPE must 

determine and report information 

attributable to any trades or businesses 

it is engaged in necessary for its owners 

to determine their section 199A 

deduction. 

(2) Computational rules. Using the 

following four rules, an RPE must 

determine the items necessary for 

individuals who own interests in the 

RPE to calculate their section 199A 

deduction under § 1.199A–1(c) or (d): 


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40928 Federal Register / Vol. 83, No. 159 / Thursday, August 16, 2018 / Proposed Rules 

(i) First, the RPE must determine if it 

is engaged in one or more trades or 

businesses. The RPE must also 

determine whether any of its trades or 

businesses is an SSTB under the rules 

of § 1.199A–5. 

(ii) Second, the RPE must apply the 

rules in § 1.199A–3 to determine the 

QBI for each trade or business engaged 

in directly. 

(iii) Third, the RPE must apply the 

rules in § 1.199A–2 to determine the W– 

2 wages and UBIA of qualified property 

for each trade or business engaged in 

directly. 

(iv) Fourth, the RPE must determine 

whether it has any qualified REIT 

dividends as defined in 1.199A–3(c)(1) 

earned directly or through another RPE. 

The RPE must also determine the net 

amount of qualified PTP income as 

defined in § 1.199A–3(c)(2) earned 

directly or indirectly through 

investments in PTPs. 

(3) Reporting rules for RPEs—(i) Trade 

or business directly engaged in. An RPE 

must separately identify and report on 

the Schedule K–1 issued to its owners 

for any trade or business engaged in 

directly by the RPE— 

(A) Each owner’s allocable share of 

QBI, W–2 wages, and UBIA of qualified 

property attributable to each such trade 

or business, and 

(B) Whether any of the trades or 

businesses described in paragraph 

(b)(3)(i)(A) of this section is an SSTB. 

(ii) Other items. An RPE must also 

report on an attachment to the Schedule 

K–1, any QBI, W–2 wages, UBIA of 

qualified property, or SSTB 

determinations, reported to it by any 

RPE in which the RPE owns a direct or 

indirect interest. The RPE must also 

report each owner’s allocated share of 

any qualified REIT dividends or 

qualified PTP income or loss received 

by the RPE (including through another 

RPE). 

(iii) Failure to report information. If 

an RPE fails to separately identify or 

report on the Schedule K–1 (or any 

attachments thereto) issued to an owner 

any items described in paragraph 

(b)(3)(i) of this section, the owner’s 

share (and the share of any upper-tier 

indirect owner) of positive QBI, W–2 

wages, and UBIA of qualified property 

attributable to trades or businesses 

engaged in by that RPE will be 

presumed to be zero. 

(c) Computational and reporting rules 

for PTPs—(1) Computational rules. Each 

PTP must determine its QBI under the 

rules of § 1.199A–3 for each trade or 

business in which the PTP is engaged in 

directly. The PTP must also determine 

whether any of the trades or businesses 

it is engaged in directly is an SSTB. 

(2) Reporting rules. Each PTP is 

required to separately identify and 

report the information described in 

paragraph (c)(1) of this section on 

Schedules K–1 issued to its partners. 

Each PTP must also determine and 

report any qualified REIT dividends or 

qualified PTP income or loss received 

by the PTP including through an RPE, 

a REIT, or another PTP. A PTP is not 

required to determine or report W–2 

wages or the UBIA of qualified property 

attributable to trades or businesses it is 

engaged in directly. 

(d) Application to trusts, estates, and 

beneficiaries—(1) In general. A trust or 

estate computes its section 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. 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 section 199A deduction, in 

the same manner as though the items 

had been allocated from an RPE. For 

purposes of this section and §§ 1.199A– 

1 through 1.199A–5, 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 section 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 another person. 

(3) Non-grantor trusts and estates—(i) 

Calculation at entity level. A trust or 

estate must calculate its QBI, W–2 

wages, UBIA of qualified property, 

qualified REIT dividends, and qualified 

PTP income. The QBI of a trust or estate 

must be computed by allocating 

qualified items of deduction described 

in section 199A(c)(3) in accordance with 

the classification of those deductions 

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). Any depletion and depreciation 

deductions described in section 642(e) 

and any amortization deductions 

described in section 642(f) 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. 

(ii) Allocation among trust or estate 

and beneficiaries. The QBI (including 

any amounts that may be less than zero 

as calculated at the trust or estate level), 

W–2 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 to be 

distributed to the beneficiary or is 

retained by the trust or estate. 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 section 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. 

(iii) 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 the cost-ofliving adjustment as outlined in 

§ 1.199A–1(b)(11). For purposes of 

determining whether a trust or estate 

has taxable income that exceeds the 

threshold amount, the taxable income of 

a trust or estate is determined before 

taking into account any distribution 

deduction under sections 651 or 661. 

(iv) Electing small business trusts. An 

electing small business trust (ESBT) is 

entitled to the deduction under section 

199A. 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 nonS portion of the ESBT must take into 

account any QBI and other items from 

any other entities or assets owned by the 

ESBT. See § 1.641(c)–1. 

(v) Anti-abuse rule for creation of 

multiple trusts to avoid exceeding the 

threshold amount. Trusts formed or 

funded with a significant purpose of 

receiving a deduction under section 

199A will not be respected for purposes 

of section 199A. See also § 1.643(f)–1 of 

the regulations. 

(vi) The following example illustrates 

the application of paragraph (d) of this 

section. 


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Example 1 to (d)(3)(vi). (i) Computation of 

DNI and inclusion and deduction amounts. 

(A) Trust’s distributive share of partnership 

items. Trust, an irrevocable testamentary 

complex trust, is a 25% partner in PRS, a 

family partnership that operates a restaurant 

that generates QBI and W–2 wages. In 2018, 

PRS properly allocates gross income from the 

restaurant of $55,000, and expenses directly 

allocable to the restaurant of $50,000 

(including W–2 wages of $25,000, 

miscellaneous expenses of $20,000, and 

depreciation deductions of $5,000) to Trust. 

These items are properly included in Trust’s 

DNI. Trust’s share of PRS’ unadjusted basis 

of qualified depreciable property is $125,000. 

PRS distributes $5,000 of cash to Trust in 

2018. 

(B) Trust’s activities. In addition to its 

interest in PRS, Trust also operates a family 

bakery conducted through an LLC whollyowned by the Trust that is treated as a 

disregarded entity. In 2018, the bakery 

produced $100,000 of gross income and 

$150,000 of expenses directly allocable to 

operation of the bakery (including W–2 

wages of $50,000, rental expense of $75,000, 

and miscellaneous expenses of $25,000). 

(The net loss from the bakery operations is 

not subject to any loss disallowance 

provisions outside of section 199A.) Trust 

also has zero unadjusted basis of qualified 

depreciable property in the bakery. For 

purposes of computing its section 199A 

deduction, Trust has properly chosen to 

aggregate the family restaurant conducted 

through PRS with the bakery conducted 

directly by Trust under § 1.199A–4. Trust 

also owns various investment assets that 

produce portfolio-type income consisting of 

dividends ($25,000), interest ($15,000), and 

tax-exempt interest ($15,000). Accordingly, 

Trust has the following items which are 

properly included in Trust’s DNI: 

Interest Income ............................ 15,000 

Dividends ..................................... 25,000 

Tax-exempt interest ..................... 15,000 

Net business loss from PRS and 

bakery ....................................... (45,000) 

Trustee commissions ................... 3,000 

State and local taxes .................... 5,000 

(C) Allocation of deductions under 

§ 1.652(b)–3. (1) Directly attributable 

expenses. In computing Trust’s DNI for the 

taxable year, the distributive share of 

expenses of PRS are directly attributable 

under § 1.652(b)–3(a) to the distributive share 

of income of PRS. Accordingly, Trust has 

gross business income of $155,000 (55,000 

from PRS and 100,000 from the bakery) and 

direct business expenses of $200,000 

($50,000 from PRS and $150,000 from the 

bakery). In addition, $1,000 of the trustee 

commissions and $1,000 of state and local 

taxes are directly attributable under 

§ 1.652(b)–3(a) to Trust’s business income. 

Accordingly, Trust has excess business 

deductions of $47,000. Pursuant to its 

authority recognized under § 1.652(b)–3(d), 

Trust allocates the $47,000 excess business 

deductions as follows: $15,000 to the interest 

income, resulting in $0 interest income, 

$25,000 to the dividends, resulting in $0 

dividend income, and $7,000 to the tax 

exempt interest. 

(2) Non-directly attributable expenses. The 

trustee must allocate the sum of the balance 

of the trustee commissions ($2,000) and state 

and local taxes ($4,000) to Trust’s remaining 

tax-exempt interest income, resulting in 

$2,000 of tax exempt interest. 

(D) Amounts included in taxable income. 

For 2018, Trust has DNI of $2,000. Pursuant 

to Trust’s governing instrument, Trustee 

distributes 50%, or $1,000, of that DNI to A, 

an individual who is a discretionary 

beneficiary of Trust. In addition, Trustee is 

required to distribute 25%, or $500, of that 

DNI to B, a current income beneficiary of 

Trust. Trust retains the remaining 25% of 

DNI. Consequently, with respect to the 

$1,000 distribution A receives from Trust, A 

properly excludes $1,000 of tax-exempt 

interest income under section 662(b). With 

respect to the $500 distribution B receives 

from Trust, B properly excludes $500 of tax 

exempt interest income under section 662(b). 

Because the DNI consists entirely of taxexempt income, Trust deducts $0 under 

section 661 with respect to the distributions 

to A and B. 

(ii) Section 199A deduction. (A) Trust’s W– 

2 wages and QBI. For the 2018 taxable year, 

Trust has $75,000 ($25,000 from PRS + 

$50,000 of Trust) of W–2 wages. Trust also 

has $125,000 of unadjusted basis in qualified 

depreciable property. Trust has negative QBI 

of ($47,000) ($155,000 gross income from 

aggregated businesses less the sum of 

$200,000 direct expenses from aggregated 

businesses and $2,000 directly attributable 

business expenses from Trust under the rules 

of § 1.652(b)–3(a)). 

(B) Section 199A deduction computation. 

(1) A’s computation. Because the $1,000 

Trust distribution to A equals one-half of 

Trust’s DNI, A has W–2 wages from Trust of 

$37,500. A also has W–2 wages of $2,500 

from a trade or business outside of Trust 

(computed without regard to A’s interest in 

Trust), which A has properly aggregated 

under § 1.199A–4 with the Trust’s trade or 

businesses (the family’s restaurant and 

bakery), for a total of $40,000 of W–2 wages 

from the aggregate trade or businesses. A has 

$100,000 of QBI from non-Trust trade or 

businesses in which A owns an interest. 

Because the $1,000 Trust distribution to A 

equals one-half of Trust’s DNI, A has 

(negative) QBI from Trust of ($23,500). A’s 

total QBI is determined by combining the 

$100,000 QBI from non-Trust sources with 

the ($23,500) QBI from Trust for a total of 

$76,500 of QBI. Assume that A’s taxable 

income exceeds the threshold amount for 

2018 by $200,000. A’s tentative deduction is 

$15,300 (.20 × $76,500), limited under the 

W–2 wage limitation to $20,000 (50% × 

$40,000 W–2 wages). Accordingly, A’s 

section 199A deduction for 2018 is $15,300. 

(2) B’s computation. For 2018, B’s taxable 

income is below the threshold amount so B 

is not subject to the W–2 wage limitation. 

Because the $500 Trust distribution to B 

equals one-quarter of Trust’s DNI, B has a 

total of ($11,750) of QBI. B also has no QBI 

from non-Trust trades or businesses, so B has 

a total of ($11,750) of QBI. Accordingly, B’s 

section 199A deduction for 2018 is zero. The 

($11,750) of QBI is carried over to 2019 as a 

loss from a qualified business in the hands 

of B pursuant to section 199A(c)(2). 

(3) Trust’s computation. For 2018, Trust’s 

taxable income is below the threshold 

amount so it is not subject to the W–2 wage 

limitation. Because Trust retained 25% of 

Trust’s DNI, Trust is allocated 25% of its 

QBI, which is ($11,750). Trust’s section 199A 

deduction for 2018 is zero. The ($11,750) of 

QBI is carried over to 2019 as a loss from a 

qualified business in the hands of Trust 

pursuant to section 199A(c)(2). 

(e) Effective/applicability date—(1) 

General rule. Except as provided in 

paragraph (e)(2) of this section, the 

provisions of this section apply to 

taxable years ending after the date the 

Treasury decision adopting these 

regulations as final regulations is 

published in the Federal Register. 

However, taxpayers may rely on the 

rules of this section until the date the 

Treasury decision adopting these 

regulations as final regulations is 

published in the Federal Register. 

(2) Exceptions—(i) Anti-abuse rules. 

The provisions of paragraph (d)(3)(v) of 

this section apply to taxable years 

ending after December 22, 2017. 

(ii) Non-calendar year RPE. For 

purposes of determining QBI, W–2 

wages, and UBIA of qualified property, 

if an individual receives any of these 

items from an RPE with a taxable year 

that begins before January 1, 2018 and 

ends after December 31, 2017, such 

items are treated as having been 

incurred by the individual during the 

individual’s taxable year in which or 

with which such RPE taxable year ends. 

■ Par. 9. Section 1.643(f)–1 is added to 

read as follows: 

§ 1.643(f)–1 Treatment of multiple trusts. 

(a) General rule. For purposes of 

subchapter J of chapter 1 of Title 26 of 

the United States Code, two or more 

trusts will be aggregated and treated as 

a single trust if such trusts have 

substantially the same grantor or 

grantors and substantially the same 

primary beneficiary or beneficiaries, and 

if a principal purpose for establishing 

such trusts or for contributing 

additional cash or other property to 

such trusts is the avoidance of Federal 

income tax. For purposes of applying 

this rule, spouses will be treated as one 

person. 

(b) A principal purpose. A principal 

purpose for establishing or funding a 

trust will be presumed if it results in a 

significant income tax benefit unless 

there is a significant non-tax (or nonincome tax) purpose that could not have 

been achieved without the creation of 

these separate trusts. 

(c) Examples. The following examples 

illustrate the application of this section: 

Example 1 to paragraph (c). (i) A owns 

and operates a pizzeria and several gas 


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40930 Federal Register / Vol. 83, No. 159 / Thursday, August 16, 2018 / Proposed Rules 

stations. A’s annual income from these 

businesses and other sources exceeds the 

threshold amount in section 199A(e)(2), and 

the W–2 wages properly allocable to these 

businesses are not sufficient for A to 

maximize the deduction allowable under 

section 199A. A reads an article in a 

magazine that suggests that taxpayers can 

avoid the W–2 wage limitation of section 

199A by contributing portions of their family 

businesses to multiple identical trusts 

established for family members. Based on 

this advice, in 2018, A establishes three 

irrevocable, non-grantor trusts: Trust 1 for the 

benefit of A’s sister, B, and A’s brothers, C 

and D; Trust 2 for the benefit of A’s second 

sister, E, and for C and D; and Trust 3 for the 

benefit of E. Under each trust instrument, the 

trustee is given discretion to pay any current 

or accumulated income to any one or more 

of the beneficiaries. The trust agreements 

otherwise have nearly identical terms. But for 

the enactment of section 199A and A’s desire 

to avoid the W–2 wage limitation of that 

provision, A would not have created or 

funded such trusts. A names A’s oldest son, 

F, as the trustee for each trust. A forms a 

family limited partnership, and contributes 

the ownership interests in the pizzeria and 

gas stations to the partnership in exchange 

for a 50-percent general partner interest and 

a 50-percent limited partner interest. A later 

contributes to each trust a 15% limited 

partner interest. Under the partnership 

agreement, the trustee does not have any 

power or discretion to manage the 

partnership or any of its businesses on behalf 

of the trusts, or to dispose of the limited 

partnership interests without the approval of 

the general partner. Each of the trusts claims 

the section 199A deduction on its Form 1041 

in full based on the amount of qualified 

business income (QBI) allocable to that trust 

from the limited partnership, as if such trust 

was not subject to the wage limitation in 

section 199A(b)(2)(B). 

(ii) Under these facts, for Federal income 

tax purposes under this section, Trust 1, 

Trust 2, and Trust 3 would be aggregated and 

treated as a single trust. 

Example 2 to paragraph (c). (i) X 

establishes two irrevocable trusts: One for the 

benefit of X’s son, G, and the other for X’s 

daughter, H. G is the income beneficiary of 

the first trust and the trustee is required to 

apply all income currently to G for G’s life. 

H is the remainder beneficiary of the first 

trust. H is an income beneficiary of the 

second trust and the trust instrument permits 

the trustee to accumulate or to pay income, 

in its discretion, to H for H’s education, 

support, and maintenance. The trustee also 

may pay income or corpus for G’s medical 

expenses. H is the remainder beneficiary of 

the second trust and will receive the trust 

corpus upon G’s death. 

(ii) Under these facts, there are significant 

non-tax differences between the substantive 

terms of the two trusts, so tax avoidance will 

not be presumed to be a principal purpose for 

the establishment or funding of the separate 

trusts. Accordingly, in the absence of other 

facts or circumstances that would indicate 

that a principal purpose for creating the two 

separate trusts was income tax avoidance, the 

two trusts will not be aggregated and treated 

as a single trust for Federal income tax 

purposes under this section. 

(d) Effective/applicability date. The 

provisions of this section apply to 

taxable years ending after August 16, 

2018. 

Kirsten Wielobob, 

Deputy Commissioner for Services and 

Enforcement. 

[FR Doc. 2018–17276 Filed 8–10–18; 4:15 pm] 

BILLING CODE 4830–01–P 


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