[Federal Register Volume 83, Number 159 (Thursday, August 16, 2018)]
[Proposed Rules]
[Pages 40884-40930]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-17276]



[[Page 40883]]

Vol. 83

Thursday,

No. 159

August 16, 2018

Part III





 Department of the Treasury





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Internal Revenue Service





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26 CFR Part 1





Qualified Business Income Deduction; Proposed Rule

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

[[Page 40884]]


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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.

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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 Sec.  1.199A-4 and proposed Sec.  1.199A-6. The 
collection of information in proposed Sec.  1.199A-4 is required for 
taxpayers that choose to aggregate two or more trades or businesses. 
The collection of information in proposed Sec.  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 self-employed 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 Sec.  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 Sec.  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

[[Page 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 like-kind 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 anti-avoidance guidance regarding 
the application of section 199A. These proposed regulations contain six 
substantive sections, Sec. Sec.  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 Sec.  1.199A-1: Operational Rules

    Section 1.199A-1 of the proposed regulations (proposed Sec.  
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 Sec.  1.199A-1(b) contains definitions applicable for 
section 199A and Sec. Sec.  1.199A-1 through 1.199A-6. Proposed Sec.  
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 Sec.  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 Sec.  1.199A-1(e) 
provides special rules related to the section 199A deduction.

A. Defined Terms

    Defined terms in proposed Sec.  1.199A-1(b) include aggregated 
trade or business, applicable percentage, phase-in 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 Sec.  1.199A-1(b) also defines trade or business for 
purposes of section 199A and proposed Sec. Sec.  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 Sec.  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 Sec.  1.199A-4 
if all of the requirements of proposed Sec.  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 Sec.  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 Sec.  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 Sec.  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 Sec.  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 Sec.  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 Sec.  1.199A-1(d) provides guidance on the application of 
these limitations.
    Proposed Sec.  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 Sec.  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 phase-in 
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 Sec.  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 Sec.  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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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 Sec.  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 Sec.  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 Sec.  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 Sec.  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 self-employment 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 Sec.  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 
Sec.  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 Sec.  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 Sec.  1.199A-1(e)(6) repeats this statutory language.

II. Proposed Sec.  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 Sec.  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 Sec.  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

[[Page 40888]]

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 Sec.  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 Sec.  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 Sec.  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 
Sec.  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 Sec.  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 Sec.  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 Sec.  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 
Sec.  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 Sec.  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 Sec.  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 Sec.  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 Sec.  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 Sec.  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

[[Page 40889]]

the applicable recovery period under section 168(c).
    Proposed Sec.  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 Sec.  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 Sec.  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 Sec.  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 Sec.  
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 
Sec.  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 like-kind exchanges and involuntary conversions 
under Sec.  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 Sec.  1.199A-2(c)(2)(iii) generally follows the 
rules of Sec.  1.168(i)-6 to provide that qualified property that is 
acquired in a like-kind exchange, as defined in Sec.  1.168(i)-
6(b)(11), or in an involuntary conversion, as defined in Sec.  
1.168(i)-6(b)(12), is treated as replacement Modified Accelerated Cost 
Recovery System (MACRS) property as defined in Sec.  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 Sec.  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 Sec.  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 Sec.  1.168(i)-6(i)(1) 
(the election not to apply Sec.  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 like-kind exchange or involuntary conversion will have two separate 
placed in service dates under the

[[Page 40890]]

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 Sec.  
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 Sec.  
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 two-step 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 non-recognition 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 Sec.  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 Sec.  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 Sec.  1.199A-3: QBI, Qualified REIT Dividends, Qualified 
PTP Income

    Proposed Sec.  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

[[Page 40891]]

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 Sec.  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 Sec.  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 Sec.  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 Sec.  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 Sec.  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 Sec.  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 Sec.  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 Sec.  
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).

[[Page 40892]]

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 short-term 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 long-term capital loss. Conference Report 
page 30. Accordingly, proposed Sec.  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

[[Page 40893]]

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 Sec.  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 well-known 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 Sec.  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 shareholder-employees, 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 Sec.  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 Sec.  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 Sec.  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 Sec.  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

[[Page 40894]]

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 Sec.  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 Sec.  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 Sec.  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 Sec.  
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 Sec.  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 Sec.  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 Sec.  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 Sec.  
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 Sec.  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 Sec.  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 Sec.  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 Sec.  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 Sec.  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

[[Page 40895]]

on taxpayers of such an approach, proposed Sec.  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 Sec.  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 Sec.  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 Sec.  
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 Sec.  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 Sec.  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 Sec.  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 Sec.  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 Sec.  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 Sec.  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 Sec.  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 Sec.  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

[[Page 40896]]

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 
Sec.  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 Sec.  1.199A-5(c)(1) provides that a trade or 
business (determined before the application of the aggregation rules in 
proposed Sec.  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 Sec.  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 Sec.  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

[[Page 40897]]

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 Sec.  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 Sec.  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 Sec.  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 Sec.  
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 Sec.  1.199A-5(b) draws 
upon the existing guidance under section 448(d)(2) when appropriate for 
purposes of section 199A. Proposed Sec.  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 Sec.  
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 Sec.  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 Sec.  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 Sec.  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 
Sec.  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.

[[Page 40898]]

d. Actuarial Science
    Proposed Sec.  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 Sec.  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 Sec.  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 Sec.  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 Sec.  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 Sec.  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 Sec.  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 Sec.  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

[[Page 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-over-year 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 Sec.  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 Sec.  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

[[Page 40900]]

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 Sec.  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 Sec.  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 Sec.  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 Sec.  1.475(c)-1(c)(2) and (4) 
for the definition of negligible sales.
    For purposes of proposed Sec.  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 Sec.  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 Sec.  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 Sec.  1.199A-5(c)(2), the renting of half of 
the building to the dental practice will be treated as an SSTB.
    Additionally, proposed Sec.  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 
Sec. Sec.  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

[[Page 40901]]

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 Sec.  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 Sec.  1.6041-2(a)(1) (other than payments to 
individuals described in section 3121(d)(3)) and Sec.  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), Sec.  1.6041-2(a)(1) (other 
than payments to individuals described in section 3121(d)(3)), or Sec.  
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 Sec.  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 Sec.  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 Sec.  
1.199A-5(d)(3) contains a presumption that applies in certain 
situations to ensure that individuals properly substantiate their 
status.
    Specifically, proposed Sec.  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 Sec.  1.199A-5(d)(3)(ii) contains three examples illustrating 
this rule.

VI. Proposed Sec.  1.199A-6: Special Rules for RPEs, PTPs, Trusts, and 
Estates

    Proposed Sec.  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 Sec.  1.199A-6(b) follows the rules applicable to 
individuals with taxable income above the threshold amount set forth in 
Sec.  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 Sec.  
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

[[Page 40902]]

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 Sec.  
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 Sec.  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 Sec.  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 Sec.  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 
Sec.  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 Sec.  1.643(f)-1: Anti-Avoidance 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 Sec.  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 Sec.  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 Sec.  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 Sec.  
1.643(f)-1, however, is not limited to avoidance of the limitations 
under section 199A and proposed Sec. Sec.  1.199A-1 through 1.199A-6.
    The rule in proposed Sec.  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 Sec.  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).

[[Page 40903]]

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 Sec. Sec.  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 Sec. Sec.  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 Sec. Sec.  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 Sec.  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 anti-
avoidance 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 Sec. Sec.  1.199A-1 through 1.199A-6) and one 
proposed under section 643(f) (proposed

[[Page 40904]]

Sec.  1.643(f)-1). Each of proposed Sec. Sec.  1.199A-1 through 1.199A-
6 provides rules relevant to the section 199A deduction and proposed 
Sec.  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 Sec.  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 Sec.  1.199A-1 is extended 
beyond the section 162 definition if a taxpayer chooses to aggregate 
businesses under the rules of proposed Sec.  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 Sec.  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 Sec.  1.199A-1
    The Treasury Department and the IRS expect that the definitions and 
guidance provided in Sec.  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 Sec.  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 Sec.  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 Sec.  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 
non-binding. 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 Sec.  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 Sec.  1.199A-1
    The Treasury Department and the IRS do not anticipate any 
meaningful economic distortions to be induced by proposed Sec.  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 Sec.  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

[[Page 40905]]

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 
Sec.  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 Sec.  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 Sec.  1.199A-2
    The Treasury Department and IRS expect that proposed Sec.  1.199A-2 
will implement the 199A deduction in an economically efficient manner. 
For example, proposed Sec.  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 Sec.  1.199A-2
    The Treasury Department and the IRS do not anticipate any 
meaningful economic distortions to be induced by proposed Sec.  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 Sec.  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 Sec.  1.199A-3
    The Treasury Department and IRS expect that proposed Sec.  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 
Sec.  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 Sec.  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 Sec.  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 Sec.  1.199A-4

1. Background
    Businesses may organize either as C corporations, which are owned 
by stockholders, or in a form generally

[[Page 40906]]

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 decision-makers. 
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 Sec.  1.199A-4
    The Treasury Department and the IRS expect that the aggregation 
guidance provided in proposed Sec.  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 Sec.  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 
Sec.  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 Sec.  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 risk-bearing 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 Sec.  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 Sec.  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 Sec.  1.199A-5
    The Treasury Department and the IRS expect that proposed Sec.  
1.199A-5 will implement the 199A deduction in an economically efficient 
manner. To this end, proposed Sec.  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.

[[Page 40907]]

3. Anticipated Costs of Proposed Sec.  1.199A-5 Relative to the 
Baseline
    In addition to the statutory threshold amount, below which SSTB 
status is not relevant, proposed Sec.  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 Sec.  
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 Sec.  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 
Sec.  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 Sec.  1.199A-6
    The Treasury Department and IRS expect that proposed Sec.  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 Sec.  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 Sec.  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 Sec.  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 Sec.  1.643(f)-1

1. Background
    Proposed Sec.  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 Sec.  1.643(f)-1 Relative to the 
Baseline
    The Treasury Department and IRS expect that the proposed Sec.  
1.643(f)-1 will implement the 199A deduction in an economically 
efficient manner. Because proposed Sec.  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 Sec.  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 Sec.  
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 Sec.  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 Sec.  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 Sec.  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 Sec.  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 Sec.  1.199A-6 reduces the compliance burden on many 
individuals that own RPEs relative a

[[Page 40908]]

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 Sec.  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 Sec. Sec.  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 Sec.  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 Sec.  1.199A-4. 
Second, the Treasury Department and the IRS project that--in complying 
with the proposed Sec.  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 Sec.  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 PRA-based 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    Years 2018 to 2027 (3% discount rate,     Years 2018 to 2027 (7% discount
            regulations                         millions $2018)                     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 Sec. Sec.  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 Sec.  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 Sec.  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 Sec.  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.

[[Page 40909]]

    The small entities subject to the collection of information in 
proposed Sec.  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 Sec.  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 
Sec.  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 self-
employed 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

0
Paragraph 1. The authority citation for part 1 are amended by adding 
sectional authorities for Sec. Sec.  1.199A-1 through 1.199A-6 and 
Sec.  1.643(f) to read in part as follows:

    Authority: 26 U.S.C. 7805 * * *
    Section Sec.  1.199A-1 also issued under 26 U.S.C. 199A(f)(4).
    Section Sec.  1.199A-2 also issued under 26 U.S.C. 199A(b)(5), 
(f)(1)(A), (f)(4), and (h).
    Section Sec.  1.199A-3 also issued under 26 U.S.C. 199A(c)(4)(C) 
and (f)(4.)
    Section Sec.  1.199A-4 also issued under 26 U.S.C. 199A(f)(4).
    Section Sec.  1.199A-5 also issued under 26 U.S.C. 199A(f)(4).
    Section Sec.  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).

0
Par. 2. Section 1.199A-0 is added to read as follows:


Sec.  1.199A-0  Table of Contents

    This section lists the section headings that appear in Sec. Sec.  
1.199A-1 through 1.199A-6.

Sec.  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.
Sec.  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.

[[Page 40910]]

    (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.
Sec.  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.
Sec.  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.
Sec.  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.
Sec.  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.

[[Page 40911]]

    (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
0
Par. 3. Section 1.199A-1 is added to read as follows:


Sec.  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 Sec. Sec.  
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 Sec. Sec.  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 Sec. Sec.  1.199A-1 through 1.199A-6. 
This section and Sec. Sec.  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 
Sec. Sec.  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 Sec.  1.199A-6.
    (b) Definitions. For purposes of section 199A and Sec. Sec.  
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 Sec.  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 Sec.  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 Sec.  1.199A-3(c)(3).
    (7) Qualified REIT dividends are defined in Sec.  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 Sec.  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 
cost-of-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 Sec.  1.199A-
4(b)(1)(i) (regardless of whether the rental activity and the trade or 
business are otherwise eligible to be aggregated under Sec.  1.199A-
4(b)(1)).
    (14) Unadjusted basis immediately after acquisition of qualified 
property (UBIA of qualified property) is defined in Sec.  1.199A-2(c).
    (15) W-2 wages means a trade or business's W-2 wages properly 
allocable to QBI as defined in Sec.  1.199A-2(b).
    (c) Computation of the Sec.  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

[[Page 40912]]

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 x 20% = $20,000) and 20% of A's 
total taxable income for the taxable year ($81,000 x 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 x 20% = $20,000) and 
20% of A's total taxable income minus net capital gain for the 
taxable year ($67,000 x 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 x 20% = $20,000) and 20% of B and 
C's total taxable income for the taxable year ($270,000 x 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 x 20% = $20,000) plus 20% of B's combined 
qualified REIT dividends and qualified PTP income ($1,500 x 20% = 
$300) and (ii) 20% of B and C's total taxable for the taxable year 
($271,500 x 20% = $54,300).

    (d) Computation of the Sec.  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 Sec.  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

[[Page 40913]]

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 Sec.  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 x 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 x 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 x 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

[[Page 40914]]

$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 phase-in range (that is, their 
taxable income exceeds the threshold amount by $60,000 and their 
phase-in range is $100,000). B and C must determine the excess 
amount, which is the excess of 20% of B's share of M's QBI, or 
$60,000, over 50% of B's share of M's W-2 wages, or $20,000. Thus, 
the excess amount is $40,000. The reduction amount is equal to 60% 
of the excess amount, or $24,000. 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 x 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 phase-in range, B must reduce the QBI 
and W-2 wages allocable to B from M to the applicable percentage of 
those items. B and C's applicable percentage is 100% reduced by the 
percentage equal to the ratio that their taxable income for the 
taxable year ($375,000) exceeds their threshold amount ($315,000), 
or $60,000, bears to $100,000. Their applicable percentage is 40%. 
The applicable percentage of B's QBI is ($300,000 x 40% =) $120,000, 
and the applicable percentage of B's share of W-2 wages is ($40,000 
x 40% =) $16,000. These reduced numbers must then be used to 
determine how B's 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 phase-in range (that is, their 
taxable income exceeds the threshold amount by $60,000 and their 
phase-in range is $100,000). B and C must determine the excess 
amount, which is the excess of 20% of B's share of M's QBI, as 
adjusted in 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 x 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 Sec.  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 x 20 percent = $200,000) and 
50% of Business X's W-2 wages ($500,000 x 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 x 20% = $200,000) and 50% of its W-2 
wages (zero) is zero. For Business Z, the lesser of 20% of QBI 
($2,000 x 20% = $400) and 50% of W-2 wages ($500,000 x 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 x 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 Sec.  
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 x 20%) and 50% 
of W-2 wages from the aggregated businesses, which is $500,000 
($1,000,000 x 50%). F's section 199A deduction is equal to the 
lesser of $400,400 and 20% of F's taxable income ($2,722,000 x 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 x 20% = $140,000) and 50% of W-2 wages 
($500,000 x 50% = $250,000) is $140,000. Business Y pays no W-2 
wages. The lesser of 20% of Business Y's QBI ($700,000 x 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 x 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 Sec.  
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 x 20% = $280,000)

[[Page 40915]]

and 50% of W-2 wages from the aggregated businesses ($1,000,000 x 
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 x 
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 x 20%) and 50% of W-2 wages is $50,000 ($100,000 x 
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 x 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 x 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 Sec.  
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 x 20% = $16,000) and 50% 
of W-2 wages ($100,500 x 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 x 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 Sec.  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

[[Page 40916]]

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.
0
Par. 4. Section 1.199A-2 is added to read as follows:


Sec.  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 
Sec.  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 
Sec.  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 Sec.  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

[[Page 40917]]

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 
Sec.  31.6071(a)-1T(a)(3)(1) of this chapter for monthly returns filed 
under Sec.  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 Sec.  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 Sec.  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 
Sec.  1.199A-3(b)(5).

[[Page 40918]]

    (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 Sec.  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 first-year 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 Sec.  1.168(i)-6(b)(11), or in an involuntary 
conversion, as defined in Sec.  1.168(i)-6(b)(12), is treated as 
replacement MACRS property as defined in Sec.  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 Sec.  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 Sec.  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 Sec.  
1.168(i)-096(i)(1) (the election not to apply Sec.  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).

[[Page 40919]]

    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.
0
Par. 5. Section 1.199A-3 is added to read as follows:


Sec.  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 Sec.  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.

[[Page 40920]]

    (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 Sec.  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 Sec.  1.199A-3(c)(2) earned 
directly or through an RPE and the net amount of qualified PTP income 
as defined in Sec.  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 Sec.  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

[[Page 40921]]

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.
0
Par. 6. Section 1.199A-4 is added to read as follows:


Sec.  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 Sec.  
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 
Sec.  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 Sec.  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 Sec.  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 Sec.  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

[[Page 40922]]

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 Sec.  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 Sec.  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 Sec.  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 Sec.  1.199A-1(d) is permissible. The loss from PRS2 will 
be netted against the aggregate profits of PRS1, PRS3 and PRS4 
pursuant to Sec.  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 Sec.  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 Sec.  1.199A-1(d). D must report S3 as a 
separate trade or business for purposes of applying Sec.  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 Sec.  
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 Sec.  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 Sec.  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 Sec.  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 
Sec.  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 Sec.  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 Sec.  1.199A-1(d).
    Example 11 to paragraph (d).  (i) Facts. H, J, K, and L own 
interests in PRS1 and PRS2,

[[Page 40923]]

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 Sec.  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 Sec.  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 Sec.  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.
0
Par. 7. Section 1.199A-5 is added to read as follows:


Sec.  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 Sec.  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 Sec.  1.199A-1(b)(11). 
A phase-in rule, provided in Sec.  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 Sec.  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;

[[Page 40924]]

    (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,

[[Page 40925]]

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 Sec.  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

[[Page 40926]]

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 well-known 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 well-known 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 Sec.  
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 Sec.  1.6041-2(a)(1) (other than

[[Page 40927]]

payments to individuals described in section 3121(d)(3)) and Sec.  
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 non-employee 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.
0
Par. 8. Section 1.199A-6 is added to read as follows:


Sec.  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 Sec.  1.199A-
1(c) or (d):

[[Page 40928]]

    (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 Sec.  1.199A-5.
    (ii) Second, the RPE must apply the rules in Sec.  1.199A-3 to 
determine the QBI for each trade or business engaged in directly.
    (iii) Third, the RPE must apply the rules in Sec.  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 Sec.  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 Sec.  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 Sec. Sec.  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 Sec.  1.652(b)-3(a), and 
deductions not directly attributable within the meaning of Sec.  
1.652(b)-3(b) (other deductions) are allocated in a manner consistent 
with the rules in Sec.  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-of-living adjustment as outlined in 
Sec.  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 non-S portion of the ESBT must 
take into account any QBI and other items from any other entities or 
assets owned by the ESBT. See Sec.  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 Sec.  1.643(f)-
1 of the regulations.
    (vi) The following example illustrates the application of paragraph 
(d) of this section.


[[Page 40929]]


    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 wholly-
owned 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 Sec.  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 Sec.  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 Sec.  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 
Sec.  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 Sec.  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 
tax-exempt 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 Sec.  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 Sec.  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 x 
$76,500), limited under the W-2 wage limitation to $20,000 (50% x 
$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.
0
Par. 9. Section 1.643(f)-1 is added to read as follows:


Sec.  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 non-income 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

[[Page 40930]]

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