Source: https://www.millerchevalier.com/publication/final-section-199a-regulations-offer-clarity-questions-and-opportunity
Timestamp: 2019-04-19 14:26:50+00:00

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What's a trade or business?
QBI must be derived from a qualifying (non-SSTB) trade or business. One pressing issue many commenters identified is how to determine whether a trade or business exists. Should the determination be made at the RPE (e.g., partnership) level, or at the individual-owner level? Can there be a trade or business for purposes of section 199A even where the taxpayer's activity does not rise to the level of being a trade or business for purposes of section 162, the standard set forth in the Proposed Regulations?
The proposed safe harbor will be a relief to some taxpayers in the rental industry. Nevertheless, some taxpayers and RPEs – particularly those enterprises that consist only of a single, low-maintenance property – will struggle to meet the annual 250-hour requirement, while others will easily meet the safe harbor, but likely already will have engaged in a sufficient level of activity to meet the general section 162 test regardless.
The Proposed Regulations had provided explanations and examples with respect to the categories of SSTBs enumerated above, but in doing so had left many questions.21 The Treasury and IRS provided significant clarity in the Final Regulations, in some cases taxpayer favorable and in some cases not. Notably, the Final Regulations rejected the suggestions of many commenters to narrowly circumscribe the SSTB definitions (where relevant) to those set forth in regulations under section 448.22 Several commenters had advocated for this approach on the grounds that the Conference Report to the TCJA had referenced these regulations (which relate to when certain taxpayers may use the cash method of accounting) as providing a "similar list of service trades or businesses" and referred to specifically when describing enumerated SSTB fields.23 The Preamble states that the intent of section 448 and section 199A are very different, and that it was therefore consistent with the TCJA and its legislative history "to expand the definitions" of an SSTB beyond those provided in the section 448 regulations. The Treasury and IRS made the distinction partially on the grounds that section 199A looks to "the trade or business of performing services involving one or more of the listed fields, and not the performance of the services themselves [as is the case with section 448] in determining whether the trade or business is an SSTB."24 In other words, the Final Regulations conclude that a business "involving" the performance of services in a certain field is broader than the direct performance of services in that field.
For example, the Final Regulations define the performance of services in the field of performing arts to include the services of any individuals who "participate in the creation of performing arts" such as directors and writers in addition to the list set forth in Treas. Reg. § 1.448-1T(e)(4)(iii) and cited in the legislative history to the TCJA ("the provision of services by actors, actress, singers, musicians, entertainers, and similar artists in their capacity as such").25 Similarly, the Final Regulations rejected limiting the performance of services in the field of athletics to the limitations provided in Treas. Reg. § 1.448-1T(e)(4)(iii), which generally would require (by analogy) that the service must be performed by an athlete in his or her capacity as such.26 Hence, professional sports franchises owned through RPEs or directly are SSTBs because they involve services performed in the field of athletics, and owners of these teams will not be able to avail themselves of the section 199A deduction.
Where a business provides qualifying services along with services in an SSTB field, the Final Regulations follow the bright line rule that was set forth in the Proposed Regulations. That is, if gross receipts attributable to the SSTB services constitute less than five percent of the annual gross receipts of the business (10 percent for businesses that have total annual gross receipts of $25 million or less), then the business is not considered to be an SSTB.27 However, if the five (or 10) percent threshold is exceeded, then the business will be an SSTB in its entirety, and none of the income derived therefrom will be eligible for the section 199A deduction unless its owners are below the relevant income threshold.
In the "economic analysis" section of the Preamble pursuant to Executive Orders 13563 and 12866, the Treasury and IRS stated that "the de minimis thresholds were set at levels to balance the desire of the Treasury Department and the IRS to allow the deduction for trades or businesses with very small amounts of SSTB activity with the intent of the legislation to disallow the deduction for trades or businesses with SSTB activity."28 The Treasury and IRS rejected comments that suggested that the deduction could be claimed on the portion of the business that did not involve SSTB services.
Businesses organized as RPEs and their owners (along with their advisors) should study the Final Regulations closely. While the Treasury and IRS intended the Final Regulations to provide certainty for taxpayers filing their 2018 returns, significant ambiguities remain, and many determinations regarding the availability and amount of a taxpayer's section 199A deduction are highly dependent on the underlying facts and circumstances. Miller & Chevalier participated substantially in the development of the Final Regulations, and stands ready to assist taxpayers with the interpretative, planning, and controversy issues that are sure to arise with respect to the Final Regulations.
1RIN 1545-BO71. The Final Regulations were accompanied by proposed regulations relating to the treatment of REIT dividends under section 199A (REG-134652-18).
2An Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018, Pub. L. 115-97, § 11011 (2017). Congress amended section 199A with respect to issues affecting cooperatives in the Consolidated Appropriations Act of 2018, Pub. L. 115-141, § 101 (2018). All section references are to the Internal Revenue Code of 1986, as amended and currently in effect.
8See https://www.regulations.gov/docket?D=IRS-2018-0021 for all comments and a list of witnesses that provided live testimony before representatives of the Treasury and IRS on October 16, 2018. The Proposed Regulations appear in the federal register at 83 Fed. Reg. 40884 (Aug. 16, 2018).
12Preamble at 49. See Treas. Reg. § 1.199A-1(d)(2)(iv)(A) (referencing "trades or business operated through RPEs" in the determination of QBI.).
14Preamble at 13 citing Commissioner v. Groetzinger, 480 U.S. 23 (1987) and Higgins v. Commissioner, 312 U.S. 212 (1941).
19Notice 2018-07, § 6. For taxable years beginning after December 31, 2022, the 250-hour requirement need only be met for any three of the five consecutive taxable years that end with the taxable year at issue for an enterprise held for five years or more.
21See Prop. Treas. Reg. § 1.199A-5(b)(2).
22See Treas. Reg. § 1.448-1T(e)(4).
23H. Rep. No. 115-466, at 216-17, n.44-46 (Dec. 15, 2017) (Conf. Rep.).
24Preamble at 75 (emphasis added).
25Treas. Reg. § 1.199A-5(b)(2)(vii); Preamble at 83.
26Treas. Reg. § 1.199A-5(b)(2)(vii), (b)(3)(vii); Preamble at 86-87.
31Taxpayers should consult their advisors and be wary of anti-abuse rules in Treas. Reg. § 1.199A-5 as well as potentially applicable common law doctrines. In particular, taxpayers should consider the anti-abuse rule of Treas. Reg. § 1.199A-5(c)(2), which states that if an otherwise qualifying trade or business provides property or services to an SSTB and there is 50 percent or more common ownership between that trade or business and the SSTB, the portion of the otherwise qualifying trade or business providing property or services to the 50 percent or more commonly-owned SSTB will be treated as a separate SSTB with respect to the related parties.

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