10 Questions: Clarity On 199A – A Discussion on the Proposed Regulations
On August 8, 2018, the U.S. Treasury issued proposed regulations intended to clarify the newly enacted Section 199A, a complex tax code section that allows a tax deduction of up to 20% of the income from many types of domestic businesses. This new deduction is expected to impact millions of taxpayers. The proposed regulations address many questions raised by the new law, and although the regulations are only in proposed form, taxpayers are permitted to rely on them until final regulations are issued.
Below are a few of the questions asked by attendees of our recent webinar, with answers provided by our CohnReznick subject matter experts: Director David Patch, and Senior Manager Daniel King.
A. Unfortunately, the IRS takes the position that partners cannot be employees of their own partnership, so having the partnership attempt to pay W-2 wages to a partner would not be an option.
In addition, any guaranteed payments received for services provided to the partnership are not eligible for the Section 199A deduction. Consider possibly taking a larger allocable share of the partnership’s income in lieu of a guaranteed payment since an allocation of partnership income may qualify for the deduction.
A. If a trade or business generates qualified business income (QBI), but pays no W-2 wages, the limitation based on 50% of W-2 wages will be zero. However, there is an alternative limitation based on 25% of W-2 wages and 2.5% of the Unadjusted Basis Immediately After Acquisition (UBIA) of qualified property. A business holding commercial real estate will typically have a large amount of qualified property, and that may produce a sufficient alternative limitation to support the Section 199A deduction. If the deduction is still limited, there may be other options.
Note that if your taxable income is below, or within, the phase-in range, the limitation may not apply, or, may apply only in part. Aggregating businesses where allowable may also increase the Section 199A deduction because the W-2 wages and UBIA of the aggregated businesses are combined. Also, you may consider changing the way the properties are serviced to allow the businesses to claim their own W-2-based wage deductions.
Any advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues. Nor is it sufficient to avoid tax-related penalties. This has been prepared for information purposes and general guidance only and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.