Long Awaited Section 199A Proposed Regulations Are Generally Favorable to Taxpayers

(Parker Tax Publishing August 2018)

BREAKING NEWS: On August 8, the IRS released proposed regulations on the Code Sec. 199A qualified business income deduction. The proposed rules, which run to 184 pages, address many issues that had been of concern to practitioners, such as the definition of a "specified trade or business," the calculation of qualified business income flowing through to multiple entities, the treatment of wages paid to employees through third parties, and the definition of "reputation or skill." The rules allow for grouping of related trades or businesses for purposes of applying Code Sec. 199A and provide for narrow applicability of Code Section 199A's "reputation or skill" clause. The IRS separately issued a proposed revenue procedure addressing the calculation of W-2 wages for purposes of the W-2 wage limitation on the deduction. REG-107892-18; Notice 2018-64.

Some of the more significant provisions in the proposed regulations include:

(1) allowing taxpayers to aggregate trades or businesses, other than a specified service business, for purposes of applying Code Sec. 199A;

(2) allowing a business that pays wages to a common law employee through a third-party to count such wages as being paid by the business in applying the W-2 wage limitation;

(3) for purposes of determining whether a trade or business is a specified service trade or business (SSTB), providing "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;

(4) limiting the meaning of the "reputation or skill" clause to fact patterns in which the individual or relevant passthrough entity (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); and

(5) providing a de minimis rule for a specified service trade or business (SSTB) so that it is not considered a SSTB, and is thus eligible for the deduction, if gross receipts are $25 million or less and less than 10 percent of gross receipts of the trade or business is attributable to the performance of services in an SSTB.

FOR AN IN-DEPTH REPORT on the proposed regulations, see Special Tax Reform Article to be published on August 13, 2018.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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