Final Regulations for 199A
On January 18, 2019, the Treasury Department issued final regulations governing the qualified business income deduction under §199A. For tax years that end in calendar year 2018, taxpayers can rely on the final regulations or on the proposed regulations (in their entirety) that were issued in August of 2018.
In many ways, the final regulations mirror the proposed regulations. However, the following are some important differences and/or noteworthy provisions that are contained in the final regulations.
Definition of net capital gain for taxable income limit (step #3 in our seminar): The final regulations indicate that adjusted taxable income (used in computing the taxable income limit in the step 3 that was discussed in our seminar) is defined as taxable income minus qualified dividends and minus the excess of long-term capital gains over short-term capital losses.
This definition differs from the definition of adjusted taxable income that was provided by the IRS in its draft instructions for Form 1040 and its draft version of Publication 535, Business Expenses. In those draft versions, the IRS had defined adjusted taxable income as taxable income minus all capital gains (short- and long-term) and minus qualified dividends.
As a result of this change, it is expected that the IRS will change the definition of adjusted taxable income in the worksheet included in the instructions for Form 1040 and in the worksheet included in Publication 535 when it issues the final versions of each.
Reductions of Qualified Business Income: The final regulations indicate that qualified business income must be reduced by the deduction for one-half of the self-employment tax, the self-employed health insurance deduction and the deduction for self-employed retirement account contributions, to the extent that such deductions relate to an activity that produces qualified business income.
Aggregation Election: The final regulations permit a passthrough entity to aggregate trades or businesses that it operates directly (or through lower tier passthrough entities) at the entity level. The proposed regulation allowed the aggregation election to be made only by individuals at the 1040 level. This new rule allows the election to be made at either the entity level or the 1040 level.
Separately, the final regulations indicate that, as a general rule, the aggregation election cannot be made on an amended return when no aggregation was made on the originally-filed return; however, for the 2018 tax year only, the final regulations permit an aggregation election on an amended return where no election had been included on the originally-filed return.
Specified Service Trades or Businesses: The final regulations provide certain examples with fact patterns designed to clarify whether assisted-living facilities, outpatient surgical centers and retail pharmacies meet the definition of the field of health for the purpose of the definition of a specified service trade or business.
In addition, the final regulations remove the rule for incidental services. (These rules were discussed on page 18 and in Example 6 on pages 19-20 of the Tax Year 2018 M+O=CPE Individual Tax Year-End Workshop Reference Book.)