IRS finalizes additional Section 199A regs

Tax Hot Topics newsletter The IRS released final regulations (TD 9899) on June 25 concerning the deduction for qualified business income (QBI) under Section 199A. The final regulations generally adopt proposed regulations issued in February 2019 that provided guidance on the treatment of previously suspended losses included in QBI and the Section 199A treatment of taxpayers that hold interests in a regulated investment company (RIC) or certain trusts, with certain clarifications and modifications, and provide additional clarity on the computation of a Section 199A deduction.

The final regulations adopt the proposed regulations’ treatment of previously suspended losses as losses from a separate trade or business (as opposed to the trade or business that generated the loss) for purposes of computing QBI in the year in which the loss is taken into account in determining taxable income. They also clarify that the provisions governing previously suspended losses apply to losses disallowed under Section 461(l) and illustrate the treatment of suspended losses from a specified service trade or business on the computation of QBI.

The final regulations also finalize, without significant changes, the rules in the proposed regulations under which a RIC may pay dividends that a shareholder in the RIC may treat in the same manner as the shareholder would treat the underlying item of income or gain if the shareholder realized it directly. This “conduit treatment” allows RIC shareholders to benefit from the Section 199A deduction as if they owned an interest in a qualifying entity directly. The final regulations do not provide such “conduit treatment” with respect to publicly traded partnership interests held by RICs.

The final regulations provide that for purposes of Section 199A, separate shares trusts will be treated as a single trust and the computation of items relevant to the Section 199A deduction (i.e., QBI, taxable income, and W-2 wages) occurs at the trust level. Rules under which distributions from a charitable remainder trust may be eligible for the Section 199A deduction were also finalized.

Ultimately, the final regulations provide clarity on a few issues that were outstanding after the first set of Section 199A final regulations was issued in February 2019. Although the decision not to extend conduit treatment to publicly traded partnership interests held by RICs may disappoint some taxpayers, the preamble to the final regulations indicates that this issue may be revisited in the future.

Grace Kim
Principal, Partnerships
Washington National Tax Office 
T +1 202 521 1590

Jose Carrasco
Senior Manager, Partnerships
Washington National Tax Office 
T +1 202 521 1552

Whit Cocanower
Washington National Tax Office
T +1 202 521 1541

Sarah Barlow
Senior Associate
Washington National Tax Office
T +1 202 521 1505

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