GUIDANCE FOR PROPOSED 199A REGULATIONS€¦ · requirements are satisfied, including the following...

BDO USA, LLP, a Delaware limited liability partnership, is the U.S. member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms.

GUIDANCE FOR PROPOSED 199A REGULATIONS

August 20, 2018

2

JEFF BILSKYNational Tax Office Partner & Technical

Practice Leader, Partnerships

[email protected]

TOMMY ORRNational Tax Office

Senior Manager

[email protected]

KEVIN ANDERSONNational Tax Office

Partner

[email protected]

TRACI KRATISH-PUMO

National Tax Office Managing Director

[email protected]

With you today

3

Agenda

Section 199A Proposed Regulations – Initial Observations

Overview of Qualified Business Income

Determination of wages attributable to QBI

Allocation of UBIA of Qualified Property Attributable to QBI

Aggregation of Trades or Businesses

Specified Service Trade or Business

Reporting Requirements

Next Steps

4

Section 199A Proposed RegulationsInitial Observations

5

Section 199A DeductionIn General

The Section 199A deduction applies to years beginning after December 31, 2017 and for tax years ending before January 1, 2026

Taxpayers other than C corporations are generally eligible to claim a deduction equal to the lesser of:1) The taxpayer’s combined qualified business income amount or2) 20 percent of the taxpayer’s taxable income in excess of capital gains

Eligible taxpayers should include: Individuals, Trusts, Estates, Partnerships, S Corporations, and Sole Proprietorships

6


Taxpayers “Combined Qualified Business Income Amount” is equal to the sum of: 1) 20 percent of the taxpayer’s qualified business income with respect to each

qualified trade or business plus 2) 20 percent of the aggregate amount of qualified real estate investment trust

dividends and qualified publicly traded partnership income

The QBI Deduction cannot exceed 20 percent of the taxpayer’s taxable income, excluding net capital gain, recognized for the taxable year

QBI is determined separately for each qualified trade or business

QBI is generally defined to mean items of income, gain, loss, and deduction generated from an effectively connected trade or business

7


Specified Services Exclusion A qualified trade or business generally includes any trade or business except for

a specified service trade or business (SSTB)

QBI generated from an SSTB is subject to exclusion for taxpayers with taxable income exceeding certain thresholds: $315,000 (joint filers) and $157,500 (other filers)

The SSTB exclusion is subject to phase-in for taxpayers with taxable income between $315,000 - $415,00 (joint filers) and $157,500 - $207,500 (other filers)

8


Specified Services Exclusion An SSTB includes any trade or business involving the performance of services in

the fields of:• Health, law, accounting, actuarial sciences, performing arts, consulting, athletics,

financial services, brokerage services, • Any trade or business where the principal asset of such trade or business is the

reputation or skill of one or more of its employees or owners, or• Which involves the performance of services that consist of investing and investment

management trading, or dealing in securities, partnership interests, or commodities

9

Section 199A DeductionW-2 Wages & Qualified Property Limitation

W-2 Wages & Qualified Property Limitation The 20% deduction for QBI from each trade or business is limited to the greater

of:• 50% of the W-2 Wages paid with respect to the trade or business generating the QBI or• 25% of the W-2 Wages paid with respect to the trade or business generating the QBI

plus 2.5% of the unadjusted basis immediately after acquisition (UBIA) of qualified property attributable to the trade or business generating the QBI

10

Section 199A DeductionProp. Reg. Section 1.199A-1

Operational Rules Important definitions including Computational rules where taxable income does not exceed the Threshold

Amount• Basic calculation• Negative amounts (QBI and/or REIT/PTP income)

Computational rules where taxable income exceeds the Threshold Amount• Basic calculation• Netting and carryover rules• Negative amounts (QBI and/or REIT/PTP income)

11


Operational Rules Determination of W-2 Wages

• Allocation of wages to a trade or business• Allocation of wages to QBI

Determination of UBIA of Qualified Property• General rules• Special situations

12


Qualified Business Income, REIT Dividends, & PTP Income Definition of QBI – specific inclusions and exclusions Definition of REIT dividends and PTP income Anti-abuse rules

13


Aggregation General aggregation rules provide flexibility but exclude SSTBs Aggregation occurs at the individual taxpayer level, not the entity level Binding election Reporting requirements

14


Specified Service Trade or Business Defines the meaning of each listed SSTB De minimis rules based on gross receipts “Incidental” rule relating to non-SSTBs Aggregation rule for non-SSTBs providing products or services to a related SSTB Performance of services as an employee

15


Relevant Passthrough Entities, PTPs, Trusts, and Estates Order of steps in computing QBI Reporting rules for QBI Computational and reporting rules for PTPs Application to trusts, estates, and beneficiaries

16

Overview of Qualified Business Income under the Proposed Regulations

17

Section 199A DeductionOverview of QBI

Introduction to Qualified Business Income Qualified business income is determined for each qualified trade or business of the

taxpayer. Thus, a single entity may conduct more than one qualified trade or business. In the case of a trade or business conducted through an S corporation or a partnership,

the section 199A deduction is computed at the shareholder or partner level. Accordingly, an owner may have a single qualified trade or business conducted through multiple pass-through entities.

The identification of qualified trades or businesses under section 199A will not necessarily follow the “activity” rules under section 469.

No specific definition of “trade or business” is provided under section 199A (with one exception), instead following the section 162 definition.

An exception is provided for the rental or licensing of tangible or intangible property to a commonly controlled business. If such activity is not otherwise a section 162 trade or business, it will be treated as a trade or business for purposes of section 199A.

18


Basic QBI Principles QBI means, for any taxable year, the net amount of qualified items of income, gain, deduction, and

loss with respect to any qualified trade or business of the taxpayer. In order to be treated as “qualified items,” etc., two requirements must be satisfied:

• The items must be effectively connected with the conduct of a trade or business within the United States, within the meaning of section 864(c), and

• The items must be included or allowed in determining taxable income for the year. Any individual subject to tax in the United States may qualify for the deduction, assuming all other

requirements are satisfied, including the following persons:• A nonresident alien who is a partner in a partnership with an effectively connected trade or

business;• A citizen or resident alien (taxable on worldwide income) with respect to any qualified trade or

business conducted directly or through a disregarded entity, an S corporation, or a partnership. QBI does not include wages, reasonable compensation paid by a qualified trade or business for services

rendered, guaranteed payments described in section 707(c) for services rendered by a partner, and payments described in section 707(a) for services rendered by a partner in a non-partner capacity.

Qualified REIT dividends and qualified PTP income are treated separately.

19


Treatment of Specific Items for QBI Purposes QBI includes gains treated as ordinary income under section 751(a) (from the sale or

exchange of a partnership interest) or section 751(b) (from a partnership distribution) to the extent that the other requirements of section 199A are met.

Guaranteed payments for the use of capital under section 707(c) are not QBI, but the partnership’s deduction of such payments may constitute QBI if the other requirements of section 199A are met.

Section 481(a) adjustments (relating to accounting method changes) attributable to a trade or business may be QBI, provided that the method change was made for a taxable year that ends after December 31, 2017.

Previously suspended losses are generally QBI in the year in which they are deducted. Typical suspended losses include the following:• Section 465 at-risk losses;• Section 469 passive activity losses;• Section 704(d) basis limitations for partnership interests; and• Section 1366(d) basis limitations for S corporations.

20


Net Operating Losses and QBI A net operating loss deductible under section 172 is not taken into account in

determining QBI because net negative QBI is accounted for separately under section 199A(c)(2).

Section 461(l) imposes a new limitation of $250,000 ($500,000 for MFJ) on the annual deduction of net business losses of non-corporate taxpayers. Any amount in excess of this limitation is carried forward to the next taxable year as a net operating loss under section 172.

Because a loss disallowed under section 461(l) is not deductible in the year sustained, it is not allowable in determining QBI for that year. Thus, to the extent that a taxpayer’s net operating loss includes amounts carried forward under section 461(l), the loss is included in QBI, to the extent the other requirements of section 199A are met.

21


Other Specific QBI Exclusions QBI does not include any item of short-term capital gain, long-term capital gain, short-

term capital loss, or long-term capital loss. The treatment of section 1231 gains and losses was not specified in the statute, but the

proposed regulations clarified that the treatment of such items depends on their ultimate classification in the hands of each taxpayer:• For a taxpayer with net section 1231 gains, all such gains and losses are long-term capital gains

and losses, and thus excluded from QBI.• For a taxpayer with net section 1231 losses, all such gains and losses are ordinary gains and losses,

thus included in QBI to the extent that all other requirements are satisfied.• The proposed rules presumably extend to gains characterized as ordinary under section 1231(c)

(five-year lookback rule).

Interest income is subject to the following rules in determining QBI:• To the extent it is properly allocable to a trade or business, such as interest received on accounts

or notes receivable, or loans made by the trade or business, it is QBI.• Interest income received on working capital, reserves, or similar accounts is not QBI.

22


Treatment of Reasonable Compensation for QBI Purposes Wages received by an individual are not QBI. Guaranteed payments for services provided by a partner under section 707(c)

are not QBI for the partner. Payments to a partner for services rendered in a non-partner capacity under

section 707(a) are not QBI for the partner. Section 199A(c)(4)(A) provides that QBI does not include “reasonable

compensation paid to the taxpayer by any qualified trade or business of the taxpayer for services rendered with respect to the trade or business.” The proposed regulations clarified concerns about the scope of this provision, limiting it to shareholder-employees of an S corporation. See Rev. Rul. 74-44.

23


Items Not Specifically Covered by Proposed Regulations The above-the-line deduction for one-half of an individual’s self-employment

tax liability Qualified retirement contributions Unreimbursed partner business expenses Allocation of section 1231 losses if some of the losses for a taxable year are QBI

while others do not relate to a trade or business Self-employed health insurance deduction Unrecaptured 1250 gains

24


Allocation of Items Among Directly-Conducted Trades or Businesses An individual or an RPE may directly conduct two or more trades or businesses. QBI must be determined for each qualified trade or business. RPEs with QBI must allocate the items of income, gain, deduction, and loss

among the trades or businesses to which they are allocable using a reasonable method that is consistent with the purposes of section 199A.

Allocation methods may vary from one item to the next, but must be consistently applied from year to year and must clearly reflect income.

Suggested reasonable methods may include direct tracing, allocations based on gross income, or other methods, depending on the facts and circumstances of each trade or business.

25


Fiscal-Year Relevant Passthrough Entities Section 199A applies to taxable years beginning after December 31, 2017. Because section 199A is applied at the owner level for S corporations and

partnerships, questions had been raised about the application of the provision for fiscal-year entities with calendar-year owners.

The proposed regulations clarify that the taxpayer (S corporation shareholder or partner) takes items of QBI, UBIA, and W-2 wages of a passthrough entity into account for the taxable year of the taxpayer in which or with which the entity’s taxable year ends.

Accordingly, for an entity with a taxable year that began in the calendar year 2017 and ends in the calendar year 2018, all of the entity’s items are taken into account in determining a calendar-year owner’s QBI, UBIA, and W-2 wages for 2018.

26


Treatment of Electing Small Business Trusts An electing small business trust (ESBT) is subject to tax under section 641(c) on its “S

portion,” consisting solely of the following items:• Items of the S corporation required to be taken into account under section 1366;• Gain or loss from the disposition of S corporation stock;• State or local income taxes and administrative expenses properly allocable to the S portion; and• Interest expense on indebtedness incurred to acquire S corporation stock.

Section 199A(f)(1)(B) provides certain rules for the application of section 199A to estates and trusts.

Because section 199A is applied at the shareholder level and is not taken into account as an S corporation item under section 1366, commentators had raised questions about whether an ESBT would be entitled to claim the section 199A deduction.

Prop. Reg. § 1.199A-6(d)(3)(iv) confirms that an ESBT is entitled to the deduction, with the S portion required to take into account only the QBI and other items of the S corporation to the extent properly allocable to the S portion (thus excluding the grantor portion and any non-S portion).

27

Determination of Wages Attributable to QBIProp. Reg. Section 1.199A-2

28

Section 199A DeductionDetermination of Wages Attributable to QBI

There is a three-step process for determining the wages paid with respect to a trade or business that are properly allocable to QBI:1) Each individual or RPE must determine its total W-2 wages paid for the taxable year 2) Each individual or RPE must allocate its W-2 wages among its trades or businesses (if

there is more than one)3) Each individual or RPE must determine the amount of wages under #2 above that are

allocable to the QBI of the trade or business

29


Step 1: Determine Total Wages Paid Notice 2018-64 – Proposed revenue procedure provides three methods for

calculating total W-2 wages:1) Unmodified Box Method – Lesser of:

o Total box 1 wages for all employees, oro Total box 5 wages for all employees

2) Modified Box 1 Method – Box 1 wages for all employees are adjusted by the following amounts:o Subtract amounts included in box 1 that are not wages for Federal income tax withholding

purposes (i.e. supplemental unemployment compensation benefits)o Add amounts reported in box 12 that are properly coded D, E, F, G and S

• D, E, F, G, & S are 401(k), 403(b), 408(k)(6), 457(b), & 408(p) deferrals respectively

3) Tracking Wages Method – Total amount of wages subject to Federal income tax withholding plus amounts reported in box 12 that are properly coded as D, E, F, G and S

Method #1 is the least burdensome but methods #2 and #3 are more accurate

30


Step 1: Determine Total Wages Paid Under section 199A(b)(4)(A) W-2 Wages are total wages under section 3401(a),

elective deferrals under section 402(g)(3), compensation deferred under section 457, and any Roth contributions under section 402A • Notice 2018-64 provides for some flexibility in this determination

In order for any wages to count they must be included on forms filed with the Social Security Administration (SSA)• Information returns must be filed within 60 days of the due date to qualify as filed

with the SSA (special rules exist for corrected returns)

Wages must be paid to employees of the taxpayer for employment by the taxpayer• If common law employees of the taxpayer are paid by a third party, the taxpayer may

still claim their wages but the third party cannot

Special rules will also apply when a trade or business is acquired or disposed of during the year and when there is a short taxable year

31


Step 2: Allocate Wages to Multiple Trades or Businesses The individual or RPE must allocate wages among their multiple trades or

businesses using a reasonable method based on all facts and circumstances• The method must be consistently applied from one taxable year to the next• The method must clearly reflect income and expenses for each trade or business• While the same method used for wages doesn’t have to be used for allocating other

items between trades or businesses, the overall combination of methods must also be reasonable based on all facts and circumstances

• The books and records maintained for a trade or business must be consistent with the method used for these allocations

32


Step 3: Allocate Wages to QBI Once wages have been allocated to a trade or business they can be allocated to

QBI to the extent the wage expense is taken into account in calculating the QBI for that trade or business

For RPEs the wage expense must then be reported to each owner for each trade or business:• For partnerships each partner’s share of W-2 wages is based on their allocable share

of wage expenses• For S corporations each shareholder’s share of W-2 wages is based on their pro rata

share of wage expenses

33

Allocation of UBIA of Qualified Property to QBIProp. Reg. Section 1.199A-2

34

Section 199A DeductionAllocation of UBIA of Qualified Property to QBI

Qualified property must meet all of the following criteria:• be tangible and have an allowance for depreciation under section 167,• be held by, and available for use in, a qualified trade or business at the close of the

taxable year,• be used in the production of QBI during the taxable year, and• the depreciable period cannot have ended before the close of the taxable year.

Depreciable period is defined as the later of:• 10 years after the placed in service date, or• The last day of the last full year in the applicable recovery period under section 168

(without regard to section 168(g))

An anti-abuse rule provides that property is not qualified property if it is acquired within 60 days of the end of the taxable year and disposed of within 120 days, without being used in the trade or business for at least 45 days

35


Depreciable period for section 1031 exchange property: Generally will be treated as two separate properties, the carryover portion

(exchanged basis) and the new portion (excess basis)• For the carryover portion, the depreciable period starts when the relinquished

property was originally placed in service• For the new portion, the depreciable period starts when the replacement property is

placed in service

If the election under Treas. Reg. § 1.168(i)-6(i)(1) is made, then the depreciable period for both the exchanged basis and the excess basis starts on the placed in service date of the replacement property

36


Unadjusted Basis Immediately after Acquisition (UBIA) Generally this will be unadjusted basis on the placed in service date Basis is not reduced for depreciation, section 179, tax credits, etc. Basis is reduced for use during the year other than in the trade or business Does not include special basis adjustments under sections 734(b) and 743(b) For contributions under sections 721 and 351 basis will generally be the

amounts determined under sections 723 and 362, respectively

37


The UBIA is allocated to partners and shareholders of RPEs as follows:• For qualified property currently generating tax depreciation

o The partner or shareholder’s share of UBIA is the same proportion as their share of tax depreciation bears to the entity’s total tax depreciation for that property

• For qualified property not currently generating tax depreciation:o For partners their share of UBIA is based on how gain would be allocated to them pursuant to

sections 704(b) and 704(c) if the qualified property were sold for cash equal to its fair market value

o For shareholders their share of UBIA is based on the ratio of shares held by them in the S corporation to total shares of the S corporation

Implications:• Due to bonus depreciation and section 179 UBIA is likely to include significant

amounts of fully depreciated property• Proper capital account maintenance will be critical to properly allocating UBIA for

partnerships

38

Aggregation of Trades or Businesses Prop. Reg. Section 1.199A-4

39

Section 199A DeductionAggregation of Trade or Business

An individual or RPE may be engaged in more than one trade or business. Unless the trades or businesses are aggregated, each trade or business is a separate trade or business for purposes of applying the Wage and Capital Limitations.

Presenter

Presentation Notes

Differs from aggregation rules under IRC 469

40


Trades or businesses may be aggregated only if an individual can demonstrate that:

(i) The same person or group of persons, directly or indirectly, owns 50 percent or more of each trade or business to be aggregated, meaning in the case of such trades or businesses owned by an S corporation, 50 percent or more of the issued and outstanding shares of the corporation, or, in the case of such trades or businesses owned by a partnership, 50 percent or more of the capital or profits in the partnership;

(ii) The ownership exists for a majority of the taxable year in which the items attributable to each trade or business to be aggregated are included in income;

(iii) All of the items attributable to each trade or business to be aggregated are reported on returns with the same taxable year, not taking into account short taxable years;

(iv) None of the trades or businesses to be aggregated is a SSTB; and

Presenter

Presentation Notes


41


(v) The trades or businesses to be aggregated satisfy at least two of the followingfactors (based on all of the facts and circumstances):

(A) The trades or businesses provide products and services that are the same or customarily offered together.

(B) The trades or businesses share facilities or share significant centralized business elements, such as personnel, accounting, legal, manufacturing, purchasing, human resources, or information technology resources.

(C) The trades or businesses are operated in coordination with, or reliance upon, one or more of the businesses in the aggregated group (for example, supply chain interdependencies).

Presenter

Presentation Notes


42


An individual may aggregate trades or businesses operated directly and the individual’s share of QBI, W-2 wages, and UBIA of qualified property from trades or businesses operated through RPEs.

Multiple owners of an RPE need not aggregate in the same manner. For those trades or businesses directly operated by the individual, the

individual computes QBI, W-2 wages, and UBIA of qualified property for each trade or business before applying these aggregation rules.

If an individual aggregates multiple trades or businesses, the individual must combine the QBI, W-2 wages, and UBIA of qualified property for all aggregated trades or businesses for purposes of applying the Wage and Capital Limitations.

Presenter

Presentation Notes


43


Family attribution• An individual is considered as owning the interest in each trade or business owned, directly or

indirectly, by or for:o The individual’s spouse (other than a spouse who is legally separated from the individual under

a decree of divorce or separate maintenance), and o The individual’s children, grandchildren, and parents.

Once an individual chooses to aggregate two or more trades or businesses, the individual must consistently report the aggregated trades or businesses in all subsequent taxable years.

An individual may add a newly created or newly acquired (including through nonrecognition transfers) trade or business to an existing aggregated trade or business.

In a subsequent year, if there is a change in facts and circumstances such that an individual’s prior aggregation of trades or businesses no longer qualifies for aggregation under the rules of this section, then the trades or businesses will no longer be aggregated within the meaning of this section, and the individual must reapply the aggregation rules to determine a new permissible aggregation (if any).

Presenter

Presentation Notes


44


Required annual disclosure. • For each taxable year, individuals must attach a statement to their returns identifying

each trade or business aggregated. The statement must contain:o description of each trade or business;o The name and EIN of each entity in which a trade or business is operated;o Information identifying any trade or business that was formed, ceased operations, was

acquired, or was disposed of during the taxable year; ando Such other information as the Commissioner may require in forms, instructions, or other

published guidance.

If an individual fails to attach the statement required, the Commissioner may disaggregate the individual’s trades or businesses.

Presenter

Presentation Notes


45

Specified Service Trade or BusinessProp. Reg. Section 1.199A-5

46

Section 199A DeductionSpecified Service Trade or Business (SSTB)

If a trade or business is an SSTB, no QBI, W-2 wages, or UBIA of qualified property from the SSTB may be taken into account by any individual whose taxable income exceeds the phase-in range, even if the item is derived from an activity that is not itself a specified service activity

If a trade or business conducted by an RPE is an SSTB, this limitation applies to any direct or indirect individual owners of the business, regardless of whether the owner is passive or participated in any specified service activity

The SSTB limitation does not apply to individuals with taxable income below the threshold amount

A phase-in rule applies to individuals with taxable income within the phase-in range, allowing them to take into account a certain “applicable percentage” of QBI, W-2 wages, and UBIA of qualified property from an SSTB

A direct or indirect owner of a trade or business engaged in the performance of a specified service is engaged in the performance of the specified service for purposes of section 199A and this section, regardless of whether the owner is passive or participated in the specified service activity

47


Health Law Accounting Actuarial science Performing arts Consulting Athletics Financial services Brokerage services Investing and investment

management Trading

Dealing in securities (as defined in section 475(c)(2)), partnership interests, or commodities (as defined in section 475(e)(2))

Any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees or owners

Presenter

Presentation Notes

SSTB definitions may not be taken into account for purposes of applying any provision of law or regulation other than section 199A and the regulations thereunder except to the extent such provision expressly refers to section 199A(d) or the Regs thereunder.

48


Health: The performance of services in the field of health means the provision of medical services by individuals such as physicians, pharmacists, nurses, dentists, veterinarians, physical therapists, psychologists and other similar healthcare professionals performing services in their capacity as such who provide medical services directly to a patient (service recipient).

The performance of services in the field of health does not include the provision of services not directly related to a medical services field, even though the services provided may purportedly relate to the health of the service recipient.

For example, the performance of services in the field of health does not include the operation of health clubs or health spas that provide physical exercise or conditioning to their customers, payment processing, or the research, testing, and manufacture and/or sales of pharmaceuticals or medical devices.

49


Law: The performance of services in the field of law means the performance of services by individuals such as lawyers, paralegals, legal arbitrators, mediators, and similar professionals performing services in their capacity as such. The performance of services in the field of law does not include the provision of services that do not require skills unique to the field of law, for example, the provision of services in the field of law does not include the provision of services by printers, delivery services, or stenography services.

Accounting: The performance of services in the field of accounting means the provision of services by individuals such as accountants, enrolled agents, return preparers, financial auditors, and similar professionals performing services in their capacity as such.

Actuarial: The performance of services in the field of actuarial science means the provision of services by individuals such as actuaries and similar professionals performing services in their capacity as such.

50


Performing Arts: The performance of services in the field of the performing arts means the performance of services by individuals who participate in the creation of performing arts, such as actors, singers, musicians, entertainers, directors, and similar professionals performing services in their capacity as such.

The performance of services in the field of performing arts does not include the provision of services that do not require skills unique to the creation of performing arts, such as the maintenance and operation of equipment or facilities for use in the performing arts. Similarly, the performance of services in the field of the performing arts does not include the provision of services by persons who broadcast or otherwise disseminate video or audio of performing arts to the public.

51


Consulting: The 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. Consulting includes providing advice and counsel regarding advocacy with the intention of influencing decisions made by a government or governmental agency and all attempts to influence legislators and other government officials on behalf of a client by lobbyists and other similar professionals performing services in their capacity as such.

The performance of services in the field of consulting does not include the performance of services other than advice and counsel, such as sales or economically similar services or the provision of training and educational courses. The determination of whether a person’s services are sales or economically similar services will be based on all the facts and circumstances of that person’s business. Such facts and circumstances include, for example, the manner in which the taxpayer is compensated for the services provided.

Performance of services in the field of consulting does not include the performance of consulting services embedded in, or ancillary to, the sale of goods or performance of services on behalf of a trade or business that is otherwise not an SSTB (such as typical services provided by a building contractor) if there is no separate payment for the consulting services.

52


Athletics: The performance of services in the field of athletics means the performance of services by individuals who participate in athletic competition such as athletes, coaches, and team managers in sports such as baseball, basketball, football, soccer, hockey, martial arts, boxing, bowling, tennis, golf, skiing, snowboarding, track and field, billiards, and racing.

The performance of services in the field of athletics does not include the provision of services that do not require skills unique to athletic competition, such as the maintenance and operation of equipment or facilities for use in athletic events. Similarly, the performance of services in the field of athletics does not include the provision of services by persons who broadcast or otherwise disseminate video or audio of athletic events to the public.

53


Financial Services: The performance of services in the field of financial services means the provision of financial services to clients including managing wealth, advising clients with respect to finances, developing retirement plans, developing wealth transition plans, the provision of advisory and other similar services regarding valuations, mergers, acquisitions, dispositions, restructurings (including in title 11 or similar cases), and raising financial capital by underwriting, or acting as a client’s agent in the issuance of securities and similar services. This includes services provided by financial advisors, investment bankers, wealth planners, and retirement advisors and other similar professionals performing services in their capacity as such.

54


Brokerage: The performance of services in the field of brokerage services includes services in which a person arranges transactions between a buyer and a seller with respect to securities (as defined in section 475(c)(2)) for a commission or fee. This includes services provided by stock brokers and other similar professionals, but does not include services provided by real estate agents and brokers, or insurance agents and brokers.

Investing & Investment Management: The performance of services that consist of investing and investment management refers to a trade or business involving the receipt of fees for providing investing, asset management, or investment management services, including providing advice with respect to buying and selling investments. The performance of services of investing and investment management does not include directly managing real property.

55


Trading: The performance of services that consist of trading means a trade or business of trading in securities (as defined in section 475(c)(2)), commodities (as defined in section 475(e)(2)), or partnership interests. Whether a person is a trader in securities, commodities, or partnership interests is determined by taking into account all relevant facts and circumstances, including the source and type of profit that is associated with engaging in the activity regardless of whether that person trades for the person’s own account, for the account of others, or any combination thereof.

A taxpayer, such as a manufacturer or a farmer, who engages in hedging transactions as part of their trade or business of manufacturing or farming is not considered to be engaged in the trade or business of trading commodities.

56


Dealing in Securities: The performance of services that consist of dealing in securities (as defined in section 475(c)(2)) means regularly purchasing securities from and selling securities to customers in the ordinary course of a trade or business or regularly offering to enter into, assume, offset, assign, or otherwise terminate positions in securities with customers in the ordinary course of a trade or business. A taxpayer that regularly originates loans in the ordinary course of a trade or business of making loans but engages in no more than negligible sales of the loans is not dealing in securities.Dealing in Commodities: The performance of services that consist of dealing in commoditiesmeans regularly purchasing commodities from and selling commodities to customers in the ordinary course of a trade or business or regularly offering to enter into, assume, offset, assign, or otherwise terminate positions in commodities with customers in the ordinary course of a trade or business.Dealing in Partnership Interests: The performance of services that consist of dealing in partnership interests means regularly purchasing partnership interests from and selling partnership interests to customers in the ordinary course of a trade or business or regularly offering to enter into, assume, offset, assign, or otherwise terminate positions in partnership interests with customers in the ordinary course of a trade or business.

57


Reputation or Skill: Any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees or owners means any trade or business that consists of any of the following (or any combination thereof):

(A) A trade or business in which a person receives fees, compensation, or other income for endorsing products or services, (B) A trade or business in which a person licenses or receives fees, compensation or other income for the use of an individual’s image, likeness, name, signature, voice, trademark, or any other symbols associated with the individual’s identity,(C) Receiving fees, compensation, or other income for appearing at an event or on radio, television, or another media format.

The term “fees, compensation, or other income” includes the receipt of a partnership interest and the corresponding distributive share of income, deduction, gain or loss from the partnership, or the receipt of stock of an S corporation and the corresponding income, deduction, gain or loss from the S corporation stock.

58


De minimis rule Gross receipts of $25 million or less. For a trade or business with gross receipts

of $25 million dollars or less for the taxable year, a trade or business is not an SSTB if less than 10 percent of the gross receipts of the trade or business are attributable to the performance of services.

Gross receipts of greater than $25 million. For a trade or business with gross receipts of greater than $25 million for the taxable year, a trade or business is not an SSTB if less than 5 percent of the gross receipts of the trade or business are attributable to the performance of services.

For purposes of determining whether the de minimus test is satisfied, the performance of any activity incident to the actual performance of services in the field is considered the performance of services in that field.

59


Services or property provided to an SSTB An SSTB includes any trade or business that provides 80 percent or more of its

property or services to an SSTB if there is 50 percent or more common ownership of the trades or businesses.

If a trade or business provides less than 80 percent of its property or services to an SSTB within the meaning of this section and there is 50 percent or more common ownership of the trades or businesses, that portion of the trade or business of providing property or services to the 50 percent or more commonly-owned SSTB is treated as a part of the SSTB.

50 percent or more common ownership includes direct or indirect ownership by related parties within the meaning of sections 267(b) or 707(b).

60


Trade or Business Incidental to an SSTB If a trade or business (that would not otherwise be treated as an SSTB) has 50

percent or more common ownership with an SSTB, including related parties (within the meaning of sections 267(b) or 707(b)), and has shared expenses with the SSTB, including shared wage or overhead expenses, then such trade or business is treated as incidental to and, therefore, part of the SSTB within the meaning of this section if the gross receipts of the trade or business represents no more than 5 percent of the total combined gross receipts of the trade or business and the SSTB in a taxable year.

61

Certain Reporting RequirementsProp. Reg. Section 1.199A-6

62

Section 199A DeductionReporting Requirements of RPEs

The proposed regulations require the following information to be provided by the RPE for each trade or business it directly engages in:• Each owner’s allocable share of QBI, W-2 wages, and UBIA• Whether any of the trades or businesses are SSTBs

If an RPE itself owns a direct or indirect interest in an RPE it must also report the QBI, W-2 wages, UBIA, and SSTB status on an attachment to the K-1 for those lower-tier RPEs

63

Section 199A DeductionReporting Requirements of RPEs

RPEs must also report quailed REIT dividends and qualified PTP income or loss whether earned directly or through lower-tier RPEs

Failure to report this information results in all amounts presumed to be zero Implications:

• Multi-tier RPEs will result in items on the face of the K-1 and on attachments• Complexity in identifying each trade or business (even if aggregated)• SSTBs will still have to comply with reporting requirements

64

Section 199A Proposed RegulationsNext Steps

65


Important Questions Does the company operate a specified SSTB where at least one owner has

taxable income below the phase-in limitation of $415,000 for joint filers or $207,500 for all other filers so as to be eligible for the QBI deduction?

Does the company operate more than one trade or business? Does the company operate a SSTB and also generate revenues from non-

specified service activities? Does the company maintain detailed partner Section 704(b) and tax basis

capital accounts? Does the company use a professional employer organization or otherwise

maintain centralized payroll covering employees in different entities or business activities?

66


Key Considerations Comprehensive QBI Deduction Analysis Specified Service Trade or Business Analysis Choice of Entity Analysis Partner Capital Account Maintenance Services Cost Segregation/Depreciation Analysis

67

Thank You!

68

BDO is the brand name for BDO USA, LLP, a U.S. professional services firm providing assurance, tax, advisory and consulting services to a wide range of publicly traded and privately held companies. For more than 100 years, BDO has provided quality service through the active involvement of experienced and committed professionals. The firm serves clients through more than 60 offices and over 500 independent alliance firm locations nationwide. As an independent Member Firm of BDO International Limited, BDO serves multi-national clients through a global network of 67,700 people working out of 1,400 offices across 158 countries.

BDO USA, LLP, a Delaware limited liability partnership, is the U.S. member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. BDO is the brand name for the BDO network and for each of the BDO Member Firms.

Material discussed is meant to provide general information and should not be acted on without professional advice tailored to your firm’s individual needs.

© 2018 BDO USA, LLP. All rights reserved. www.bdo.com

GUIDANCE FOR PROPOSED 199A REGULATIONS€¦ · requirements are satisfied, including the following...

Documents

Transcript of GUIDANCE FOR PROPOSED 199A REGULATIONS€¦ · requirements are satisfied, including the following...