HIGHLIGHTS Bulletin No. 2018–35 OF THIS ISSUE August 27, 2018 · 2018. 8. 24. · Notice...

HIGHLIGHTSOF THIS ISSUEThese synopses are intended only as aids to the reader inidentifying the subject matter covered. They may not berelied upon as authoritative interpretations.

ADMINISTRATIVE

T.D. 9839, page 325.These final regulations provide guidance regarding how a part-nership can designate a partnership representative under thenew centralized partnership audit regime enacted by section1101 of the Bipartisan Budget Act of 2015. The regulationsprovide guidance on eligibility requirements for a partnershiprepresentative, authority of the partnership representative, res-ignation of a partnership representative, and revocation of apartnership representative. These regulations also finalize thetemporary regulations regarding how partnerships can electinto the centralized partnership audit regime for tax yearsending between November 2, 2015 and December 31, 2017.

Employee Plans

Notice 2018–65, page 350.This notice sets forth updates on the corporate bond monthlyyield curve, the corresponding spot segment rates for August2018 used under § 417(e)(3)(D), the 24-month average seg-ment rates applicable for August 2018, and the 30-year Trea-sury rates, as reflected by the application of § 430(h)(2)(C)(iv).

Income Tax

Notice 2018–64, page 347.This notice contains a proposed revenue procedure that pro-vides guidance on methods for calculating W–2 wages forpurposes of section 199A of the Internal Revenue Code (Code)and proposed §§ 1.199A–1 through –6 of the Income TaxRegulations (26 CFR part 1) which are being published contem-poraneously with this notice. Specifically, this notice providesmethods for calculating W–2 wages (1) for purposes of section

199A(b)(2) which, for certain taxpayers, provides a limitation,based on W–2 wages, to the amount of qualified businessincome subject to the deduction under section 199A; and (2)for purposes of section 199A(b)(7) which, for certain specifiedagricultural and horticultural cooperative patrons, provides areduction to the section 199A(a) deduction based on W–2wages.

REG–107892–18, page 353.Section 199A provides that, for taxable years beginning afterDecember 31, 2017 and before January 1, 2026, taxpayersother than C corporations may deduct 20 percent of thequalified business income from the taxpayer’s qualified tradesor businesses, which can be operated through a partnership, Scorporation, trust, estate, or sole proprietorship. The deduc-tion is subject to multiple limitations based on the type of tradeor business, the taxpayer’s taxable income, the amount of W–2wages paid with respect to the qualified trade or business, andthe unadjusted basis of qualified property held by the trade orbusiness. Taxpayers other than C corporations generally mayalso deduct 20 percent of aggregate qualified REIT dividendsand qualified publicly traded partnership income. Special rulesapply to specified agricultural or horticultural cooperatives.The proposed regulations provide computational, definitional,and anti-abuse guidance necessary to apply these rules.

Finding Lists begin on page ii.

Bulletin No. 2018–35August 27, 2018

The IRS MissionProvide America’s taxpayers top-quality service by helpingthem understand and meet their tax responsibilities and en-force the law with integrity and fairness to all.

IntroductionThe Internal Revenue Bulletin is the authoritative instrument ofthe Commissioner of Internal Revenue for announcing officialrulings and procedures of the Internal Revenue Service and forpublishing Treasury Decisions, Executive Orders, Tax Conven-tions, legislation, court decisions, and other items of generalinterest. It is published weekly.

It is the policy of the Service to publish in the Bulletin allsubstantive rulings necessary to promote a uniform applicationof the tax laws, including all rulings that supersede, revoke,modify, or amend any of those previously published in theBulletin. All published rulings apply retroactively unless other-wise indicated. Procedures relating solely to matters of internalmanagement are not published; however, statements of inter-nal practices and procedures that affect the rights and dutiesof taxpayers are published.

Revenue rulings represent the conclusions of the Service onthe application of the law to the pivotal facts stated in therevenue ruling. In those based on positions taken in rulings totaxpayers or technical advice to Service field offices, identify-ing details and information of a confidential nature are deletedto prevent unwarranted invasions of privacy and to comply withstatutory requirements.

Rulings and procedures reported in the Bulletin do not have theforce and effect of Treasury Department Regulations, but theymay be used as precedents. Unpublished rulings will not berelied on, used, or cited as precedents by Service personnel inthe disposition of other cases. In applying published rulings andprocedures, the effect of subsequent legislation, regulations,court decisions, rulings, and procedures must be considered,and Service personnel and others concerned are cautioned

against reaching the same conclusions in other cases unlessthe facts and circumstances are substantially the same.

The Bulletin is divided into four parts as follows:

Part I.—1986 Code.This part includes rulings and decisions based on provisions ofthe Internal Revenue Code of 1986.

Part II.—Treaties and Tax Legislation.This part is divided into two subparts as follows: Subpart A, TaxConventions and Other Related Items, and Subpart B, Legisla-tion and Related Committee Reports.

Part III.—Administrative, Procedural, and Miscellaneous.To the extent practicable, pertinent cross references to thesesubjects are contained in the other Parts and Subparts. Alsoincluded in this part are Bank Secrecy Act Administrative Rul-ings. Bank Secrecy Act Administrative Rulings are issued bythe Department of the Treasury’s Office of the Assistant Sec-retary (Enforcement).

Part IV.—Items of General Interest.This part includes notices of proposed rulemakings, disbar-ment and suspension lists, and announcements.

The last Bulletin for each month includes a cumulative index forthe matters published during the preceding months. Thesemonthly indexes are cumulated on a semiannual basis, and arepublished in the last Bulletin of each semiannual period.

The contents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.

August 27, 2018 Bulletin No. 2018–35

Part I. Rulings and Decisions Under the Internal Revenue Codeof 198626 CFR 301.6223–1, 301.6223–2, 301.9100–22

T.D. 9839

DEPARTMENT OF THETREASURYInternal Revenue Service26 CFR Part 301

Partnership Representativeunder the CentralizedPartnership Audit Regime andElection to Apply theCentralized Partnership AuditRegime

AGENCY: Internal Revenue Service(IRS), Treasury.

ACTION: Final regulation and removal oftemporary regulations.

SUMMARY: This document contains fi-nal regulations regarding the designationand authority of the partnership represen-tative under the centralized partnershipaudit regime, which was enacted into lawon November 2, 2015 by section 1101 ofthe Bipartisan Budget Act of 2015 (BBA).These final regulations affect partnershipsfor taxable years beginning after Decem-ber 31, 2017. This document also containsfinal regulations and removes temporaryregulations regarding the election to applythe centralized partnership audit regime topartnership taxable years beginning afterNovember 2, 2015 and before January 1,2018 under section 1101(g)(4) of theBBA. These final regulations affect part-nerships for taxable years beginning afterNovember 2, 2015 and before January 1,2018.

DATES: Effective date: These regulationsare effective on August 9, 2018.

Applicability Date: For dates of appli-cability, see §§ 301.6223–1(h), 301.6223–2(f), and 301.9100–22(e).

FOR FURTHER INFORMATION CON-TACT: Concerning the regulations under§§ 301.6223–1 and 301.6223–2, Joy E.Gerdy Zogby of the Office of AssociateChief Counsel (Procedure and Adminis-

tration), (202) 317-4927; concerning§ 301.9100–22, Jennifer M. Black of theOffice of Associate Chief Counsel (Proce-dure and Administration), (202) 317-6834(not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

This document contains final regula-tions to amend the Procedure and Admin-istration Regulations (26 CFR Part 301)under Subpart – Tax Treatment of Part-nership Items to implement the rules forthe partnership representative under thecentralized partnership audit regime en-acted by section 1101 of the BBA, PublicLaw 114–74. Section 1101 of the BBAwas amended on December 18, 2015, bythe Protecting Americans from Tax HikesAct of 2015, Public Law 114–113, and onMarch 23, 2018 by the Tax TechnicalCorrections Act of 2018, which was en-acted into law as part of the ConsolidatedAppropriations Act of 2018, Public Law115–141. Section 301.6223–1 providesthe rules regarding the designation of thepartnership representative, § 301.6223–2provides the rules regarding the authorityof the partnership representative, and§ 301.9100–22 provides the rules formaking the election under section 1101(g)(4) of the BBA with respect to returnsfiled for partnership taxable years begin-ning after November 2, 2015 and beforeJanuary 1, 2018.

On August 5, 2016, the Treasury De-partment and the IRS published in theFederal Register (81 FR 51795) tempo-rary regulations (TD 9780) regarding thetime, form, and manner for making anelection to apply the centralized partner-ship audit regime to partnership taxableyears beginning after November 2, 2015and before January 1, 2018. On the sameday, the Treasury Department and the IRSpublished in the Federal Register (81 FR51835) a notice of proposed rulemaking(REG–105005–16) cross-referencing thetemporary regulations. No commentswere received in response to the pro-posed regulations, and no hearing wasrequested or held.

On June 14, 2017, the Treasury De-partment and the IRS published in theFederal Register (82 FR 27334) a noticeof proposed rulemaking (REG–136118–15) regarding a number of provisions ofthe centralized partnership audit regime, in-cluding section 6223, relating to the partner-ship representative (June 14 NPRM). Apublic hearing regarding the proposed reg-ulations was held on September 18, 2017.The Treasury Department and the IRS alsoreceived written public comments in re-sponse to the proposed regulations, includ-ing comments regarding the partnership rep-resentative under section 6223.

On November 30, 2017, the TreasuryDepartment and the IRS published in theFederal Register (82 FR 56765) a noticeof proposed rulemaking (REG–119337–17) regarding international rules under thecentralized partnership audit regime. OnDecember 19, 2017, the Treasury Depart-ment and the IRS published in the Fed-eral Register (82 FR 27071) a notice ofproposed rulemaking (REG–120232–17)regarding certain procedural rules underthe centralized partnership audit regime,including proposed § 301.6231–1 regard-ing notices that are required to be mailedto partnerships (December 19 NPRM). OnJanuary 2, 2018, the Treasury Departmentand the IRS published in the FederalRegister (82 FR 28398) final regulationsfor electing out of the partnership auditregime. On February 2, 2018, the Trea-sury Department and the IRS published inthe Federal Register (83 FR 4868) a no-tice of proposed rulemaking (REG–118067–17) regarding rules for adjustingtax attributes under the centralized part-nership audit regime.

After careful consideration of all writ-ten public comments and statements madeduring the public hearing relating to sec-tion 6223, the portions of the June 14NPRM relating to section 6223 are ad-opted as amended by this Treasury Deci-sion. These amendments are discussed inthe next section. Examples were revised toconform to the amendments discussed inthe next section, and clarifying and edito-rial revisions were also made. The Trea-sury Department and the IRS received

Bulletin No. 2018–35 August 27, 2018325

no comments with respect to proposed§ 301.9100 –22 and made no substantiverevisions to the proposed regulations. Ac-cordingly, the final regulations adopt theproposed regulations without any substan-tive change. Minor editorial changes weremade. The temporary regulations are re-moved.

Summary of Comments andExplanation of Revisions

1. Partnership Representative

In response to the June 14 NPRM, theTreasury Department and the IRS re-ceived 33 written comments, and fivestatements were provided at the publichearing. All comments (both written andprovided orally at the public hearing)were considered, and written commentsare available for public inspection atwww.regulations.gov or upon request.This preamble addresses only the com-ments or portions of comments relatingto the proposed regulations under sec-tion 6223, which are the proposed reg-ulations from the June 14 NPRM beingfinalized in this Treasury Decision.Comments, or any portion of a com-ment, that relate to other aspects of theproposed regulations in the June 14NPRM that have not yet been finalizedwill be addressed when final regulationsregarding those provisions are pub-lished. The comments relating to theproposed regulations under section 6223cover a broad range of topics, includingeligibility to serve as the partnershiprepresentative, designating and chang-ing a partnership representative, and thebinding effect and authority of the part-nership representative. These commentswere considered and revisions to theregulations were made in response to thecomments.

A. Eligibility to Serve as the PartnershipRepresentative

Proposed § 301.6223–1(b)(1) providedthat a partnership may designate any per-son that has a substantial presence in theUnited States and that has the capacity toact to be the partnership representative. Ifan entity is designated as the partnershiprepresentative, the partnership must ap-point a designated individual to act on the

entity’s behalf. See proposed § 301.6223–1(b)(2), (3), and (4).

One comment recommended that§ 301.6223–1(b)(1) explicitly provide thata disregarded entity can serve as the part-nership representative. This comment hasbeen adopted. Any person as defined insection 7701(a)(1), including an entity,can serve as the partnership representativeprovided that person meets the require-ments of § 301.6223–1(b). Therefore,§ 301.6223–1(b)(1) has been revised toclarify that a disregarded entity can be apartnership representative. Because a dis-regarded entity is not an individual and is anentity partnership representative, the part-nership must appoint a designated individ-ual to act on behalf of the disregarded entityin accordance with § 301.6223–1(b)(3). Inaddition, both the disregarded entity and thedesignated individual must have substantialpresence as described in § 301.6223–1(b)(2).

Section 301.6223–1(b)(1) has alsobeen revised to clarify that a partnershipmay designate itself as its own partnershiprepresentative. The rules regarding eligi-bility to serve as a partnership representa-tive are designed to permit the partnershipto designate the person it believes is mostappropriate to serve as partnership repre-sentative, provided that person meets therequirements of § 301.6223–1(b)(2) (sub-stantial presence) and § 301.6223–1(b)(3)(designated individual). Therefore, a part-nership may serve as its own partnershiprepresentative if the partnership has sub-stantial presence in the United States andalso appoints a designated individual thathas a substantial presence in the UnitedStates to act on the partnership’s behalf inthe partnership’s role as partnership rep-resentative.

One comment recommended that theregulations confirm that, in the case of anentity designated as partnership represen-tative, the designated individual does nothave to be an employee of that entity.Nothing in the regulations requires thatthe designated individual be an employeeof the entity partnership representative. Asexplained in part 4.F. of the preamble tothe June 14 NPRM, an entity with noemployees is permitted to be the partner-ship representative provided the partner-ship appoints a designated individual toact on behalf of that entity and both the

entity and the designated individual havesubstantial presence in the United States.Because the plain language of the regula-tion does not require the designated indi-vidual to be an employee of the entitypartnership representative, no clarificationis necessary and the comment was notadopted.

Another comment suggested that apartnership should not be required to ap-point a designated individual to act for anentity partnership representative until theIRS issues a notice of administrative pro-ceeding (NAP) or the partnership files avalid administrative adjustment request(AAR) under section 6227. This commentwas not adopted. The purpose of the des-ignated individual requirement is to havean individual identified who can act onbehalf of the entity partnership represen-tative prior to the beginning of an admin-istrative proceeding under subchapter C ofchapter 63 (administrative proceeding). Ifno designated individual is appointed andthe IRS initiates an administrative pro-ceeding, neither the partnership nor theIRS will know who has the authority toact on behalf of the entity partnership rep-resentative. This could delay the begin-ning of the proceeding and consequentlyslow down the administrative proceeding.

As explained in part 2.D. of the pream-ble to the June 14 NPRM, these types ofdelays frequently occurred under TEFRA.Under TEFRA, partnerships and the IRSoften spent a significant amount of timeestablishing that a person designated asthe tax matters partner (TMP) was quali-fied to be the TMP or, in the case of anentity TMP, identifying and locating anindividual to act on the entity’s behalf.Also as explained in part 2.D. of the pre-amble to the June 14 NPRM, the introduc-tion of the partnership representative con-cept under the centralized partnershipaudit regime was intended to address theshortcomings of the TMP rules. Accord-ingly, the proposed regulations requiredthe partnership to identify and appoint adesignated individual prior to the start ofan administrative proceeding to avoid adelay related to locating and confirmingthe identity of an individual to act onbehalf of an entity partnership representa-tive. With that objective in mind, the finalregulations maintain the rule that in thecase of an entity partnership representa-


tive, the partnership must appoint a des-ignated individual at the time the partner-ship representative is designated.

Another comment suggested that theentity partnership representative itself,rather than the partnership, should appointthe designated individual. The partnershipmakes the initial designation of the part-nership representative on the partnership’sreturn. When an entity is chosen, the part-nership must appoint a designated individ-ual to act on behalf of the entity partnershiprepresentative. See § 301.6223–1(c)(2).While this rule requires that the partnershipappoint the designated individual, nothingin the regulations precludes the entity part-nership representative from identifying whothe designated individual should be andcommunicating that decision to the partner-ship. Ultimately, however, the partnershipmust determine who will be the partnershiprepresentative. Determining who will be thedesignated individual to act on behalf of anentity partnership representative is part ofthat determination. Therefore, the final reg-ulations retain the rule that the partnershipmust appoint the designated individual onits partnership return for the relevant taxableyear.

This rule ensures that designation ofthe entity partnership representative andappointment of the designated individualoccur simultaneously on the partnershipreturn with the result that it will be clear toboth the partnership and the IRS at thetime the partnership return is filed whohas the authority to act on behalf of thepartnership for the taxable year for whichthe return is filed for purposes of the cen-tralized partnership audit regime. As dis-cussed previously in this section of thepreamble, under TEFRA, the IRS spentsignificant time and resources determiningwho was the TMP. If that TMP was anentity, the IRS and taxpayers spent addi-tional time and resources determiningwho could act on behalf of the entity TMPunder state law. Moreover, in cases wherestate law permitted an entity to act onbehalf of an entity TMP, the IRS and thepartnership had to identify an individualwho could act on behalf of that entity todetermine someone who could ultimatelyact on behalf of the entity TMP. The ruleunder § 301.6223–1(c)(2) allows the IRSand the partnership to readily identify whocan act on behalf of the partnership rep-

resentative without having to inquire intowho has the state law authority to act onbehalf of the entity partnership represen-tative. Because the partnership makes thedesignated individual appointment underthe final regulations, the rule eliminatesthe time spent determining who can actfor the partnership.

This rule is also necessary because un-der the centralized partnership audit re-gime an entity partnership representativecan only act through a designated individ-ual. To achieve this, the partnership mustappoint the designated individual for theentity partnership representative to takeaction under the centralized partnershipaudit regime. Prior to the appointment of adesignated individual, the entity partner-ship representative does not have the abilityto act under the centralized partnership auditregime. Accordingly, the comment recom-mending the partnership representative makethe designated individual appointment was notadopted, and § 301.6223–1(b)(3)(ii) has beenmodified to clarify that the partnershipmust appoint the designated individual.

i. Substantial presence

Section 6223(a) provides that a part-nership representative must have a sub-stantial presence in the United States. Pro-posed § 301.6223–1(b)(2) provided that aperson has substantial presence in theUnited States for purposes of section 6223if the person is able to meet in person withthe IRS in the United States at a reason-able time and place, has a United Statesstreet address and telephone numberwhere the person can be reached duringnormal business hours, and has a UnitedStates taxpayer identification number(TIN). Several comments suggested thatthe first two criteria for substantial pres-ence were too vague and recommendedclarification of what is considered reason-able with respect to the time and place formeetings between the partnership repre-sentative and the IRS and whether thereference to normal business hours is de-termined based on the IRS’s businesshours or based on the partnership’s busi-ness hours.

Section 301.6223–1(b)(2) is designedto allow the partnership and the IRS max-imum flexibility to determine mutuallyconvenient times to meet, to schedule

phone calls, and to share information,while at the same time ensuring that thepartnership and its books and records areavailable to the IRS during the adminis-trative proceeding. Because what consti-tutes a reasonable time and place dependson the facts and circumstances, providingspecific rules by regulation applicable toevery circumstance that could arise in anadministrative proceeding is not feasibleand, even if it were, doing so would in-terfere with rather than facilitate a produc-tive environment for the administrativeproceeding. There are existing regulationsrelating to the reasonable time and placefor an examination in § 301.7605–1 thatare applicable to the centralized partner-ship audit regime. Section 301.7605–1(a)states: “The time and place of examina-tion . . . are to be fixed by an officer oremployee of the Internal Revenue Service,and officers and employees are to en-deavor to schedule a time and place thatare reasonable under the circumstances.”To address the comment, the regulationsunder § 301.6223–1(b)(2) have been clar-ified to include a cross-reference to theseprovisions.

With respect to the comment regardingthe meaning of “normal business hours,”the Treasury Department and the IRSagree that this terminology is confusing.In addition, cross-referencing the rules forthe time and place of examination under§ 301.7605–1 makes this term unnecessary.Therefore, the final regulations remove thereference in § 301.6223–1(b)(2)(ii) to nor-mal business hours. The partnership repre-sentative still must have a telephone numberwith a United States area code, but the ref-erence to normal business hours has beenremoved to avoid confusion regarding whatconstitutes normal business hours.

The Treasury Department and the IRSalso revised the phrase in § 301.6223–1(b)(2)(i) - “The person is available tomeet in person with the IRS” - to read -“The person makes themselves availableto meet in person with the IRS.” Thischange was made to distinguish between apartnership representative who is gener-ally available to meet and works with theIRS to facilitate communications and apartnership representative who is gener-ally available but refuses to meet with theIRS. Examples have also been added un-


der § 301.6223–1(b)(4) to illustrate thisclarification.

Another comment recommended thatregulations under proposed § 301.6223–1(b)(2) establish a “safe harbor” for sub-stantial presence that would allow thepartnership to designate a location in theUnited States for purposes of communica-tions between the partnership representa-tive and the IRS, similar to how busi-nesses designate a registered agent and anaddress for accepting service of process.Section 301.6223–1(b)(2)(ii) requires thepartnership to provide a United Statesstreet address and phone number wherethe partnership representative can bereached by United States mail and tele-phone. This rule already allows the part-nership to designate a location within theUnited States for communications be-tween the partnership representative andthe IRS, including receipt of formal doc-uments from the IRS. However, in addi-tion to having a United States streetaddress and telephone, a partnership rep-resentative must also make themselvesavailable to meet in person with the IRS.As discussed in part 2.D of the preambleto the June 14 NPRM, the purpose of thesubstantial presence requirement is to “en-sure that the person selected to representthe partnership will be available to theIRS in the United States when the IRSseeks to communicate or meet with therepresentative.” Because the partnershiprepresentative must make themselvesavailable to meet with the IRS, the part-nership representative may have any tele-phone number with a United States areacode and a street address in any locationin the United States, provided the tele-phone number and street address allow theIRS to contact the partnership representa-tive. Consequently, an explicit “safe har-bor” for substantial presence is unneces-sary, and the comment has not beenadopted.

ii. Capacity to Act

One of the components of eligibility toserve as a partnership representative ordesignated individual under the proposedregulations was the capacity to act. Pro-posed § 301.6223–1(b)(4) described fivespecific events that cause a person to losethe capacity to act for purposes of section

6223 and included a catch-all provisionfor any unforeseen circumstances inwhich the IRS reasonably determined aperson may no longer have the capacity toact. If a partnership representative lost thecapacity to act under proposed § 301.6223–1(b)(4), the IRS could determine that thedesignation of the partnership representativeor appointment of a designated individualwas not in effect. See proposed § 301.6223–1(f). Additionally, where all general part-ners lost the capacity to act, a partner otherthan a general partner could sign a revoca-tion of the partnership representative. Seeproposed § 301.6223–1(e).

In response to the capacity-to-act re-quirements in the proposed regulations, onecomment recommended that the list of cir-cumstances under proposed § 301.6223–1(b)(4) be expanded to include other spe-cific situations such as when the person hasbeen convicted of a felony or a crime thatinvolves dishonesty or breach of trust, whenthe person is in bankruptcy or receivership,or when the person is known to be undercriminal investigation for a violation of theCode. The same comment recommendedthat standards or limitations be includedwithin the catch-all provision under pro-posed § 301.6223–1(b)(4)(vi), which pro-vides that a person loses the capacity to actin �any similar situation where the IRS rea-sonably determines the person may no lon-ger have capacity to act.” Another commentsuggested that if a partnership becomesaware that the partnership representativelacks the capacity to act, the regulationsshould require the partnership to revoke thatpartnership representative’s designation.

The capacity-to-act requirement wasintended to correspond to situations wherethe person would not be able to representthe partnership during the administrativeproceeding, for instance, when the persondied, was legally incapacitated, or wasotherwise unable to act during the admin-istrative proceeding. After reviewing thecomments regarding capacity to act, theTreasury Department and the IRS reeval-uated whether such a requirement isneeded. Rather than creating a regulatoryrequirement for who should be the part-nership representative or a designated in-dividual, the Treasury Department and theIRS believe that partnerships are in thebest position to make the decision as towho can best represent them before the

IRS. For the reasons discussed below, theTreasury Department and the IRS havedetermined that regulations regarding ca-pacity to act would provide an unneces-sary limitation on the partnership’s choiceof who it believes is the best person to acton the partnership’s behalf. Therefore, thecomments have not been adopted, and thecapacity-to-act requirement has been re-moved from the final regulations.

Under the proposed regulations, thepartnership had complete control overwho is designated as the partnership rep-resentative and appointed as a designatedindividual so long as the person desig-nated or appointed satisfies the substantialpresence requirement. Further, the part-nership had the unilateral power to revokethe partnership representative for any rea-son. Therefore, the partnership can ade-quately protect itself if the concept of ca-pacity is removed since it can revoke thepartnership representative.

Beyond requiring a partnership repre-sentative to have a substantial presence inthe United States, the Treasury Depart-ment and the IRS have determined that itis not the proper role of the IRS to makefurther inquiries into whether, in the viewof the IRS, the designated partnership rep-resentative or designated individual is theright person to represent the partnership.For example, some partnerships may notwish to be represented by a partnershiprepresentative that has filed for bank-ruptcy. But, in other cases, the partnershipmay determine that the partnership repr-esentative’s bankruptcy status is not rele-vant to whether the person can serve aspartnership representative.

By setting forth specific capacity fac-tors, like bankruptcy, for making someoneineligible to act on behalf of the partner-ship, the regulations would be unnecessar-ily supplanting the partnership’s judgmentwith that of the government. Accordingly,the final regulations remove the capacity-to-act requirement entirely because thepartnership should have as much flexibil-ity as possible in determining a partner-ship representative so long as the personmeets the substantial presence require-ments. Because this section has been re-moved, the cross-reference to that sectionin § 301.6223–1(e) has also been re-moved. In addition, because this sectionhas been removed, the comment suggest-


ing that the IRS clarify that the partnershipmust require a revocation if it becomesaware that one of the capacity-to-act cir-cumstances applies to its partnership repre-sentative is inapplicable and therefore is notadopted.

Although the capacity-to-act sectionhas been removed from the final regula-tions, the IRS may still determine that adesignation of the partnership representa-tive is not in effect due to circumstancesthat would have resulted in a partnershiprepresentative not having capacity to actbecause at least some of the capacity-to-act requirements overlapped with substan-tial presence. For instance, the IRS maydetermine that a partnership representa-tive designation is not in effect if thepartnership representative is incarceratedbecause that partnership representativecannot make herself available to theIRS, which means the partnership rep-resentative does not satisfy the substan-tial presence requirement. Having a sep-arate capacity-to-act requirement wasduplicated in these circumstances.

Two of the specified circumstanceslisted in proposed § 301.6223–1(b)(4) in-volve determinations by a court that re-strict a partnership representative’s or des-ignated individual’s ability to serve. Thesecircumstances would likely arise veryrarely, and the IRS would likely not knowthese circumstances exist unless they werebrought to the IRS’s attention by a partneror the partnership itself. In the case of acourt order stating that a person does nothave capacity to manage his or her estate,the IRS may not know about this issuebecause the very nature of such a proceed-ing is sensitive and may not be madepublic. In the case of a court order inwhich an injunction was sought, the mostlikely parties to seek such an injunctionwould be partners or the partnership itself.The partnership, generally through its re-viewed year partners, may revoke a part-nership representative designation withoutthe need for a court order, which wouldalleviate the need for a partnership or part-ner to pursue a court-ordered injunction.Even if such a court order existed, the IRSwould need to review the court order todetermine to what degree it inhibited apartnership representative from acting onbehalf of the partnership. Because thesecircumstances would be rare, and because

there would need to be actual knowledgeof the court order as well as at least someinterpretation of that court order, the Trea-sury Department and the IRS have re-moved these circumstances, which werepreviously listed in proposed § 301.6223–1(b)(4), from the regulations.

B. Designating or Changing aPartnership Representative or aDesignated Individual

Multiple comments recommendedchanges to the timing and mechanics fordesignating, appointing, and changing apartnership representative and designatedindividual. The comments included sug-gestions about the timing of when achange should occur, the effective date ofsuch a change, notice requirements sur-rounding the change, and who can revokea designation.

One comment suggested clarificationregarding whether a partnership that haselected out of the centralized partnershipaudit regime under section 6221(b) mustdesignate a partnership representative. Apartnership that has elected out of the cen-tralized partnership audit regime is notrequired to designate a partnership repre-sentative. The partnership representativeis the person who has the sole authority toact on behalf of the partnership under thecentralized partnership audit regime. If apartnership is not subject to the central-ized partnership audit regime, a partner-ship representative has no authority withrespect to the partnership. Nothing in theregulations requires a partnership that haselected out of the regime to designate apartnership representative. Therefore, thecomment was not adopted.

i. Time for Changing the PartnershipRepresentative

Under proposed § 301.6223–1(d)(2)and (e)(2), a partnership representative des-ignation can only be changed after the IRSmails a NAP or in conjunction with thefiling of a valid AAR by the partnershipunder section 6227. Several comments sug-gested that proposed § 301.6223–1(d)(2)and (e)(2) be revised to allow for changes tothe partnership representative at any timeafter the original designation. One commentspecifically recommended that the IRS

adopt a system to monitor designations ofand changes to partnership representativesin the same way that the IRS monitors thelast known address of taxpayers.

Allowing partnerships to change thepartnership representative designation withthe IRS at any time after the original desig-nation is unnecessary and burdensome froma tax administration perspective and mayincrease burden for partnerships that are notselected for an administrative proceedingand have not filed an AAR. This is becausethe responsibilities and authority of a part-nership representative are generally applica-ble only if a partnership is selected forexamination as part of an administrativeproceeding or the partnership files an AAR.In many cases, allowing partnerships tochange the partnership designation beforean administrative proceeding begins or be-fore the partnership files an AAR means thatthe partnership would be filing a request tochange a partnership representative thatnever takes, or plans to take, any actionunder the centralized partnership audit re-gime.

Further, preparing and filing a requestto change a designation of a partnershiprepresentative requires partnerships toexpend time and resources. Because thepartnership representative designationmay differ each year, tracking which part-nership representatives were listed onwhich returns, and if a change were made,tracking those changes, can become com-plex. A partnership agreement requiringconsultation with the partners (which maydiffer from year to year) when there is achange in the partnership representativeadds further complexity.

For its part, the IRS would have toprocess requests to change a designationand associate that change with the correctpartnership account even if the IRS neverselects the partnership taxable year for anadministrative proceeding and, therefore,never interacts with the partnership repre-sentatives. Currently, the IRS does nothave a system to process these changesoutside of the administrative proceedingprocess or when an AAR is filed.

A comment recommended that the IRSdevelop a system to track changes in thedesignation of the partnership representa-tive that is similar to the system used tomonitor a taxpayer’s last known address.Development of such a system would be


very costly with little benefit to be gainedbecause, as discussed above, the majorityof changes would be for partnershipswhose partnership representatives wouldnever take any action on behalf of suchpartnerships.

Accordingly, the final regulationsmaintain the rule that a partnership rep-resentative may only be changed in thecontext of an administrative proceedingor in conjunction with the filing of avalid AAR. As the IRS gains experiencewith the centralized partnership auditregime, and methods are identified toalleviate the administrative and regula-tory burden created by changes to a partner-ship representative designation before thecommencement of an administrative pro-ceeding, the rules may be revisited in futureforms, instructions, or other guidance.

To address the aspect of the commentsthat reflect a desire to be able to changethe partnership representative prior to thebeginning of the administrative proceed-ing, § 301.6223–1(e)(2) has been revisedto allow the partnership to change thepartnership representative through revoca-tion when the partnership is notified thatthe partnership return is selected for ex-amination as part of an administrative pro-ceeding, in addition to when the NAP ismailed. In general, the IRS will issue thepartnership, but not the partnership repre-sentative, a notice of selection for exami-nation prior to mailing the NAP to informthe partnership that it is being selected forexamination. Under the proposed regula-tions, the partnership was not able tochange the partnership representative untilit received the NAP.

This rule will provide the partnership anopportunity to change its partnership repre-sentative before an administrative proceed-ing commences, allowing the partnership tobe represented by the partnership represen-tative of its choice throughout the adminis-trative proceeding. Because the notice ofselection for examination is only issued tothe partnership, and not the partnership rep-resentative, this rule allows the partnershipto make a change to the partnership repre-sentative without the involvement of thepartnership representative (whom the part-nership may be removing for cause). As aresult of the revised rule, the NAP can besent to the partnership’s preferred partner-ship representative at the time the adminis-

trative proceeding begins. The rule also al-lows the partnership to change a designatedindividual prior to the beginning of the ad-ministrative proceeding.

Other comments suggested that thedesignation of the partnership representa-tive should be required on an annual basis,that the currently designated partnershiprepresentative should have the sole au-thority to represent the partnership for allopen years, and that partnerships shouldbe required to designate one partnershiprepresentative for all years in the contextof a multi-year administrative proceeding.

Under § 301.6223–1(c), a partnershipmust designate the partnership representa-tive on the partnership return for that part-nership taxable year, that is, Form 1065,U.S. Return of Partnership Income. Iden-tification of a partnership representativeon an annual basis with the return pro-vides certainty regarding who is the part-nership representative for a particular tax-able year. The other systems suggested inthe comments would be difficult to admin-ister and could result in the IRS having todetermine that no designation of a part-nership representative is in effect becauseof this uncertainty.

Designation of a partnership represen-tative on the return for that taxable year isalso not an undue burden on the partner-ship. The identification, selection, anddesignation of the partnership representa-tive is wholly within the discretion of thepartnership (provided the person desig-nated meets the requirements under§ 301.6223–1(b)). Nothing in the pro-posed regulations prevents a partnershipfrom designating the same partnershiprepresentative on each partnership returnit files or, once administrative proceedingswith respect to more than one taxable yearhave commenced, designating one part-nership representative (through the revo-cation procedures described in proposed§ 301.6223–1(e)) to act for the partnershipfor all years subject to the administrativeproceeding.

Further, the partnership representativeplays an important role in representing theinterests of the partnership and, by exten-sion, the partners for the taxable year sub-ject to an administrative proceeding. Themake-up of the partners in a partnershipmay change from tax year to tax year, andthe economic arrangements within the

partnership and between partners mayalso change. The partnership and its part-ners for each particular taxable year are inthe best position to determine who thepartnership representative should be ifthat particular taxable year is subject to anadministrative proceeding. For these rea-sons, the comments have not been ad-opted.

ii. Resignation

Proposed § 301.6223–1(d) providedthe rules for resignations of partnershiprepresentatives and designated individu-als. Proposed § 301.6223–1(d)(1) pro-vided that a resignation by a partnershiprepresentative “may” include a designa-tion of a successor partnership represen-tative. However, when the resignation wasmade with the filing of an AAR, proposed§ 301.6223–1(d)(2) provided that the part-nership representative “must” designate asuccessor partnership representative. Pro-posed § 301.6223–1(d)(3) provided that aresigning designated individual “may, butis not required to,” designate a successor.

One comment noted the differences inthe quoted language of these provisionsand recommended that the final regula-tions be clarified to explain the conse-quences, if any, of those differences. Thecomment also questioned why the pro-posed regulations required designation ofa successor partnership representative inthe case of an AAR resignation, but not inthe case of resignation that occurs during anadministrative proceeding. The commentsuggested that the rules should require des-ignation of a successor for all resignations.In contrast, another comment recommendedthat a partnership representative never bepermitted to designate a successor partner-ship representative and suggested that thepartnership have a 30-day window after aresignation to designate a successor partner-ship representative.

After considering these comments, thefinal regulations remove the ability of aresigning partnership representative ordesignated individual to designate a suc-cessor. Under the proposed rule, a resign-ing partnership representative had thepower to designate a partnership represen-tative even though the partnership mightnot approve of the new partnership repre-sentative. For instance, this could occur in


a situation where the partnership represen-tative is resigning due to an adverse rela-tionship with the partnership. To avoidthis result, the resignation of a partnershiprepresentative or designated individualshould be the final action of that personfor purposes of the centralized partnershipaudit regime.

For similar reasons, a resigning part-nership representative should not be ableto resign by filing an AAR. The partner-ship representative or designated individ-ual may be revoked simultaneously withthe filing of an AAR, though an AAR maynot be filed solely for that purpose. Seeproposed § 301.6227–1(a). However, it isunfair to the partnership to allow a resign-ing partnership representative to requestadjustments to items of a partnership. Ac-cordingly, the final regulations have beenrevised to prohibit a resignation at thetime of the filing of an AAR.

Proposed § 301.6223–1(d)(3) providedthat a resignation of a designated individualis “subject to the time of resignation restric-tions described in [proposed] § 301.6223–1(d)(2),” that is, the timing rules that applyto a resignation of a partnership representa-tive. One comment requested clarification ofwhether the ability of a designated individ-ual to resign is subject to all of the restric-tions in proposed § 301.6223–1(d)(2) orwhether the quoted language means somerestrictions do not apply. As discussedabove, the final regulations have been re-vised to remove the ability of a partnershiprepresentative to resign with the filing of anAAR; a partnership representative may re-sign only after a NAP has been issued by theIRS, or at such other time as prescribed bythe IRS in other guidance. The final regu-lations have also been revised to providethat the rules governing when and how apartnership representative may resignalso apply to designated individuals.Section 301.6223–1(d) provides specificrules explaining how a designated indi-vidual resigns. Therefore, clarification isnot necessary, and the comment was notadopted.

iii. Revocation

Proposed § 301.6223–1(e)(3)(i) pro-vided that a revocation must be signed bya person who was a general partner at theclose of the taxable year for which the

partnership representative designation isin effect as shown on the partnership re-turn for that taxable year. One commentsuggested that the language “as shown onthe partnership return” be deleted to makeclear that a partnership is not limited torevoking only the initial partnership rep-resentative designated on the partnershipreturn.

The purpose of the quoted languagewas to describe how to determine whethera person was a general partner at the closeof the taxable year, that is, by looking tothe partnership return for that taxableyear. It was not intended to describe whattype of partnership representative desig-nation can be revoked by the partnership.A partnership can revoke any designationof a partnership representative, includinga designation made by the IRS, providedpermission is granted by the IRS. See§ 301.6223–1(e)(6). Sections 301.6223–1(e)(1) and (e)(4) have been revised toclarify this point.

The comment also suggested that anypartner of the partnership, instead of onlya general partner, should be able to sign arevocation provided that partner certifiesthe partner has the authority to do so. Thiscomment was adopted in the final regula-tions. The final regulations allow any part-ner who was a partner during the partner-ship taxable year to which the revocationrelates, not just a general partner, to sign arevocation. Allowing any partner for thetaxable year to which the revocation re-lates to sign the revocation provides max-imum flexibility to the partnership to de-termine which partners should have thatauthority.

The rules under proposed § 301.6223–1(e)(3)(ii) made clear that for purposes ofdetermining who may sign a revocationfor a limited liability company (LLC), amember–manager is treated as a generalpartner and any other member is treated asa non-general partner. These rules werenecessary to clarify in the context of LLCswhich members can sign a revocation. Asdiscussed above in this section of the pre-amble, however, the proposed regulationshave been revised to permit any partnerduring the taxable year to which the revo-cation relates, not just a general partner, tosign a revocation. Therefore, § 301.6223–1(e)(3)(ii) has been removed from theregulations because the rule equating

member-managers with general partnersis no longer necessary.

The comment also recommended thatthe “catch-all” provision under proposed§ 301.6223–1(b)(4)(vi) (regarding capac-ity to act) also apply in determiningwhether partners other than a general part-ner can sign a revocation. Proposed§ 301.6223–1(b)(4) has been removedfrom the final regulations and is no longerreferenced in § 301.6223–1(e); therefore,this comment was not adopted. The refer-ences to capacity to act were necessarywhen only certain partners could revokethe designation. Because the regulationshave been revised to allow any partner forthe partnership taxable year to which therevocation relates to sign the revocation,there is no need to describe situations inwhich general partners do not have thecapacity to act and no need for the asso-ciated catch-all provision.

Lastly, the comment recommendedthat the regulations explicitly provide thata partnership can revoke a partnershiprepresentative designation for any reason.As discussed in section 2.C. of this pre-amble, nothing in the regulations requiresthe partnership to have a specific reason,or any reason at all, for a revocation.However, this comment was adopted toclarify that neither a revocation nor a res-ignation requires any particular reason.The final regulations also clarify that arevocation may occur regardless of whenand how the designation was made, exceptwith respect to a designation made by theIRS. See § 301.6223–1(e)(6).

Proposed § 301.6223–1(e)(3)(ii) ap-plied the rules for signing a revocation toLLCs and provided that for purposes ofthe proposed regulations the term LLCmeans an organization that, among otherthings, “is classified as a partnership forFederal tax purposes.” A comment recom-mended that the phrase “is classified as apartnership for Federal tax purposes” beremoved from the definition of LLC be-cause the quoted language creates confu-sion about whether the LLC has to becurrently classified as a partnership for theproposed rules regarding revocation to ap-ply. As discussed in this section of thepreamble, § 301.6223–1(e)(3)(ii) has beenremoved from the regulations because theparagraph is no longer necessary in lightof the changes to the revocation process.


While considering these comments, theTreasury Department and the IRS had theopportunity to reevaluate the portion ofthe rule in proposed § 301.6223–1(e)(3)that required a person revoking a designa-tion to be a partner at the close of the taxableyear and determined that this rule is unnec-essarily restrictive. This is because being apartner on the last day of the taxable year isnot meaningful so long as the person is apartner during the taxable year. For in-stance, a person who is a partner on the lastday of the taxable year could be a partnerwith a small interest in the partnership orcould have acquired their interest in the part-nership on the next to last day of the part-nership taxable year, whereas a person whois a partner during the year but not on thelast day of the year could have owned a verylarge interest in the partnership or couldhave been a partner for all days during theyear, except the last day.

Further, while the partnership returnidentifies partners during the taxable year,it is not readily apparent from the face ofthe return or the Schedules K-1 who was apartner on the last day of the partnershiptaxable year. Therefore, the IRS could noteasily determine if the partner signing therevocation was a partner on the last day ofthe taxable year.

Finally, there may be more partnerturnover during a partnership’s taxableyear as a result of fewer partnership shorttaxable years after the repeal of technicalterminations under section under 708(b)(1).See section 13504 of “[a]n Act to providefor reconciliation pursuant to titles II and Vof the concurrent resolution on the budgetfor fiscal year 2018,” Public Law 115–97.Generally, under a technical termination un-der section 708(b)(1)(B), when 50 percentor more of a partnership’s capital and profitsare sold or exchanged during any 12 monthperiod, the partnership taxable year ended,causing a short partnership taxable year.However, after repeal of the technical ter-mination rule, there can be significant part-ner turnover during a partnership’s full tax-able year without resulting in an early closeof the partnership taxable year. Thus, part-ners who dispose of their partnership inter-est, and who would have been partners for afull taxable year at the close of a shortpartnership taxable year when there was atechnical termination, are now partners for

only part of a full 12 month partnershiptaxable year.

Accordingly, the final regulations havebeen revised to allow any person who wasa partner at any time during the taxableyear to which the revocation relates tosign the revocation. The final regulationswere also revised to provide that the Trea-sury Department and the IRS may in thefuture provide forms, instructions, orother guidance that would allow the part-nership to revoke the designation of apartnership representative if there are noreviewed year partners (as defined in pro-posed § 301.6241–1(a)(9)) at the time ofrevocation.

One comment also suggested that apartnership should be able to revoke anappointment of a designated individualwithout first revoking the entity partner-ship representative designation. This com-ment was adopted in § 301.6223–1(e).However, to ensure that the IRS has acontact point for the partnership, the reg-ulations under § 301.6223–1(e)(1) havealso been revised to provide that if a part-nership revokes the appointment of a des-ignated individual and not the entity part-nership representative, the partnershipmust appoint a successor designated indi-vidual at the same time of the revocation.Similar to the rules under the regulationswith respect to the partnership representa-tive resignation, failure to follow the rulesof § 301.6223–1(e), including failure toappoint a successor designated individual,results in an invalid revocation of the des-ignated individual.

iv. Effective Date of a Resignation orRevocation

The proposed regulations provided thata resignation or revocation of the partner-ship representative (or designated individ-ual, if applicable) is effective 30 daysfrom the date on which the IRS receiveswritten notification of the resignation orthe revocation. See proposed § 301.6223–1(d)(1), (e)(1). One comment recom-mended that the IRS refrain from requir-ing time-sensitive actions or responsesfrom the partnership during this 30-dayperiod. Another comment recommendedthat a resignation or revocation of a part-nership representative be immediately ef-fective in certain situations, including

when the partnership representative is thesubject of a court order determining thepartnership representative is incompetentor enjoining the partnership representativefrom serving as the partnership represen-tative, the partnership representative is in-carcerated, the partnership representativehas become the subject of a criminal taxinvestigation, the partnership representa-tive has been convicted of a felony or of acrime that involves dishonesty or breachof trust, or the partnership representativehas become the subject of bankruptcy orreceivership proceedings.

In response to these comments,§ 301.6223–1(d) and (e) are revised toprovide that generally a partnership rep-resentative resignation or revocation iseffective immediately upon receipt bythe IRS. In cases where there is a revo-cation of a partnership representativedesignated by the IRS, the final regula-tions provide that the revocation is ef-fective on the date the IRS sends noti-fication that it determined that therevocation is valid.

The comment requesting that the revo-cation or resignation be immediately ef-fective on the date it is signed or sent wasnot adopted. Until it is received by theIRS, the IRS cannot be aware of a revo-cation or resignation to give it effect. Be-fore the revocation or resignation is re-ceived, the IRS will continue to work withthe person designated to represent thepartnership as the partnership representa-tive. Nothing in the regulations prevents apartnership or partnership representativefrom providing a revocation or resignationdirectly to the IRS employee handling theadministrative proceeding to ensure thatthe IRS has received prompt notificationof the change.

Proposed § 301.6223–1(d)(1) and(e)(1) provided that the IRS will notifythe partnership and other affected persons(the resigning partnership representativeor designated individual or the partnershiprepresentative (and designated individual,if applicable) whose status is being re-voked) when the IRS receives a resigna-tion or revocation. To provide assurancethat the IRS has received and processed aresignation or revocation, these sectionsof the final regulations have been revisedto provide that, no later than 30 days afterreceipt of a valid notification of a revoca-


tion or resignation, the IRS will notify thepartnership and the resigning partnershiprepresentative or designated individual orthe partnership representative (and desig-nated individual, if applicable) whose sta-tus is being revoked of its acceptance.

Proposed § 301.6223–1(e)(4) providedthat a partnership cannot revoke the des-ignation of a partnership representativedesignated by the IRS unless the partner-ship receives permission from the IRS.The final regulations under § 301.6223–1(e)(6) are clarified to provide that the IRSwill not unreasonably withhold such per-mission. To avoid confusion, § 301.6223–1(e)(3) and (6) have been revised to providethat when permission is granted, the IRSwill send the notification described in para-graph § 301.6223–1(e)(1). The effectivedate of the revocation is the date of thatnotification, which, if the IRS is grantingpermission for the revocation of the IRS-designated partnership representative, willbe sent no later than 30 days after receipt ofthe revocation.

v. Notification of Change

Proposed § 301.6223–1(d)(1) providedthat a resigning partnership representativemust notify the partnership and the IRS ofthe resignation, and proposed § 301.6223–1(e)(1) provided that when a partnershiprevokes a partnership representative des-ignation, the partnership must notify thepartnership representative and the IRS.Proposed § 301.6223–1(e)(3)(iii)(A)(2)required a notification of revocation toinclude a certification from the partnersigning the revocation that the person hasprovided a copy of the revocation to thepartnership and to the partnership repre-sentative whose designation is being re-voked. Failure to include that certificationrendered the revocation invalid. One com-ment recommended clarification on howthis certification should be made when thepartnership representative is deceased ordissolved or the partnership is no longer incontact with the partnership representa-tive. The comment suggested that sendingthe copy of the revocation to the lastknown address should be sufficient. Thecomment also suggested that the regula-tions clarify whether there are any otherrestrictions on the method of notifying the

partnership representative, such as proofof delivery or electronic delivery.

State law and any contractual arrange-ment between the parties generally controlthe terms of the relationship between thepartnership and the partnership represen-tative. Except as necessary to carry out thestatute, the regulations implementing thecentralized partnership audit regime attemptnot to impose requirements with respect tointeractions between the partnership and thepartnership representative. The require-ments in proposed § 301.6223–1(d)(1) and(e)(1) that the partnership notify the partner-ship representative and that the partnershiprepresentative notify the partnership werenot consistent with this approach. Therefore,the Treasury Department and the IRSbelieve that including these requirementswould unnecessarily create regulatory bur-dens on partnerships and partnership repre-sentatives without any significant benefit totax administration. Accordingly, the finalregulations have been revised to removethese requirements. Consequently, a resign-ing partnership representative and a partner-ship making a revocation must now onlynotify the IRS of the change in designation.As long as they notify the IRS as requiredunder the regulations, the partnership andthe partnership representative may agree toother notification requirements and are inthe best position to determine if such re-quirements are necessary.

Another comment suggested that, inthe case of an entity partnership represen-tative, notification by the IRS of a revo-cation (as well as other notifications)should also be required to be sent to thedesignated individual. This comment wasnot adopted. In the case of a change to anentity partnership representative, the IRSwill only send one notification and plansto adopt procedures under which such anotification will be sent to the partnershiprepresentative and addressed to the atten-tion of the designated individual. Thisprocedure should avoid the need to sendduplicate notifications, which is burden-some for the IRS, while also allowing thepartnership, the entity partnership repre-sentative, and the designated individual toarrange their affairs in a way to ensurethat important notifications from the IRSare received by the appropriate persons.

Proposed § 301.6223–1(e)(1) requiredthe IRS to notify the partnership and the

affected partnership representative of a re-vocation. This requirement has been re-vised to provide that the IRS will onlygive notification of a revocation made af-ter the issuance of a notice of selection forexamination or a NAP. In contrast, thefinal regulations do not require the IRS togive notification of a revocation made si-multaneously with an AAR. This changeis warranted because in some cases, theIRS might accept an AAR as filed withoutfurther interaction with the partnership orcommunication with the partnership rep-resentative. Requiring the IRS to providenotification of a change in partnership rep-resentative when an AAR is filed is un-necessary unless the IRS selects the part-nership for an examination as part of anadministrative proceeding, in which casethe partnership and the new partnershiprepresentative will receive a NAP, whichis confirmation that the IRS received thechange made on the AAR. The partner-ship can also confirm with the IRS at thattime of receipt of the notice of selectionfor examination that the IRS received thechange of partnership representative.

In addition, the final regulations clarifythat the failure of the IRS to send anynotifications under §§ 301.6223–1(d) and(e) to acknowledge receipt of a valid res-ignation or revocation does not invalidatethe resignation or revocation. The noti-fication provides the partnership withinformation about when the change in part-nership representative became effective.However, the mere fact that a party does notreceive an IRS notification does not meanthat the resignation or revocation is not avalid change in partnership representative.A resignation or revocation that is validunder paragraph (d) or (e) of § 301.6223–1is valid regardless of whether the IRS sendsnotification of receipt.

C. IRS Designation of PartnershipRepresentative

i. Determination that a Designation IsNot in Effect

Proposed § 301.6223–1(f) provided theIRS may determine a designation is not ineffect under certain circumstances. Underproposed § 301.6223–1(f)(1), if the IRSmakes a determination that a designationis not in effect, the IRS will notify the


partnership and “the most recent partner-ship representative for that partnershiptaxable year” of that determination. Onecomment noted that there may be circum-stances where there was never a partner-ship representative for the taxable yearand recommended the regulations be clar-ified on this point. The comment describesan example where the partnership repre-sentative designated on the partnership re-turn lacks substantial presence and con-cludes that there would be no partnershiprepresentative in that case.

This conclusion is incorrect. A part-nership representative designated under§ 301.6223–1 is in effect unless anduntil the IRS determines otherwise. See§ 301.6223–1(b)(1). Therefore, a persondesignated on a partnership return as thepartnership representative is the partner-ship representative for that taxable yeareven if the person lacks substantial pres-ence as defined in § 301.6223–1(b)(2)unless and until the IRS makes a determi-nation, in accordance with § 301.6223–1(f),that the designation is not in effect. Accord-ingly, prior to the issuance of a notificationfrom the IRS under § 301.6223–1(f)(1) thatthe partnership representative designation isnot in effect, the designation of the partner-ship representative on the partnership returnis in effect, even if the person designatedlacks substantial presence in the UnitedStates.

Because a designated partnership rep-resentative is in effect unless and until theIRS determines otherwise, the vast major-ity of partnerships will have a partnershiprepresentative designation in effect be-cause they will have designated the part-nership representative on the return as re-quired under § 301.6223–1(c). As a result,in most cases there will be a partnershiprepresentative to whom the notificationmust be sent. However, there may be sit-uations in which the partnership failed tomake a valid designation in accordancewith § 301.6223–1(c). To address thesesituations, the comment was adopted and§ 301.6223–1(f)(1) has been revised toclarify that the IRS is not required tonotify the most recent partnership repre-sentative if the partnership failed to des-ignate one.

Another comment recommended thatany determination that a designation is notin effect should not be made effective

until a new partnership representative hasbeen designated, either by the partnershipor the IRS. This comment was not ad-opted. If there has been a determinationthat a partnership representative designa-tion is not in effect for a taxable year, theIRS has determined that the partnershiprepresentative is no longer a valid partner-ship representative for purposes of con-ducting an administrative proceeding ofthat partnership with respect to that tax-able year. To keep the designation in placewould run counter to this determinationand would hinder the partnership admin-istrative proceeding. If, for example, thepartnership representative no longer meetsthe substantial presence requirements un-der § 301.6223–1(b) because the partner-ship representative has left the countryand, as a result, is unreachable, neither thepartnership nor the IRS benefits from hav-ing that partnership representative desig-nation remain in place until a new part-nership representative is designated. Thebest result for both the partnership and theIRS is for the partnership to designate anew partnership representative who canmove the administrative proceeding for-ward, which the partnership will have theopportunity to do prior to the IRS desig-nating one under the rules in § 301.6223–1(f). Delaying the effective date of thedetermination that no partnership repre-sentative is in effect slows down the ad-ministrative proceeding, which does notbenefit the partnership or the IRS.

Proposed § 301.6223–1(f)(2) provideda list of reasons why the IRS might deter-mine that a partnership representative des-ignation is not in effect. Proposed§ 301.6223–1(f)(2) provided that the IRSmay determine a designation is not in ef-fect when, among other circumstances,the IRS has received multiple revocationswithin a 90-day period. See proposed§ 301.6223–1(e)(7). One comment sug-gested that the regulations should limit thediscretion of the IRS to determine that adesignation is not in effect under proposed§ 301.6223–1(f)(2) to situations where theIRS determines the multiple revocationsrepresent an effort to delay or obstruct theadministrative proceeding.

While there may be benign reasons formultiple revocations, the practical effect isthe same regardless of the reason. TheIRS’s receipt of multiple revocations and

designations will delay the administrativeproceeding and prevent the IRS from ef-fectively conducting an administrativeproceeding. The administrative proceed-ing should not be delayed, intentionally orunintentionally, due to an inability to set-tle on a partnership representative.

Additionally, requiring the IRS to de-termine if multiple revocations were dueto inadvertence or a desire to delay orobstruct the administrative proceedingadds additional burden that would becostly for both the partnership and the IRSto resolve. It would also inevitably lead todisputes between the IRS and partnershipsregarding factually intensive questionsunderlying the intent of revocations. Anytime and resources devoted to discerningthe purpose behind each revocation ulti-mately delays the entire administrativeproceeding. There may be situations inwhich partners genuinely disagree as towho had authority to appoint the partner-ship representative or who the partnershiprepresentative should be. However, thesedisputes are best resolved by the partnersthemselves. The IRS should not be thearbiter of disputes between partners. Con-sequently, this comment has not been ad-opted.

There may be circumstances, however,when multiple revocations are necessarydue to circumstances outside of the part-nership’s control, such as death or serioushealth issues or due to a ministerial error.To accommodate these types of circum-stances, the proposed regulations pro-vided the IRS with the discretion to keepthe partnership designation in effect eventhough multiple revocations were re-ceived within a 90-day period. The pro-posed regulations did not require the IRSto make a determination that the designa-tion is no longer in effect, but rather pro-vided the IRS with the ability to makesuch a determination when appropriate. Inretaining this rule, the final regulationsaccommodate situations where multiplerevocations are not the result of bad faithand the IRS determines that allowing suchrevocations does not interfere with theIRS’s ability to conduct the administrativeproceeding.

Section 301.6223–1(f)(5) of theproposed regulations provided that themultiple-revocation rule was triggered ifthe IRS receives more than one revocation


for the same partnership taxable yearwithin a 90-day period. The final regula-tions remove the language “signed by dif-ferent partners” from that provision. Thefact that multiple revocations are receivedwithin 90 days is all that is required forthe IRS to exercise its discretion under§ 301.6223–1(f)(2). The number of part-ners involved is not relevant to whethermultiple revocations are received andwhether that could slow down the admin-istrative proceeding. Accordingly, the reg-ulations have been revised to make clearthat the receipt of multiple revocations,not the receipt of multiple revocationssigned by different partners, is what isrequired for the provision in § 301.6223–1(f) to be satisfied.

In addition, the rule in the proposedregulations allowing the partnership theoption to appoint a partnership represen-tative before one is designated by the IRShas been revised in the case of multiplerevocations. The final regulations providethat if the IRS determines a designation isnot in effect in the case of multiple revo-cations, the IRS will designate a partner-ship representative, and unlike the generalrule for IRS designation of a partnershiprepresentative, the partnership will not begiven 30 days to designate a partnershiprepresentative. The stricter rule in the caseof multiple revocations is necessary be-cause providing the partnership anotheropportunity to designate a partnership rep-resentative would only perpetuate the ex-isting problem and may delay the admin-istrative proceeding. The final regulationsalso make clear that the multiple revoca-tions rule applies to multiple revocationsof a designated individual as well. Al-though the IRS may designate a new part-nership representative in the case of mul-tiple revocations, like any other IRSdesignation of a partnership representa-tive, the partnership may revoke that part-nership representative designation withthe consent of the IRS.

In order to clarify the operation of the90-day period under the multiple revoca-tion rule, § 301.6223–1(e)(7) was revisedto provide that if the IRS receives a revo-cation (the current revocation), and,within the 90-day period prior to receivingthe current revocation, the IRS had re-ceived another revocation for the samepartnership taxable year, the IRS may de-

termine that a designation is not in effect.This change clarifies that the multiple re-vocation rule may apply to any revocationreceived by the IRS. When the IRS re-ceives a revocation, the IRS may lookback to the preceding 90 days and deter-mine whether it had received a prior re-vocation for the same taxable year. If ithad, the multiple revocation rule applies.

A time limitation for the IRS to notifythe partnership that the designation is notin effect was also added to the multiplerevocation rule in § 301.6223–1(e)(7)(ii).That time limitation provides that if theIRS plans to determine a designation isnot in effect due to receipt of multiplerevocations, the IRS must do so within 90days of the receipt of the current revoca-tion the IRS is considering. For example,assume the partnership files two revoca-tions with respect to the same taxable year- one on May 31, 2019 and one on August25, 2019. With respect to the August 25threvocation, the IRS received the May 31strevocation within the 90-day period priorto August 25, 2019, meaning the multiplerevocation rule under § 301.6223–1(e)(7)(i) applies. Under the time limita-tion provided in § 301.6223–1(e)(7)(ii),the IRS would then have 90 days fromAugust 25, 2019 to determine a designa-tion is not in effect. If, during that 90-dayperiod starting with August 25, 2019, theIRS received another revocation, the mul-tiple revocation rule under § 301.6223–1(e)(7)(i) would again be triggered, andpursuant to § 301.6223–1(e)(7)(ii), theIRS would have another 90 days from thatadditional revocation to determine a des-ignation is not in effect. The time limita-tion under § 301.6223–1(e)(7)(ii) pro-vides certainty for the partnership and theIRS regarding when the IRS may deter-mine that a designation is not in effectafter multiple revocations have been filed.

Another comment recommended that apartnership that makes a “technicallyfaulty” designation and receives notifica-tion from the IRS that no designation of apartnership representative is in effectshould be given an opportunity to curethat designation before the IRS designatesa new partnership representative. Nothingin the regulations prevents the IRS fromproviding the partnership with an oppor-tunity to cure a defective designation priorto the IRS making its own designation.

The IRS will provide additional guidanceto its agents regarding designation of apartnership representative, and the IRS in-tends to generally recommend providingan opportunity to cure a defective desig-nation. The IRS, however, may not allowfor such an opportunity in all cases due totime restraints, multiple revocations, orthe particular circumstances. Accordingly,this comment was not adopted. However,as the Treasury Department and the IRSdevelop more experience in this area, ad-ditional guidance may be issued.

Proposed § 301.6223–1(f)(2) has alsobeen amended to add a new paragraph(vii), which provides that the IRS maydetermine that a designation is not in ef-fect for any other reason described in pub-lished guidance. This paragraph wasadded to allow flexibility to add othercircumstances that may require the IRS todetermine the designation is not in effectas the Treasury Department and the IRSgain more experience with the centralizedpartnership audit regime.

The final regulations also provide thatthe IRS is under no obligation to searchfor information about whether any of thecircumstances listed in § 301.6223–1(f)(2) exists. In addition, the final regu-lations clarify that even if the IRS hasknowledge that one of the circumstanceslisted in § 301.6223–1(f)(2) exists, theIRS is not required to determine that adesignation is not in effect. This clarifica-tion was added for the reasons statedabove in this section of the preamble. Forinstance, partners may have filed multiplerevocations within 90 days, but if therewas a valid reason for the multiple revo-cations, the IRS may not need to deter-mine the partnership representative desig-nation is not in effect.

ii. IRS Designation

Numerous comments recommendedchanges to the rules under proposed§ 301.6223–1(f) governing IRS designa-tion of a partnership representative whenno designation is in effect. Several com-ments recommended that the regulationsimpose restrictions on whom the IRS maydesignate to serve as the partnership rep-resentative. Two comments suggestedprohibiting the IRS from designating anIRS employee, agent, or contractor as the


partnership representative. The TreasuryDepartment and the IRS agree that an IRSemployee, agent, or contractor who has noaffiliation with the partnership subject toan administrative proceeding should notbe designated as the partnership represen-tative. An IRS employee, agent, or con-tractor may be a partner in the partnershipsubject to an administrative proceeding,however. Provided this interest in the part-nership is unrelated to the individual’saffiliation with the IRS, the individual’saffiliation with the IRS should not pre-clude designation as the partnership rep-resentative. Accordingly, § 301.6223–1(f)(5) was revised to provide that the IRSmay not designate an IRS employee,agent, or contractor as the partnership rep-resentative unless the individual is a part-ner in the partnership subject to an admin-istrative proceeding. Even if the IRSemployee, agent, or contractor is a partnerin such partnership, however, the IRS in-tends to avoid designating such an indi-vidual as the partnership representative ifanother suitable person is available.

Several comments recommended thatthe IRS be required to select a currentpartner to serve as the partnership repre-sentative. Another comment recom-mended that the IRS be required to selectthe partner with the largest profits interest.Another comment requested that the reg-ulations include an ordering rule (that is,the IRS selects a partner first; if no partneris available, an employee, etc.). Anothercomment recommended that where thepartnership is in bankruptcy, the IRSshould select the trustee to serve as thepartnership representative.

Imposing regulatory restrictions onwhom the IRS can designate as the part-nership representative could adversely af-fect the IRS’s ability to select a suitablepartnership representative, which harmsboth the IRS and the partnership. In somecases, a current partner might be the ap-propriate selection. In other cases, a for-mer partner or an employee of the part-nership might be more appropriate. Forexample, a current year partner might bemore appropriate in a case where the cur-rent year partner is the person with accessto the books and records of the partner-ship. However, a former partner has theadvantage of being a partner from the yearsubject to an administrative proceeding

and may be able to communicate withreviewed year partners more efficientlywhen seeking to modify the imputed un-derpayment. In the context of a partner-ship in bankruptcy, a non-member man-ager of the partnership, more familiar withthe partnership’s day-to-day businessmight be a more appropriate partnershiprepresentative than the bankruptcy trusteehired during the administrative proceed-ing. The Treasury Department and the IRSdo not yet have experience with the newcentralized partnership audit regime. Assuch, it would be unwise at this time torestrict whom the IRS may designate to bethe partnership representative (other than asdescribed earlier in this section). Conse-quently, comments recommending thesetypes of restrictions were not adopted.

One comment asked that the final reg-ulations clarify that the IRS may select anentity partnership representative and thatif it does so, the IRS must provide thepartnership with the contact informationof the designated individual. This com-ment was adopted. Therefore, if the IRSdoes designate an entity to be the part-nership representative, the IRS will alsoappoint a designated individual and pro-vide the contact information of the des-ignated individual to the partnership.See § 301.6223–1(f)(5)(i).

Proposed § 301.6223–1(f)(5)(ii) pro-vides a list of factors the IRS “may” con-sider when designating a partnership rep-resentative. A comment suggested thatproposed § 301.6223–1(f)(5)(ii) be re-vised to provide that the IRS “will ordi-narily” consider “one or more” of thosefactors. The IRS intends to consider thesefactors when designating a partnershiprepresentative. Because the suggested lan-guage “will ordinarily” more accuratelyreflects the IRS’s intent this comment hasbeen adopted. However, the final regula-tions have also been revised to clarify thatthe IRS is not obligated to search forinformation about the factors to be con-sidered and that IRS knowledge of any ofthe factors does not obligate the IRS toselect a particular person as partnershiprepresentative. This clarification is partic-ularly important in the case of a partner-ship that is nonresponsive because the IRSmay not be able to consider certain factorswhere the partners are unreachable andcertain information is not readily attain-

able. The IRS, therefore, will ordinarilyconsider these factors, but the IRS maynot consider the factors in every case.

The final regulations have also beenrevised to clarify that these factors are notthe equivalent of requirements for eligi-bility to be designated by the IRS as apartnership representative. Only one fac-tor may be applicable to the person des-ignated as partnership representative andyet that person may be the one who isappropriate to designate based on who isavailable and willing to serve and the uniquefacts and circumstances of the partnership,the administrative proceeding, or other is-sues. Accordingly, § 301.6223–1(f)(5)(ii)has been revised to clarify that the IRS willordinarily consider one or more of the fac-tors when determining whom to designateas partnership representative, no single fac-tor is determinative, and a person may bedesignated by the IRS as partnership repre-sentative even if none of the factors is ap-plicable.

Several comments requested changes tothe factors listed in proposed § 301.6223–1(f)(5)(ii). One comment recommended thatthe IRS generally consider the profits inter-ests of the partners. Considering the profitsinterest of a partner is reasonable becauseprofits interest can in some circumstancesdirectly affect how the results of an admin-istrative proceeding will affect an individualpartner. Additionally, because profits inter-est is a factor that can be determined fromthe face of the partnership return for mostpartnerships, consideration of a partner’sprofits interest when designating a partner-ship representative is administrable for theIRS. Therefore, § 301.6223–1(f)(5)(ii) hasbeen revised to adopt this comment.

One comment suggested that the IRSshould consider the person’s involvementin the partnership’s business in determin-ing whether to designate that person as thepartnership representative. The regula-tions already contain factors that considerthe person’s overall knowledge of thepartnership and its books and records.These factors already incorporate consid-eration of the person’s involvement in thepartnership’s business. Because the pro-posed factor duplicates those already in-cluded, this comment was not adopted.

Several comments made suggestionswith respect to the partnership’s inabilityto revoke a partnership representative des-


ignation made by the IRS without havingIRS consent of that revocation. One com-ment disagreed in general with this ruleand recommended that the partnership beable to revoke a partnership designationmade by the IRS without the consent ofthe IRS. Another comment stated that thepartnership should be involved in theIRS’s designation of a partnership repre-sentative. Another comment suggestedthat the partnership should be able to re-voke a partnership representative desig-nated by the IRS if there is a bona fidedispute over the capacity of the partner-ship representative designated by the IRS.

The rule that the partnership must seekthe IRS’s permission before revoking anIRS-designated partnership representativeis premised on the fact that the partnershiphas not properly designated a partnershiprepresentative on its own. If the IRS has tomake a designation, the partnership haseither failed to designate its own choicefor partnership representative or has mademultiple revocations.

Allowing the partnership to unilater-ally revoke a partnership representativethat had been designated by the IRS un-dermines the purpose of the IRS designa-tion. For an administrative proceeding tofunction properly and without delay andfor the partnership to be represented inthat administrative proceeding, a personwho can act for the partnership and who isan eligible partnership representative mustbe designated. Additionally, because theIRS only designates a partnership repre-sentative when a partnership has failed toproperly make its own designation, thepartnership is ultimately in control overwhether the IRS will need to designate apartnership representative. Consequently,the final regulations retain the rule that apartnership may revoke a partnership rep-resentative designated by the IRS onlywith the consent of the IRS, and the com-ments were not adopted.

D. Authority of the PartnershipRepresentative

i. Binding Effect of Actions Taken bythe Partnership Representative

One comment suggested that, giventhat partnerships are formed under statelaw, state law should control the designa-

tion and authority of the partnership rep-resentative. Another comment suggestedthat the final regulations should clarifythat the principles of agency law apply tothe partnership representative, and that thepartnership representative “will be operat-ing as the agent on behalf of the partner-ship subject to the same control by thepartnership as any principal would haveover an agent.” These comments relate toproposed § 301.6223–2(c), which pro-vided that no state law, partnership agree-ment, or other document could limit theauthority of the partnership representa-tive. Because the authority of the partner-ship representative under federal law pre-empts any state law requirements thesecomments were not adopted. The lan-guage of § 301.6223–2(d) (which corre-sponds with proposed § 301.6223–2(c))has been revised to clarify that this rule isapplicable only with respect to the central-ized partnership audit regime. Accord-ingly, the final regulations provide that thefailure to adhere to state law requirementshas no effect on actions taken by the part-nership representative with respect to thecentralized partnership regime.

The regulations are drafted to providesignificant flexibility to the partnership todetermine who will represent it and for thepartnership and the partnership represen-tative to negotiate the terms of their rela-tionship. The Treasury Department andthe IRS have attempted to refrain fromcreating unnecessary regulatory burdens.The partnership and the partnership repre-sentative are free to enter into contractualagreements to define the scope and limitsof their relationship. However, becausethe IRS is not a party to these agreements,it is not bound by them. Any remedy thepartnership would have against the part-nership representative if the partnershiprepresentative failed to act in accordancewith those agreements would be understate law with respect to the partnershiprepresentative.

Section 301.6223–2(d) is not intendedto prevent partnerships from taking ad-vantage of state law remedies for partner-ships who wish to restrict a partnershiprepresentative’s authority under state law.Rather, the regulations leave the enforce-ment of such restrictions to the relevantparties, which simplifies the administra-tive proceeding consistent with the design

of the centralized partnership auditregime. Under TEFRA, significant re-sources were often expended by the IRSand the partnership to determine whatstate law restrictions might affect whocould act for the partnership and underwhat circumstances. The centralized part-nership audit regime removes this aspectof TEFRA.

ii. Authority

One comment recommended thatwhere there is a question regarding a per-son’s authority to serve as the partnershiprepresentative, the partnership should pro-vide a notice signed by all the partners inthe partnership as conclusive evidencethat a particular person has the authorityto serve as the partnership representative.This comment was not adopted becauseunder section 6223 the authority of a per-son to act as partnership representative isbased on whether the person was properlydesignated as the partnership representa-tive in accordance with section 6223 andthe regulations, not on whether state lawor notice from the partners confirms suchauthority.

One comment suggested that clarifyinglanguage be added to the end of a sentencein § 301.6223–2(a) providing that a noticeof final partnership adjustment is finalwhen not contested by the partnership rep-resentative “on behalf of the partnership.”The Treasury Department and the IRSagree that as drafted § 301.6223–2(a) wasconfusing. It is the partnership that con-tests the notice of final partnership adjust-ment, even if it does so through the part-nership representative. Accordingly, thefinal regulations clarify this language byrevising § 301.6223–2(a) to remove thereference to the partnership representa-tive.

E. Other Comments and Changes

A comment recommended that pro-posed § 301.6223–2 be clarified to pro-vide that a partnership representative mayengage a person to act on behalf of thepartnership representative under a powerof attorney during the administrative pro-ceeding (referred to as a “POA”) and thatthe POA can participate in meetings orreceive copies of correspondence. Noth-


ing in the regulations prevents the partner-ship representative from engaging a POAfor this purpose. Language has beenadded to § 301.6223–2(d) to clarify thisissue. Language has also been added to§ 301.6223–1(a) to clarify that appoint-ment of a POA does not designate thePOA as partnership representative.

A new paragraph (c) has been added tothe final regulations to address the effectof withdrawal of a NAP on actions takenby a partnership representative. Proposed§ 301.6231–1(f) (December 19 NPRM)allows the IRS to withdraw a NAP after ithas been issued. Proposed § 301.6231–1(f) further provides that the withdrawnNAP has no effect for purposes of thecentralized partnership audit regime.

The partnership representative mayhave taken actions before withdrawal ofthe NAP. In addition, after the NAP hasbeen issued, but before the NAP has beenwithdrawn, the partnership representativemay have changed. Section 301.6223–2(c) has been added to the final regula-tions to clarify that even though the with-drawn NAP has no effect, any actionstaken by a partnership representative (orsuccessor partnership representative aftera change in partnership representative thatoccurred after the issuance of the NAPand before the NAP was withdrawn) arebinding on the partnership, even thoughthe NAP has been withdrawn. An examplewas also added to illustrate this clarifica-tion under § 301.6223–2(c) regardingwithdrawal of the NAP. See § 301.6223–2(e), Example 6. As a result of this newparagraph (c), proposed § 301.6223–2(c)was moved to § 301.6223–2(d).

One comment suggested that a partner-ship representative should have to affirmthat he or she will serve as the partnershiprepresentative by checking a box on thepartnership return where the designationis made. The comment suggested that hav-ing such an affirmation will save time atthe beginning of the administrative pro-ceeding.

Adopting this comment would not savetime at the beginning of the administrativeproceeding because even if the box waschecked by the partnership representativeat the time the return is filed, by the timethe IRS commences the administrativeproceeding, the partnership representativemay no longer be available or willing to

serve. Similarly, a partnership representa-tive might erroneously not check the boxat the time the return is filed but be willingto serve at the time the administrativeproceeding commences. Whether the part-nership representative checked the box atone point in time is not the right proxy forwhether the partnership representative iswilling to serve as the partnership repre-sentative at some other point in time.Rather than add this unnecessary require-ment, the regulations provide that the per-son designated as the partnership repre-sentative is the partnership representativeuntil there is a resignation, revocation, orthe IRS determines no designation is ineffect. Once the administrative proceedingbegins, an unwilling partnership represen-tative may resign or the partnership mayrevoke the partnership representative anddesignate a successor. Accordingly, thiscomment was not adopted.

One comment suggested that the part-nership representative be required to no-tify partners of significant developments(for example, extensions of the periodof limitations, settlements, petitioning acourt, etc.). There is no requirement in thestatute for the partnership representativeto notify any partner of significant devel-opments. This is a departure from TE-FRA, which required certain notificationsand provided participation rights for cer-tain partners. The proposed regulationsadhered to the legislative judgment thatthe partnership representative is the solerepresentative of the partnership, and theactions of the partnership representativebind the partners. Nothing in the proposedregulations prevents the partnership fromcontracting with the partnership represen-tative to require the partnership represen-tative to notify the partnership or the part-ners of any developments, significant orotherwise.

The Treasury Department and the IRShave determined that the governmentshould not mandate how and when thepartnership representative communicateswith partners or other persons. By remain-ing silent on this issue, the regulationsallow a partnership, its partners, and thepartnership representative to arrange theirown affairs without unnecessary regula-tory requirements that interfere with theserelationships. Accordingly, this commentwas not adopted.

Proposed § 1.6223–1(a) provided that apartnership representative must update thepartnership representative’s contact infor-mation when such information changes asrequired by forms, instructions, and otherguidance prescribed by the IRS. One com-ment requested that a partnership repre-sentative only be required to update itscontact information upon the selection ofthe partnership for an examination or thefiling of an AAR. At this time, there is norequirement that the partnership represen-tative update contact information prior toselection for examination or the filing ofan AAR. Experience with the new regimemay inform the Treasury Department andthe IRS that updating contact informationprior to selection for an examination orfiling an AAR is helpful or important. Thefinal regulations have been clarified toprovide that contact information must beupdated if required by forms, instructions,or other guidance published by the IRS.

2. Election into Centralized PartnershipAudit Regime

The Treasury Department and the IRSreceived no comments with respect to pro-posed § 301.9100–22 and made no sub-stantive revisions to the proposed regula-tions. Accordingly, the final regulationsadopt the proposed regulations withoutany substantive change. Minor editorialchanges were made. The temporary regu-lations are removed.

Special Analyses

This regulation is not subject to reviewunder section 6(b) of Executive Order12866 pursuant to the Memorandum ofAgreement (April 11, 2018) between theDepartment of the Treasury and the Officeof Management and Budget regarding re-view of tax regulations. Therefore, a reg-ulatory impact assessment is not required.

It is hereby certified that these ruleswill not have a significant economic im-pact on a substantial number of small en-tities. Although these rules may affect asubstantial number of small entities, theeconomic impact is not substantial becausethese rules merely provide clarifying guid-ance on the statutory requirements to desig-nate a partnership representative. Theserules reduce the existing burden on partner-ships to comply with the statutory require-


ments by providing clear rules and guidanceregarding the statutory requirements forpartnerships required to designate a partner-ship representative under section 6223 andfor partnerships to make an election for thecentralized partnership audit regime to ap-ply to taxable years beginning after Novem-ber 2, 2015 and before January 1, 2018. Forthe reasons stated, the final rules will nothave a significant economic impact on asubstantial number of small entities. Ac-cordingly, a regulatory flexibility analysisunder the Regulatory Flexibility Act (5U.S.C. Chapter 6) is not required.

Pursuant to section 7805(f) of theCode, the notice of proposed rulemakingpreceding these regulations was submittedto the Chief Counsel for Advocacy of theSmall Business Administration for com-ment on its impact on small business, andno comments were received.

Statement of Availability of IRSDocuments

IRS Revenue Procedures, RevenueRulings, Notices and other guidance citedin this preamble are published in the In-ternal Revenue Bulletin (or CumulativeBulletin) and are available from the Su-perintendent of Documents, U.S. Govern-ment Publishing Office, Washington, DC20402, or by visiting the IRS website atwww.irs.gov.

Drafting Information

The principal authors of these final reg-ulations are Joy E. Gerdy Zogby of theOffice of the Associate Chief Counsel(Procedure and Administration) and Jen-nifer M. Black of the Office of the Asso-ciate Chief Counsel (Procedure and Ad-ministration). However, other personnelfrom the Treasury Department and theIRS participated in their development.

* * * * *

Adoption of Amendments to theRegulations

Accordingly, 26 CFR part 301 isamended as follows:

PART 301—PROCEDURE ANDADMINISTRATION

Paragraph 1. The authority citation forpart 301 continues to read in part as fol-lows:

Authority: 26 U.S.C. 7805 * * *Par. 2. Section 301.6223–1 is added to

read as follows:

§ 301.6223–1 Partnershiprepresentative.

(a) Each partnership must have a part-nership representative. A partnership sub-ject to subchapter C of chapter 63 of theInternal Revenue Code (subchapter C ofchapter 63) for a partnership taxable yearmust designate a partnership representa-tive for the partnership taxable year inaccordance with this section. There maybe only one designated partnership repre-sentative for a partnership taxable year atany time. The designation of a partnershiprepresentative for a partnership taxableyear under this section remains in effectuntil the date on which the designation ofthe partnership representative is termi-nated by valid resignation (as described inparagraph (d) of this section), valid revo-cation (as described in paragraph (e) ofthis section), or a determination by theInternal Revenue Service (IRS) that thedesignation is not in effect (as describedin paragraph (f) of this section). A desig-nation of a partnership representative for apartnership taxable year under paragraphs(e) or (f) of this section supersedes allprior designations of a partnership repre-sentative for that year. If required byforms, instructions, and other guidanceprescribed by the IRS, a partnership rep-resentative must update the partnershiprepresentative’s contact information whensuch information changes. Only a persondesignated as a partnership representative inaccordance with this section will be recog-nized as the partnership representative undersection 6223. A power of attorney (includ-ing a Form 2848, Power of Attorney) maynot be used to designate a partnership rep-resentative. See § 301.6223–2(a), (b), and(c) with regard to the binding effect of ac-tions taken by the partnership representa-tive. See § 301.6223–2(d) with regard to thesole authority of the partnership representa-tive to act on behalf of the partnership. See

paragraph (f) of this section for rules regard-ing designation of a partnership representa-tive by the IRS.

(b) Eligibility to serve as a partnershiprepresentative—(1) In general. Any per-son (as defined in section 7701(a)(1)) thatmeets the requirements of paragraphs(b)(2) and (3) of this section, as applica-ble, is eligible to serve as a partnershiprepresentative, including a wholly ownedentity disregarded as separate from itsowner for federal tax purposes. A persondesignated under this section as partner-ship representative is deemed to be eligi-ble to serve as the partnership representa-tive unless and until the IRS determinesthat the person is ineligible. A partnershipcan designate itself as its own partnershiprepresentative provided it meets the re-quirements of paragraphs (b)(2) and (3) ofthis section.

(2) Substantial presence in the UnitedStates. A person must have substantialpresence in the United States to be thepartnership representative. A person hassubstantial presence in the United Statesfor the purposes of this section if—

(i) The person makes themselves avail-able to meet in person with the IRS in theUnited States at a reasonable time andplace as determined by the IRS in accor-dance with § 301.7605–1; and

(ii) The person has a United Statestaxpayer identification number, a streetaddress that is in the United States and atelephone number with a United Statesarea code.

(3) Eligibility of an entity to be a part-nership representative—(i) In general. Aperson who is not an individual may be apartnership representative only if an indi-vidual who meets the requirements ofparagraph (b)(2) of this section is ap-pointed by the partnership as the sole in-dividual through whom the partnershiprepresentative will act for all purposes un-der subchapter C of chapter 63. A partner-ship representative meeting the require-ments of this paragraph (b)(3) is an entitypartnership representative, and the indi-vidual through whom such entity partner-ship representative acts is the designatedindividual. Designated individual statusautomatically terminates on the date thatthe designation of the entity partnershiprepresentative for which the designatedindividual was appointed is no longer in


effect in accordance with paragraph (d),(e), or (f) of this section.

(ii) Appointment of a designated indi-vidual. A designated individual must beappointed by the partnership at the time ofthe designation of the entity partnershiprepresentative in the manner prescribed bythe IRS in forms, instructions, and otherguidance. Accordingly, if the entity part-nership representative is designated on thepartnership return for the taxable year inaccordance with paragraph (c)(2) of thissection, the designated individual must beappointed by the partnership at that time.Similarly, if the entity partnership repre-sentative is designated under paragraph(e) of this section (regarding revocationand subsequent designation after revoca-tion of a partnership representative), thedesignated individual must be appointedat that time. If the partnership fails toappoint a designated individual at the timeand in the manner set forth in this para-graph (b)(3)(ii), the IRS may determinethat the entity partnership representativedesignation is not in effect under para-graph (f) of this section.

(4) Examples. The following examplesillustrate the rules of this paragraph (b).

Example 1. Partnership designates PR as its part-nership representative for its 2018 tax year on itstimely filed 2018 partnership return. The IRS initi-ates an administrative proceeding with respect toPartnership’s 2018 tax year. PR has a United Statestaxpayer identification number, a United States streetaddress, and a phone number with a United Statesarea code. The IRS contacts PR and requests anin-person meeting with respect to the administrativeproceeding. PR works with the IRS and agrees tomeet. PR has substantial presence in the UnitedStates because she meets all the requirements underparagraph (b)(2) of this section.

Example 2. The facts are the same as in Example1 of this paragraph (b)(4), except that PR is an entityand Partnership appointed DI, a designated individ-ual to act on behalf of PR for its 2018 tax year on itstimely filed 2018 partnership return. DI has a UnitedStates taxpayer identification number and a phonenumber with a United States area code. However, theaddress provided for DI is not a United States ad-dress. Accordingly, PR is not an eligible partnershiprepresentative because PR is an entity and DI doesnot satisfy the requirements of paragraph (b)(3)(i) ofthis section. Although DI does not have substantialpresence in the United States under paragraph (b)(2)of this section and therefore PR is not an eligiblepartnership representative, until there is a resignationor revocation under paragraph (d) or (e) of thissection or until the IRS determines the partnershiprepresentative designation is no longer in effect un-der paragraph (f) of this section, the designation ofPR as the partnership representative remains in ef-fect in accordance with paragraph (a) of this section,

and Partnership and all its partners are bound by theactions of PR as the partnership representative.

Example 3. The facts are the same as in Example1 of this paragraph (b)(4), except PR works in aforeign country and spends the majority of her timethere. Unless PR otherwise fails to meet one of therequirements under paragraph (b)(2) of this section,PR has substantial presence in the United States.However, even if PR fails to meet one of the require-ments under paragraph (b)(2) of this section, untilthere is a resignation or revocation under paragraph(d) or (e) of this section or until the IRS determinesthe partnership representative designation is no lon-ger in effect under paragraph (f) of this section, thedesignation of PR as the partnership representativeremains in effect in accordance with paragraph (a) ofthis section, and Partnership and all its partners arebound by the actions of PR as the partnership rep-resentative.

(c) Designation of partnership repre-sentative by the partnership—(1) In gen-eral. The partnership must designate apartnership representative separately foreach taxable year. The designation of apartnership representative for one taxableyear is effective only for the taxable yearfor which it is made.

(2) Designation. Except in the case of adesignation of a partnership representative(and the appointment of the designatedindividual, if applicable) after an eventdescribed in paragraph (d) of this section(regarding resignation), paragraph (e) ofthis section (regarding revocation by thepartnership), or paragraph (f) of this sec-tion (regarding designation made by theIRS), or except as prescribed in forms,instructions, and other guidance, designa-tion of a partnership representative (andthe appointment of the designated individ-ual, if applicable) must be made on thepartnership return for the partnership tax-able year to which the designation relatesand must include all of the informationrequired by forms, instructions, and otherguidance, including information about thedesignated individual if paragraph (b)(3)of this section applies. The designation ofthe partnership representative (and the ap-pointment of the designated individual, ifapplicable) is effective on the date that thepartnership return is filed.

(3) Example. The following exampleillustrates the rules of this paragraph (c).

Example. Partnership properly designates PR1 asits partnership representative for taxable year 2018on its 2018 partnership return. Partnership designatesPR2 as its partnership representative for taxable year2021 on its 2021 partnership return. In 2022, the IRSmails Partnership a notice of administrative proceed-ing under section 6231(a)(1) with respect to Partner-

ship’s 2018 taxable year. PR1 is the partnershiprepresentative for the 2018 partnership taxable year,notwithstanding the designation of PR2 as partner-ship representative for the 2021 partnership taxableyear.

(d) Resignations—(1) In general. Apartnership representative or designatedindividual may resign as partnership rep-resentative or designated individual, asapplicable, for a partnership taxable yearfor any reason by notifying the IRS inwriting of the resignation in accordancewith forms, instructions, and other guid-ance prescribed by the IRS. A resigningpartnership representative may not desig-nate a successor partnership representa-tive. A resigning designated individualmay not designate a successor designatedindividual or partnership representative.No later than 30 days after the IRS re-ceives a written notification of resigna-tion, the IRS will send written confirma-tion of receipt of the written notification tothe partnership and the resigning partner-ship representative (to the attention of thedesignated individual if appropriate). Afailure by the IRS to send any notificationunder this paragraph (d) does not invali-date a valid resignation made pursuant tothis paragraph (d). A failure by the part-nership representative (or designated indi-vidual, if the designated individual is theperson resigning) to satisfy the require-ments of this paragraph (d) is treated as ifthere were no resignation, and the partner-ship representative designation (and desig-nated individual appointment, if applicable)remains in effect until the designation (orappointment) is terminated by valid resigna-tion (as described in this paragraph (d)),valid revocation by the partnership (as de-scribed in paragraph (e) of this section), or adetermination by the IRS that the designa-tion is not in effect (as described in para-graph (f) of this section). See § 301.6223–2for binding nature of actions taken by thepartnership representative or designated in-dividual on behalf of a partnership represen-tative, if applicable, prior to resignation.

(2) Time for resignation. A partnershiprepresentative or designated individualmay submit the written notification of res-ignation described in paragraph (d)(1) ofthis section to the IRS only after the IRSissues a notice of administrative proceed-ing (NAP) under section 6231(a)(1) forthe partnership taxable year for which thepartnership representative designation is


in effect or at such other time as pre-scribed by the IRS in forms, instructions,or other guidance. If the IRS withdrawsthe NAP pursuant to § 301.6231–1(f), anyvalid resignation by the partnership repre-sentative or designated individual underthis paragraph (d) prior to the withdrawalof the NAP remains in effect.

(3) Effective date of resignation. Avalid resignation is immediately effectiveupon the IRS’s receipt of the written no-tification described in paragraph (d)(1) ofthis section. As of the effective date of theresignation—

(i) The resigning partnership represen-tative (and designated individual, if appli-cable) may not take any action on behalfof the partnership with respect to the part-nership taxable year affected by the resig-nation;

(ii) The partnership representative des-ignation is no longer in effect with respectto the partnership taxable year affected bythe resignation;

(iii) In the case of a resigning entitypartnership representative, the appoint-ment of the designated individual is nolonger in effect with respect to the part-nership taxable year affected by the resig-nation; and

(iv) In the case of a resigning desig-nated individual, the designation of theentity partnership representative is no lon-ger in effect with respect to the partner-ship taxable year affected by the resigna-tion.

(e) Revocations–(1) In general. A part-nership may revoke a designation of apartnership representative or appointmentof a designated individual for a partner-ship taxable year for any reason by noti-fying the IRS in writing of the revocationin accordance with forms, instructions,and other guidance prescribed by the IRS.The partnership may make such revoca-tion regardless of when and how the des-ignation or appointment was made, exceptas provided in paragraph (e)(6) of thissection (regarding designation by theIRS). The revocation must include thedesignation of a successor partnershiprepresentative (and the appointment of adesignated individual, if applicable). Inthe case of a revocation of only the des-ignated individual appointment, the part-nership must designate a successor desig-nated individual. No later than 30 days

after the IRS receives a written notifica-tion of revocation submitted at the timedescribed in paragraph (e)(2) of this sec-tion, the IRS will send written confirma-tion of receipt of the written notification tothe partnership, the revoked partnershiprepresentative or, in the case of a revoca-tion of only the appointment of a desig-nated individual, to the revoked desig-nated individual, and to the newlydesignated partnership representative. Inthe case of a revocation of an entity part-nership representative, the notificationwill be sent to the entity partnership rep-resentative, to the attention of the desig-nated individual. A failure by the IRS tosend any notification under this paragraph(e) does not invalidate a valid revocationmade pursuant to this paragraph (e). Afailure by the partnership to satisfy therequirements of this paragraph (e), includ-ing failure to designate a successor, istreated as if no revocation has occurredand the partnership representative desig-nation (and designated individual appoint-ment, if applicable) remains in effect untilthe designation (or appointment) is termi-nated either by valid resignation (as de-scribed in paragraph (d) of this section),valid revocation by the partnership (asdescribed in this paragraph (e)), or deter-mination by the IRS that the designation isnot in effect (as described in paragraph (f)of this section). See § 301.6223–2 forbinding nature of actions taken by thepartnership representative or designatedindividual on behalf of a partnership rep-resentative, if applicable, prior to revoca-tion.

(2) Time for revocation—(i) Revoca-tion during an administrative proceeding.Except as provided in paragraph (e)(2)(ii)of this section or in forms, instructions, orother guidance prescribed by the IRS, apartnership may revoke a designation of apartnership representative or appointmentof a designated individual only after theIRS issues a notice of selection for exam-ination or a NAP under section 6231(a)(1)for the partnership taxable year for whichthe designation or appointment is in ef-fect. If the IRS withdraws the NAP pur-suant to § 301.6231–1(f), any valid revo-cation of a partnership representativedesignation or designated individual ap-pointment under this paragraph (e) prior

to the withdrawal of the NAP remains ineffect.

(ii) Revocation with an AAR. The part-nership may revoke a designation of apartnership representative or appointmentof a designated individual for the taxableyear prior to receiving a notice of selec-tion for examination or a NAP by filing avalid administrative adjustment request(AAR) in accordance with section 6227 fora partnership taxable year. A partnershipmay not use the form prescribed by the IRSfor filing an AAR solely for the purpose ofrevoking a designation of a partnership rep-resentative or appointment of a designatedindividual. See § 301.6227–1 for the rulesregarding the time and manner of filing anAAR.

(3) Effective date of revocation. Exceptas described in paragraph (e)(6)(ii) of thissection (regarding the effective date of arevocation of a partnership representativedesignated by the IRS under paragraph(f)(5) of this section), a valid revocation isimmediately effective upon the IRS’s re-ceipt of the written notification describedin paragraph (e)(1) of this section. A re-vocation of a partnership representativedesignation and a designation of a newpartnership representative (and appoint-ment of a new designated individual, ifapplicable) is effective on the date thepartnership files a valid AAR. Similarly, arevocation of a designated individual ap-pointment and appointment of a new des-ignated individual is effective on the datethe partnership files a valid AAR. As ofthe effective date of the revocation—

(i) The revoked partnership representa-tive (and designated individual, if appli-cable) may not take any action on behalfof the partnership with respect to the part-nership taxable year affected by the revo-cation;

(ii) The designation of the revokedpartnership representative is no longer ineffect, and the successor partnership rep-resentative designation (and designatedindividual appointment, if applicable) isin effect with respect to the partnershiptaxable year affected by the revocation;

(iii) In the case of a revoked entitypartnership representative, the appoint-ment of the designated individual is nolonger in effect with respect to the part-nership taxable year affected by the revo-cation; and


(iv) In the case of a revoked designatedindividual where the designation of theentity partnership representative has notbeen revoked, the revoked designated in-dividual may not take any action on behalfof the partnership with respect to the part-nership taxable year affected by the revo-cation, the appointment of the revokeddesignated individual is no longer in ef-fect, and the appointment of the successordesignated individual is in effect.

(4) Partners who may sign revocation.A revocation under this paragraph (e)must be signed by a person who was apartner at any time during the partnershiptaxable year to which the revocation re-lates or as provided in forms, instructions,and other guidance prescribed by the IRS.

(5) Form of the revocation. The writtennotification of revocation described inparagraph (e)(1) of this section must in-clude the items described in this para-graph (e)(5). A notification of revocationdescribed in paragraph (e)(1) of this sec-tion that does not include each of thefollowing items is not a valid revocation:

(i) A certification under penalties ofperjury that the person signing the notifi-cation is a partner described in paragraph(e)(4) of this section authorized by thepartnership to revoke the designation ofthe partnership representative (or appoint-ment of the designated individual, if ap-plicable).

(ii) A statement that the person signingthe notification is revoking the designa-tion of the partnership representative (orappointment of the designated individual,if applicable);

(iii) A designation of a successor part-nership representative (and appointmentof a designated individual, if applicable)in accordance with this section and forms,instructions, and other guidance pre-scribed by the IRS; and

(iv) In the case of a revocation of anappointment of a designated individual,appointment of a successor designated in-dividual in accordance with this sectionand forms, instructions, and other guid-ance prescribed by the IRS.

(6) Partnership representative desig-nated by the IRS—(i) In general. If apartnership representative is designated(and a designated individual is appointed,if applicable) by the IRS pursuant to para-graph (f)(5) of this section, the partnership

may only revoke that designation (or theappointment of the designated individual,if applicable) with the permission of theIRS, which the IRS will not unreasonablywithhold.

(ii) Effective date of revocation. Theeffective date of any revocation submittedin accordance with paragraph (e)(6)(i) ofthis section is the date on which the IRSsends notification that the revocation isvalid.

(7) Multiple revocations —(i) In gen-eral. The IRS may determine that a des-ignation is not in effect under paragraph(f) of this section if:

(A) The IRS receives a revocation of adesignation of a partnership representativeor appointment of a designated individual,and

(B) Within the 90-day period prior tothe date the revocation described in para-graph (e)(7)(i)(A) of this section was re-ceived, the IRS received another revoca-tion for the same partnership taxable year.

(ii) Time limitation. The IRS may notdetermine that a designation is not in ef-fect in accordance with paragraph (e)(7)(i)of this section later than 90 days after theIRS’s receipt of the revocation describedin paragraph (e)(7)(i)(A) of this section.

(8) Examples. The following examplesillustrate the rules of this paragraph (e).

Example 1. Partnership properly designates PR,an individual, as partnership representative for its2018 taxable year on its timely filed 2018 partner-ship return. In 2020, Partnership mails written noti-fication to the IRS to revoke designation of PR as itspartnership representative for Partnership’s 2018taxable year. The revocation is not made in connec-tion with an AAR for Partnership’s 2018 taxableyear, and the IRS has not mailed Partnership a noticeof selection for examination or a NAP under section6231(a)(1) with respect to Partnership’s 2018 tax-able year. Because the revocation was not madewhen permitted under paragraph (e)(2) of this sec-tion, the revocation is not effective and B remainsthe partnership representative for Partnership’s 2018taxable year unless and until B’s status as partner-ship representative is properly revoked under para-graph (e) of this section or terminated in accordancewith paragraph (d) (regarding resignation) or (f) (re-garding IRS designation) of this section.

Example 2. During an administrative proceedingwith respect to Partnership’s 2018 taxable year, Part-nership provides the IRS with written notification torevoke its designation of PR, an individual, as itspartnership representative for the 2018 taxable year.The written notification does not include a designa-tion of a new partnership representative for Partner-ship’s 2018 taxable year. Because the revocationdoes not include a designation of a new partnershiprepresentative as required under paragraph (e)(1) of

this section, the revocation is not effective and PRremains the partnership representative for Partner-ship’s 2018 taxable year unless and until B’s statusas partnership representative is properly revoked un-der paragraph (e) of this section or terminated inaccordance with paragraph (d) (regarding resigna-tion) or (f) (regarding IRS designation) of this sec-tion.

(f) Designation of the partnership rep-resentative by the IRS–(1) In general. Ifthe IRS determines that a designation of apartnership representative is not in effectfor a partnership taxable year in accor-dance with paragraph (f)(2) of this sec-tion, the IRS will notify the partnershipthat a partnership representative designa-tion is not in effect. The IRS will alsonotify the most recent partnership repre-sentative for the partnership taxable year,except as described in paragraph (f)(2)(iii)of this section. In the case of an entitypartnership representative, the notificationwill be sent to the entity partnership rep-resentative, to the attention of the desig-nated individual. The determination that adesignation is not in effect is effective onthe date the IRS mails the notification.Except as described in paragraph (f)(4) ofthis section, the partnership may desig-nate, in accordance with paragraph (f)(3)of this section, a successor partnershiprepresentative (and designated individual,if applicable) eligible under paragraph (b)of this section within 30 days of the datethe IRS mails the notification. In the caseof a resignation of a partnership represen-tative, this notification may include thewritten confirmation of receipt describedin paragraph (d)(1) of this section. Seeparagraph (f)(2)(iv) of this section. If thepartnership does not designate a successorwithin 30 days from the date of IRS noti-fication, the IRS will designate a partner-ship representative in accordance withparagraph (f)(5) of this section. A partner-ship representative designation made inaccordance with paragraphs (c), (e), or (f)of this section remains in effect until theIRS determines the designation is not ineffect. See § 301.6223–2 for binding na-ture of actions taken by the partnershiprepresentative or designated individual onbehalf of a partnership representative, ifapplicable, prior to a determination by theIRS that the designation is not in effect.

(2) IRS determination that partnershiprepresentative designation not in effect.The IRS may, but is not required to, de-


termine that a partnership representativedesignation is not in effect. The IRS is notobligated to search for or otherwise seekout information related to the circum-stances in which the IRS may determine apartnership representative designation isnot in effect, and the fact that the IRS isaware of any such circumstances does notobligate the IRS to determine that a part-nership representative designation is notin effect. The IRS may determine that thepartnership representative designation isnot in effect if the IRS determines that –

(i) The partnership representative orthe designated individual does not havesubstantial presence as described in para-graph (b)(2) of this section;

(ii) The partnership failed to appoint adesignated individual as described inparagraph (b)(3) of this section, as appli-cable;

(iii) The partnership failed to make avalid designation as described in para-graph (c) of this section;

(iv) The partnership representative ordesignated individual resigns as describedin paragraph (d) of this section;

(v) The partnership has made multiplerevocations as described in paragraph(e)(7) of this section; or

(vi) The partnership representative des-ignation is no longer in effect as describedin other published guidance.

(3) Designation by the partnershipduring the 30-day period. Designation ofa partnership representative (and appoint-ment of a designated individual, if appli-cable) by the partnership during the 30-day period described in paragraph (f)(1)of this section must be made in accor-dance with forms, instructions, and otherguidance prescribed by the IRS. If thepartnership fails to provide all informationrequired by forms, instructions, and otherguidance, the partnership will have failedto make a designation (and appointment,if applicable). If the partnership does notfully comply with the requirement of thisparagraph (f)(3) within the 30-day perioddescribed in paragraph (f)(1) of this sec-tion, the IRS will designate a partnershiprepresentative (and appoint a designatedindividual, if applicable).

(4) No opportunity for designation bythe partnership in the case of multiplerevocations. In the event that the IRS de-termines a partnership representative des-

ignation is not in effect due to multiplerevocations as described in paragraph(e)(7) of this section, the partnership willnot be given an opportunity to designatethe successor partnership representativeprior to the designation by the IRS asdescribed in paragraph (f)(5) of this sec-tion. However, see paragraph (e)(6) of thissection regarding revocation of a partner-ship representative designated by the IRS.

(5) Designation by the IRS–(i) In gen-eral. The IRS designates a partnershiprepresentative under this paragraph (f)(5)by notifying the partnership of the name,address, and telephone number of the newpartnership representative. If the IRS des-ignates an entity partnership representa-tive, the IRS will also appoint a desig-nated individual to act on behalf of theentity partnership representative. The des-ignation of a partnership representative(and appointment of a designated individ-ual, if applicable) by the IRS is effectiveon the date on which the IRS mails thenotification of the designation (and ap-pointment, if applicable) to the partner-ship. The IRS will also mail a copy of thenotification of the designation (and ap-pointment, if applicable) to the new part-nership representative (through the newdesignated individual, if applicable) thathas been designated (and appointed, ifapplicable) by the IRS under this section.

(ii) Factors considered when partner-ship representative designated by the IRS.The IRS will ordinarily consider one ormore of the factors set forth in this para-graph (f)(5)(ii) when determining whom todesignate as partnership representative. Nosingle factor is determinative, and other thanas described in paragraph (f)(5)(iii) of thissection, the IRS may exercise its discretionto designate a person as partnership repre-sentative even if none of the factors areapplicable to such person. The factors arenot requirements for eligibility to be desig-nated by the IRS as partnership representa-tive; the only requirements for eligibility aredescribed under paragraph (b) of this sec-tion. The IRS is not obligated to search foror otherwise seek out information related tothe factors, and the fact that the IRS is awareof any information related to such factorsdoes not obligate the IRS to designate aparticular person. Although the IRS maydesignate any person to be the partnershiprepresentative, a principal consideration in

determining whom to designate as a part-nership representative is whether there is areviewed year partner that is eligible toserve as the partnership representative inaccordance with paragraph (b)(1) of thissection or whether there is a partner at thetime the partnership representative designa-tion is made that is eligible to serve as thepartnership representative. Other factors thatwill ordinarily be considered by the IRS indetermining whom to designate as a part-nership representative include, but are notlimited to:

(A) The views of the partners having amajority interest in the partnership regard-ing the designation;

(B) The general knowledge of the per-son in tax matters and the administrativeoperation of the partnership;

(C) The person’s access to the booksand records of the partnership;

(D) Whether the person is a UnitedStates person (within the meaning of sec-tion 7701(a)(30)); and

(E) The profits interest of the partner inthe case of a partner.

(iii) IRS employees. The IRS will notdesignate a current employee, agent, or con-tractor of the IRS as the partnership repre-sentative unless that employee, agent, orcontractor was a reviewed year partner or iscurrently a partner in the partnership.

(6) Examples. The following examplesillustrate the rules of this paragraph (f).

Example 1. The IRS determines that Partnershiphas designated a partnership representative that doesnot have substantial presence in the United States asdefined in paragraph (b)(2) of this section. The IRSmay, but is not required to, determine that the des-ignation is not in effect and designate a new part-nership representative after following the proceduresin this paragraph (f).

Example 2. Partnership designates as its partner-ship representative a corporation but fails to appointa designated individual to act on behalf of the cor-poration as required under paragraph (b)(3) of thissection. The IRS may, but is not required to, deter-mine that the partnership representative designationis not in effect and may designate a new partnershiprepresentative after following the procedures in thisparagraph (f).

Example 3. The partnership representative re-signs pursuant to paragraph (d) of this section. TheIRS mails Partnership a notification informing Part-nership that no designation is in effect and that theIRS plans to designate a new partnership represen-tative. Partnership fails to respond within 30 days ofthe date the IRS mails the notification. The IRS mustdesignate a partnership representative pursuant tothis paragraph (f).

Example 4. Partnership designated on its partner-ship return a partnership representative, PR1. After


Partnership received a NAP, Partnership submits tothe IRS the form described in paragraph (e)(4) of thissection requesting the revocation of PR1’s designa-tion as partnership representative and designatingPR2 as the partnership representative. Sixty dayslater, Partnership signs and submits a form describedin paragraph (e)(4) of this section requesting therevocation of PR2’s designation as partnership rep-resentative and designating PR3 as the partnershiprepresentative. The IRS accepts the revocation ofPR2 and designation of PR3 as valid and effectiveupon receipt pursuant to paragraph (e)(3) of thissection. However, because PR2’s revocation waswithin 90 days of PR1’s revocation, the IRS maydetermine within 90 days of IRS’s receipt of PR2’srevocation, pursuant to paragraphs (e)(7) and (f)(2)of this section, that there is no designation in effectdue to multiple revocations. The IRS may then des-ignate a new partnership representative pursuant tothis paragraph (f) without allowing Partnership anopportunity to designate a partnership representativewithin the 30-day period described in paragraph(f)(1) of this section.

(g) Reliance on forms required by thissection. The IRS may rely on any form orother document filed or submitted underthis section as evidence of the designation,resignation, or revocation on such formand as evidence of the date on which suchform was filed or submitted relating to adesignation, resignation, or revocation.

(h) Applicability date—(1) In general.Except as provided in paragraph (h)(2) ofthis section, this section applies to part-nership taxable years beginning after De-cember 31, 2017.

(2) Election under § 301.9100–22 in ef-fect. This section applies to any partnershiptaxable years beginning after November 2,2015 and before January 1, 2018 for whicha valid election under § 301.9100–22 is ineffect.

Par. 3. Section 301.6223–2 is added toread as follows:

§ 301.6223–2 Binding effect of actionsof the partnership and partnershiprepresentative.

(a) Binding nature of actions by part-nership and final decision in a partnershipproceeding. The actions of the partnershipand the partnership representative takenunder subchapter C of chapter 63 of theInternal Revenue Code (subchapter C ofchapter 63) and any final decision in a pro-ceeding brought under subchapter C ofchapter 63 with respect to the partnershipbind the partnership, all partners of the part-nership (including partnership-partners asdefined in § 301.6241–1(a)(7) that have a

valid election under section 6221(b) in ef-fect for any taxable year that ends with orwithin the taxable year of the partnership),and any other person whose tax liability isdetermined in whole or in part by taking intoaccount directly or indirectly adjustmentsdetermined under subchapter C of chapter63 (for example, indirect partners as definedin § 301.6241–1(a)(4)). For instance, a set-tlement agreement entered into by the part-nership representative on behalf of thepartnership, a notice of final partnership ad-justment (FPA) with respect to the partner-ship that is not contested by the partnership,or the final decision of a court with respectto the partnership if the FPA is contested,binds all persons described in the precedingsentence.

(b) Actions by the partnership repre-sentative before termination of designa-tion. A termination of the designation of apartnership representative because of aresignation under § 301.6223–1(d) ora revocation under § 301.6223–1(e), or asa result of a determination by the InternalRevenue Service (IRS) under § 301.6223–1(f) that the designation is not in effect, doesnot affect the validity of any action taken bythat partnership representative during theperiod prior to such termination. For exam-ple, if a partnership representative properlydesignated under § 301.6223–1 consentedto an extension of the period of limitationson making adjustments under section6235(b) in accordance with § 301.6235–1(d), that extension remains valid even aftertermination of the designation of that part-nership representative.

(c) Actions by the partnership repre-sentative upon withdrawal of notice ofadministrative proceeding. If the IRS is-sues a notice of administrative proceeding(NAP) under section 6231(a)(1) and sub-sequently withdraws such NAP pursuantto § 301.6231–1(f), any actions taken by apartnership representative (or successorpartnership representative after a changeto the partnership representative that oc-curred after the issuance of the NAP andbefore the NAP was withdrawn) are bind-ing as described in paragraph (a) of thissection even though the NAP has beenwithdrawn and has no effect for purposesof subchapter C of chapter 63.

(d) Partnership representative has thesole authority to act on behalf of the part-nership–(1) In general. The partnership

representative has the sole authority to acton behalf of the partnership for all pur-poses under subchapter C of chapter 63. Inthe case of an entity partnership represen-tative, the designated individual has thesole authority to act on behalf of the part-nership representative and the partnership.Except for a partner that is the partnershiprepresentative or the designated individ-ual, no partner, or any other person, mayparticipate in an administrative proceed-ing without the permission of the IRS. Thefailure of the partnership representative tofollow any state law, partnership agree-ment, or other document or agreement hasno effect on the authority of the partner-ship representative or the designated indi-vidual as described in section 6223,§ 301.6223–1, and this section. Nothing inthis section affects, or otherwise restricts,the ability of a partnership representativeto authorize a person to represent the part-nership representative, in the partnershiprepresentative’s capacity as the partner-ship representative, before the IRS under avalid power of attorney in a proceedinginvolving the partnership under subchap-ter C of chapter 63.

(2) Designation provides authority tobind the partnership—(i) Partnershiprepresentative. A partnership representa-tive, by virtue of being designated undersection 6223 and § 301.6223–1, has theauthority to bind the partnership for allpurposes under subchapter C of chapter63.

(ii) Designated individual. A partnershipthat is required to appoint a designated in-dividual described under § 301.6223–1(b)(3)(i) acts through such designated indi-vidual. By virtue of being appointed as partof the designation of the partnership repre-sentative under § 301.6223–1, the desig-nated individual has the sole authority tobind the partnership representative andtherefore the partnership, its partners, andany other person as described in paragraph(a) of this section for all purposes undersubchapter C of chapter 63 so long as thepartnership representative designation anddesignated individual appointment are in ef-fect.

(e) Examples. The following examplesillustrate the rules of this section.

Example 1. Partnership designates a partnershiprepresentative, PR, on its timely filed partnershipreturn for 2020. PR is a partner in Partnership. Thepartnership agreement for Partnership includes a


clause that requires PR to consult with an identifiedmanagement group of partners in Partnership beforetaking any action with respect to an administrativeproceeding before the IRS. The IRS initiates anadministrative proceeding with respect to Partner-ship’s 2020 taxable year. During the course of theadministrative proceeding, PR consents to an exten-sion of the period of limitations on making adjust-ments under section 6235(b) allowing additionaltime for the IRS to mail an FPA. PR failed to consultwith the management group of partners prior toagreeing to this extension of time. PR’s consentprovided to the IRS to extend the time period is validand binding on Partnership because, pursuant to sec-tion 6223, PR, as the designated partnership repre-sentative, has authority to bind Partnership and all itspartners.

Example 2. Partnership designates a partnershiprepresentative, PR, on its timely filed partnershipreturn for 2020. PR is not a partner in Partnership.During an administrative proceeding with respect toPartnership’s 2020 taxable year, PR agrees to certainpartnership adjustments and within 45 days after theissuance of the FPA elects the alternative to paymentof the imputed underpayment under section 6226.Certain partners in Partnership challenge the actionstaken by PR during the administrative proceedingand the validity of the section 6226 statements fur-nished to those partners, alleging that PR was neverauthorized to act on behalf of Partnership under statelaw or the partnership agreement. Because PR wasdesignated by Partnership as the partnership repre-sentative under section 6223 and this section, PRwas authorized to act on behalf of Partnership for allpurposes under subchapter C of chapter 63, and theIRS may rely on that designation as conclusive ev-idence of PR’s authority to act on behalf of Partner-ship.

Example 3. Partnership designates an entity part-nership representative, EPR, and appoints an indi-vidual, A, as the designated individual on its timelyfiled partnership return for 2020. EPR is a C corpo-ration. A is unaffiliated with EPR and is not anofficer, director, or employee of EPR. During anadministrative proceeding with respect to Partner-ship’s 2020 taxable year, A, acting for EPR, agreesto an extension of the period of limitations on mak-ing adjustments under section 6235(b) from March15, 2024 to December 31, 2024. The IRS mails anFPA with respect to the 2020 partnership taxableyear on December 13, 2024, before expiration of theextended period of limitations on making adjust-ments as agreed to by EPR, but after the expirationof the unextended period of limitations on makingadjustments. Partnership challenges the FPA as un-timely, alleging that A was not authorized understate law to act on behalf of EPR and thus theextension agreement was invalid. Because A wasappointed by the partnership as the designated indi-vidual to act on behalf of EPR, A was authorized toact on behalf of EPR for all purposes under subchap-ter C of chapter 63, and the IRS may rely on thatappointment as conclusive evidence of A’s authorityto act on behalf of EPR and Partnership.

Example 4. The partnership representative, PR,consents to an extension of the period of limitationson making adjustments under section 6235(b) and§ 301.6235–1(d) for Partnership for the partnership

taxable year. After signing the consent, PR resignsas partnership representative in accordance with§ 301.6223–1(d). The consent to extend the period oflimitations on making adjustments under section6235(b) remains valid even after PR resigns.

Example 5. Partnership designates a partnershiprepresentative who does not make themselves avail-able to meet with the IRS in person in the UnitedStates as required by § 301.6223–1(b). Although thepartnership representative does not have substantialpresence in the United States within the meaning of§ 301.6223–1(b)(2), until a termination occurs under§ 301.6223–1(d) or (e) or the IRS determines thepartnership representative designation is no longer ineffect under § 301.6223–1(f), the partnership repre-sentative designation remains in effect, and Partner-ship and all its partners are bound by the actions ofthe partnership representative.

Example 6. Partnership designates PR1 as thepartnership representative on its timely filed partner-ship return for 2020. On September 1, 2022, the IRSsends a NAP for the 2020 taxable year to Partnershipand PR, and Partnership revokes PR1’s designationand designates PR2 as the partnership representativein accordance with § 301.6223–1(e). On November1, 2023, PR2 consents to an extension of the periodof limitations on making adjustments under section6235(b) and § 301.6235(d) for Partnership’s 2020taxable year. On December 1, 2023, the IRS thenwithdraws the NAP. PR2 remains the partnershiprepresentative, and the consent to extend the periodof limitations on making adjustments under section6235(b) remains valid even after the NAP is with-drawn.

(f) Applicability date—(1) In general.Except as provided in paragraph (f)(2) ofthis section, this section applies to part-nership taxable years beginning after De-cember 31, 2017.

(2) Election under § 301.9100–22 ineffect. This section applies to any partner-ship taxable years beginning after Novem-ber 2, 2015 and before January 1, 2018 forwhich a valid election under § 301.9100–22is in effect.

Par. 4. Section 301.9100–22 is addedto read as follows:

§ 301.9100–22 Time, form, and mannerof making the election under section1101(g)(4) of the Bipartisan Budget Actof 2015 for returns filed for partnershiptaxable years beginning after November2, 2015 and before January 1, 2018.

(a) Election. Pursuant to section 1101(g)(4) of the Bipartisan Budget Act of 2015,Public Law 114–74 (BBA), a partnershipmay elect at the time and in such form andmanner as described in this section foramendments made by section 1101 of theBBA, except section 6221(b) as added bythe BBA, to apply to any return of the

partnership filed for an eligible taxableyear as defined in paragraph (d) of thissection. An election is valid only if madein accordance with this section. Oncemade, an election may only be revokedwith the consent of the Internal RevenueService (IRS). An election is not valid if itfrustrates the purposes of section 1101 ofthe BBA. A partnership may not requestan extension of time under § 301.9100–3for an election described in this section.

(b) Election on notification by theIRS—(1) Time for making the election.Except as described in paragraph (c) ofthis section, an election under this sectionmust be made within 30 days of the dateof notification to a partnership, in writing,that a return of the partnership for aneligible taxable year has been selected forexamination (a notice of selection for ex-amination).

(2) Form and manner of making theelection—(i) In general. The partnershipmakes an election under this section by pro-viding a written statement with the words“Election under Section 1101(g)(4)” writtenat the top that satisfies the requirements ofparagraph (b)(2) of this section to the indi-vidual identified in the notice of selectionfor examination as the IRS contact regard-ing the examination.

(ii) Statement requirements. A state-ment making an election under this sec-tion must be in writing and be dated andsigned by the tax matters partner, as de-fined under section 6231(a)(7) (prior toamendment by the BBA), and the appli-cable regulations, or an individual whohas the authority to sign the partnershipreturn for the taxable year under section6063, the regulations thereunder, and ap-plicable forms and instructions. The factthat an individual dates and signs thestatement making the election describedin this paragraph (b) shall be prima facieevidence that the individual is authorizedto make the election on behalf of the part-nership. A statement making an electionmust include—

(A) The partnership’s name, taxpayeridentification number, and the partnershiptaxable year for which the election de-scribed in this paragraph (b) is beingmade;

(B) The name, taxpayer identificationnumber, address, and daytime telephone


number of the individual who signs thestatement;

(C) Language indicating that the part-nership is electing application of section1101(c) of the BBA for the partnershipreturn for the eligible taxable year identi-fied in the notice of selection for exami-nation;

(D) The information required to prop-erly designate the partnership representa-tive as defined by section 6223 asamended by the BBA, which must includethe name, taxpayer identification number,address, and daytime telephone number ofthe partnership representative and any ad-ditional information required by applica-ble regulations, forms and instructions,and other guidance issued by the IRS;

(E) The following representations—(1) The partnership is not insolvent and

does not reasonably anticipate becominginsolvent before resolution of any adjust-ment with respect to the partnership tax-able year for which the election describedin this paragraph (b) is being made;

(2) The partnership has not filed, anddoes not reasonably anticipate filing, vol-untarily a petition for relief under title 11of the United States Code;

(3) The partnership is not subject to,and does not reasonably anticipate becom-ing subject to, an involuntary petition forrelief under title 11 of the United StatesCode; and

(4) The partnership has sufficient as-sets, and reasonably anticipates havingsufficient assets, to pay a potential im-puted underpayment with respect to thepartnership taxable year that may be de-termined under subchapter C of chapter63 of the Internal Revenue Code asamended by the BBA; and

(F) A representation, signed under pen-alties of perjury, that the individual sign-ing the statement is duly authorized tomake the election described in this para-graph (b) and that, to the best of the indi-vidual’s knowledge and belief, all of theinformation contained in the statement istrue, correct, and complete.

(iii) Notice of Administrative Pro-ceeding. Upon receipt of the electiondescribed in this paragraph (b), the IRSwill promptly mail a notice of adminis-trative proceeding to the partnershipand the partnership representative, asrequired under section 6231(a)(1) asamended by the BBA. Notwithstandingthe preceding sentence, the IRS will notmail the notice of administrative pro-ceeding before the date that is 30 daysafter receipt of the election described inparagraph (b) of this section.

(c) Election for the purpose of filing anadministrative adjustment request (AAR)under section 6227 as amended by theBBA—(1) In general. A partnership thathas not been issued a notice of selectionfor examination as described in paragraph(b)(1) of this section may make an elec-tion with respect to a partnership returnfor an eligible taxable year for the purposeof filing an AAR under section 6227 asamended by the BBA. Once an electionunder this paragraph (c) is made, all of theamendments made by section 1101 of theBBA, except section 6221(b) as added bythe BBA, apply with respect to the part-nership taxable year for which such elec-tion is made.

(2) Time for making the election. Noelection under this paragraph (c) may bemade before January 1, 2018.

(3) Form and manner of making anelection. An election under this paragraph(c) must be made in the manner prescribedby the IRS for that purpose in accordancewith applicable regulations, forms and in-structions, and other guidance issued bythe IRS.

(4) Effect of filing an AAR before Jan-uary 1, 2018. Except in the case of anelection made in accordance with para-graph (b) of this section, an AAR filed onbehalf of a partnership before January 1,2018, is deemed for purposes of paragraph(d)(2) of this section, to be an AAR filedunder section 6227(c) (prior to amend-ment by the BBA) or an amended returnof partnership income, as applicable.

(d) Eligible taxable year—(1) In gen-eral. For purposes of this section, the termeligible taxable year means any partner-ship taxable year beginning after Novem-ber 2, 2015 and before January 1, 2018,except as provided in paragraph (d)(2) ofthis section.

(2) Exception if AAR or amended re-turn filed or deemed filed. Notwithstand-ing paragraph (d)(1) of this section, a part-nership taxable year is not an eligibletaxable year for purposes of this section iffor the partnership taxable year—

(i) The tax matters partner has filed anAAR under section 6227(c) (prior toamendment by the BBA),

(ii) The partnership is deemed to havefiled an AAR under section 6227(c) (priorto the amendment by the BBA) in accor-dance with paragraph (c)(4) of this sec-tion, or

(iii) An amended return of partnershipincome has been filed or has been deemedto be filed under paragraph (c)(4) of thissection.

(e) Applicability date. These regula-tions are applicable to returns filed forpartnership taxable years beginning afterNovember 2, 2015 and before January 1,2018.

§ 301.9100–22T [Removed]

Par. 5. Section 301.9100 –22T isremoved.

Kirsten Wielobob,Deputy Commissioner for Services

and Enforcement.Approved: July 20, 2018

David J. Kautter,Assistant Secretary of the Treasury

(Tax Policy).

(Filed by the Office of the Federal Register on August 6,2018, 4:15 p.m., and published in the issue of the FederalRegister for August 9, 2018, 83 F.R. 39331)


Part III. Administrative, Procedural, and MiscellaneousMethods for CalculatingW–2 Wages for Purposes ofSection 199A

Notice 2018–64

SECTION 1. PURPOSE

This notice (Notice) contains a pro-posed revenue procedure that providesguidance on methods for calculating W–2wages for purposes of section 199A of theInternal Revenue Code (Code) and pro-posed §§ 1.199A–1 through 1.199A–6 ofthe Income Tax Regulations (26 CFR part1), which are contained in a notice ofproposed rulemaking (REG–107892–18)being published contemporaneously withthis Notice. Specifically, this Notice pro-vides methods for calculating W–2 wages(1) for purposes of section 199A(b)(2),which, for certain taxpayers, provides alimitation based on W–2 wages to theamount of the deduction for qualified busi-ness income under section 199A(a); and (2)for purposes of section 199A(b)(7), which,for certain specified agricultural and horti-cultural cooperative patrons, provides a re-duction to the section 199A(a) deductionbased on W–2 wages.

SECTION 2. BACKGROUND

Section 199A was enacted on Decem-ber 22, 2017 as part of the act entitled “AnAct to provide for reconciliation pursuantto titles II and V of the concurrent reso-lution on the budget for fiscal year 2018,”P.L. 115–97 (Act), and was amended onMarch 23, 2018 retroactively to January 1,2018, by H.R.1625 – Consolidated Ap-propriations Act, 2018, P.L. 115–141,(H.R. 1625). Congress enacted section199A to provide a deduction to non-corporate taxpayers of up to 20 percent ofthe taxpayer’s qualified business income(QBI) from each of the taxpayer’s quali-fied trades or businesses, including thoseoperated through a partnership, S corpo-ration, or sole proprietorship, as well as adeduction of up to 20 percent of aggregatequalified REIT dividends and qualifiedpublicly traded partnership income. Foreach qualified trade or business, section199A(b)(2) limits the amount of the sec-

tion 199A deduction to the lesser of (1) 20percent of the taxpayer’s QBI with respectto the qualified trade or business, or (2)the greater of (A) 50 percent of the W–2wages with respect to the qualified tradeor business, or (B) the sum of 25 percentof the W–2 wages with respect to thequalified trade or business plus 2.5 percentof the unadjusted basis immediately afteracquisition of all qualified property. Un-der section 199A(b)(3), this limitation isphased in above a threshold amount oftaxable income.

Section 199A(b)(7) provides that in thecase of any qualified trade or business of apatron of a specified agricultural or horti-cultural cooperative, the amount deter-mined under section 199A(b)(2) with re-spect to such trade or business shall bereduced by the lesser of (A) 9 percent ofso much of the qualified business incomewith respect to such trade or business as isproperly allocable to qualified paymentsreceived from such cooperative, or (B) 50percent of so much of the W–2 wageswith respect to such trade or business asare so allocable.

Section 199A(b)(4)(A) of the Code de-fines the term “W–2 wages” to mean, withrespect to any person for any taxable yearof such person, the amounts described insection 6051(a)(3) and (8) paid by suchperson with respect to employment of em-ployees by such person during the calen-dar year ending during such taxable year.Proposed § 1.199A–2 further defines W–2wages for purposes of section 199A. Theproposed revenue procedure included inthis Notice would provide methods forcalculating the amount of W–2 wages, asdefined in section 199A(b)(4) and pro-posed § 1.199A–2, for purposes of deter-mining the deduction limitation in section199A(b)(2) and the reduction in section199A(b)(7). Section 1.199A–2(b)(2)(iv)(A) of the proposed regulations provides theInternal Revenue Service with authority toissue guidance providing the methods thatmay be used to calculate W–2 wages.

SECTION 3. REQUEST FORCOMMENTS

The Treasury Department and the IRSrequest comments on this proposed reve-

nue procedure. In particular, the TreasuryDepartment and the IRS request com-ments concerning the calculation of “W–2wages” with respect to remuneration paidfor services performed in Puerto Rico.Section 199A(f)(1)(C)(ii) provides that inthe case of a taxpayer with qualified busi-ness income from sources within the com-monwealth of Puerto Rico, the determina-tion of W–2 wages of such taxpayer shallbe made without regard to any exclusionunder section 3401(a)(8) for remunerationpaid for services performed in the Com-monwealth of Puerto Rico. Because bonafide residents of the Commonwealth ofPuerto Rico are not subject to federal in-come tax and do not receive Forms W–2,the methods provided in the proposed rev-enue procedure will be difficult to applywith respect to employees who are resi-dents of Puerto Rico. The Treasury De-partment and the IRS request commentsconcerning appropriate methods for calcu-lating W–2 wages with respect to remu-neration paid for services performed inPuerto Rico by bona fide residents ofPuerto Rico.

Interested parties are invited to submitcomments on this Notice by October 1,2018. Comments should be submittedto: CC:PA:LPD:PR (Notice 2018–64),Room 5203, Internal Revenue Service,P.O. Box 7604, Ben Franklin Station,Washington, D.C., 20044. Submissionsmay be hand-delivered Monday throughFriday between the hours of 8 a.m. and 4p.m. to CC:PA:LPD:PR (Notice 2018–64), Courier’s Desk, Internal Revenue Ser-vice, 1111 Constitution Avenue, N.W.,Washington, D.C. 20224. Alternatively, tax-payers may submit comments electronicallyto [email protected] include “Notice 2018–64” in thesubject line of any electronic submission.

SECTION 4. EFFECTIVE DATEAND IMMEDIATE RELIANCE

This Notice is effective on August 27,2018. The proposed revenue procedure isproposed to apply generally to taxableyears ending after December 31, 2017.

Until such time that the proposed rev-enue procedure is published in final form,taxpayers may use the methods described


in the proposed revenue procedure in cal-culating W–2 wages, as defined in section199A(b)(4)(A), for purposes of determin-ing the limitation in section 199A(b)(2)and the reduction in section 199A(b)(7).

SECTION 5. DRAFTINGINFORMATION

The principal authors of this Notice areAndrew Holubeck and Mikhail Zhidkovof the Office of the Associate Chief Coun-sel (Tax Exempt and Government Enti-ties) and Frank J. Fisher and Benjamin H.Weaver of the Office of the AssociateChief Counsel (Passthroughs & SpecialIndustries). However, other personnelfrom the Treasury Department and theIRS participated in its development. Forfurther information regarding this Notice,contact Andrew Holubeck or MikhailZhidkov at (202) 317-4774, or Frank J.Fisher or Benjamin H. Weaver at (202)317-6850.

SECTION 6. FORM OF PROPOSEDREVENUE PROCEDURE

Set forth below is the form of the pro-posed revenue procedure that is proposedin this Notice:

FORM OF PROPOSED REVENUEPROCEDURE

26 CFR 1.199A–2: Determination ofW–2 Wages

Rev. Proc. 2018–XX

SECTION 1. PURPOSE

This revenue procedure provides meth-ods for calculating W–2 wages, as definedin section 199A(b)(4) and § 1.199A–2 ofthe Income Tax Regulations, (1) for pur-poses of section 199A(b)(2) of the Inter-nal Revenue Code (Code) which, forcertain taxpayers, provides a limitationbased on W–2 wages to the amount ofthe deduction for qualified business in-come (QBI); and (2) for purposes ofsection 199A(b)(7), which, for certainspecified agricultural and horticulturalcooperative patrons, provides a reduc-tion to the section 199A deduction basedon W–2 wages.

SECTION 2. BACKGROUND

For taxpayers above a certain amountof taxable income, section 199A(b)(2)limits the amount of a taxpayer’s section199A deduction for each qualified trade orbusiness to the lesser of (1) 20 percent ofthe taxpayer’s QBI with respect to thequalified trade or business, or (2) thegreater of (A) 50 percent of the W–2wages with respect to the qualified tradeor business, or (B) the sum of 25 percentof the W–2 wages with respect to thequalified trade or business plus 2.5 percentof the unadjusted basis immediately afteracquisition of all qualified property. Sec-tion 199A(b)(7) provides that in the caseof any qualified trade or business of apatron of a specified agricultural or horti-cultural cooperative, the amount deter-mined under section 199A(b)(2) with re-spect to such trade or business shall bereduced by the lesser of (A) 9 percent ofso much of the qualified business incomewith respect to such trade or business as isproperly allocable to qualified paymentsreceived from such cooperative, or (B) 50percent of so much of the W–2 wageswith respect to such trade or business asare so allocable.

Section 199A(b)(4)(A) defines theterm “W–2 wages” to mean, with respectto any person for any taxable year of suchperson, the amounts described in section6051(a)(3) and (8) paid by such personwith respect to employment of employeesby such person during the calendar yearending during such taxable year. Section199A(b)(4)(B) provides that W–2 wagesdoes not include any amount which is notproperly allocable to qualified business in-come for purposes of section 199A(c)(1).Section 199A(b)(4)(C) provides that W–2wages shall not include any amount that isnot properly included in a return filed withthe Social Security Administration (SSA)on or before the 60th day after the due date(including extensions) for such return.

Section 1.199A–2(b)(2)(iv)(A) of theregulations provides the Internal RevenueService with authority to issue guidanceproviding the methods that may be used tocalculate W–2 wages.

This revenue procedure provides threemethods for calculating W–2 wages, as de-fined in section 199A(b)(4) and § 1.199A–2,for purposes of section 199A(b) and the

regulations thereunder. The first method(the unmodified Box method) allows for asimplified calculation while the second andthird methods (the modified Box 1 methodand the tracking wages method) providegreater accuracy.

W–2 wages calculated under this rev-enue procedure are not necessarily eligi-ble for use in computing the section 199Alimitations. As mentioned above, onlyW–2 wages which are properly allocableto QBI may be taken into account in com-puting the section 199A(b)(2). W–2 wage lim-itations. Under § 1.199A–2(g), the taxpayermust determine the extent to which the W–2wages calculated under this revenue proce-dure are properly allocable to QBI. Then,the properly allocable W–2 wages amount isused in determining the W–2 wages limita-tion under section 199A(b)(2) for that tradeor business as well as any reduction forincome received from cooperatives undersection 199A(b)(7).

SECTION 3. RULES OFAPPLICATION

.01 In general. In calculating W–2wages for a taxable year under the meth-ods described in this revenue procedure,include only wages properly reported onForms W–2 that meet the applicable rulesof § 1.199A–2(b). Specifically, § 1.199A–2(b)(2)(i) provides that, except as pro-vided in § 1.199A–2(b)(2)(iv)(C)(2) (con-cerning short taxable years that do notinclude December 31) and § 1.199A–2(b)(2)(iv)(D) (concerning remunerationfor services performed in the Common-wealth of Puerto Rico), the Forms W–2,“Wage and Tax Statement,” or any subse-quent form or document used in determin-ing the amount of W–2 wages are thoseissued for the calendar year ending duringthe person’s taxable year for wages paidto employees (or former employees) ofthe person for employment by the person.Section 1.199A–2(b)(2)(i) also providesthat, for purposes of § 1.199A–2, employ-ees of the person are limited to employeesof the person as defined in section3121(d)(1) and (2) (that is, officers of acorporation and employees of the personunder the common law rules). Therefore,Forms W–2 provided to statutory employ-ees described in section 3121(d)(3) (thatis, Forms W–2 in which the “StatutoryEmployee” box in Box 13 is checked)


should not be included in calculating W–2wages under any of the methods describedin this revenue procedure.

.02 No application in determiningwhether amounts are wages for employ-ment tax purposes. The discussions of“wages” in this revenue procedure and inthe regulations under section 199A are forpurposes of section 199A only and haveno application in determining whetheramounts are wages under section 3121(a)for purposes of the Federal InsuranceContributions Act, under section 3306(b)for purposes of the Federal Unemploy-ment Tax Act, or under section 3401(a)for purposes of the Collection of IncomeTax at Source on Wages (federal incometax withholding), or any other wage-related determination. See § 1.199A–2 ofthe regulations.

SECTION 4. DEFINITION OF W–2WAGES AND CORRELATIONWITH BOXES ON FORM W–2

.01 Definition of W–2 wages. Section199A(b)(4)(A) provides that W–2 wagesmeans, with respect to any person for anytaxable year of such person, the sum of theamounts described in section 6051(a)(3)and (8) paid by such person with respectto employment of employees by suchperson during the calendar year endingduring such taxable year. Thus, W–2wages include: (i) the total amount ofwages as defined in section 3401(a); (ii)the total amount of elective deferrals(within the meaning of section 402(g)(3)); (iii) the compensation deferred un-der section 457; and (iv) the amount ofdesignated Roth contributions (as de-fined in section 402A).

.02 Correlation with Form W–2. Underthe 2018 Forms W–2, the elective defer-rals under section 402(g)(3) and theamounts deferred under section 457 di-rectly correlate to coded items reported inBox 12 on Form W–2. Box 12, Code D isfor elective deferrals to a section 401(k)cash or deferred arrangement plan (in-cluding a SIMPLE 401(k) arrangement);Box 12, Code E is for elective deferralsunder a section 403(b) salary reductionagreement; Box 12, Code F is for electivedeferrals under a section 408(k)(6) salaryreduction Simplified Employee Pension(SEP); Box 12, Code G is for electivedeferrals and employer contributions (in-

cluding nonelective deferrals) to any gov-ernmental or nongovernmental section457(b) deferred compensation plan; Box12, Code S is for employee salary reduc-tion contributions under a section 408(p)SIMPLE (simple retirement account);Box 12, Code AA is for designated Rothcontributions (as defined in section 402A)under a section 401(k) plan; and Box 12,Code BB is for designated Roth contribu-tions (as defined in section 402A) under asection 403(b) salary reduction agree-ment. However, designated Roth contri-butions are also reported in Box 1, Wages,tips, other compensation and are subject toincome tax withholding.

SECTION 5. METHODS FORCALCULATING W–2 WAGES

For any taxable year, a taxpayer mustcalculate W–2 wages for purposes of sec-tion 199A(b)(2) using one of the threemethods described in section 5.01, 5.02,and 5.03 of this revenue procedure. For ataxpayer with a short taxable year, seeSection 6 of this revenue procedure. Incalculating W–2 wages for a taxable yearunder the methods below, the taxpayerincludes only those Forms W–2 that arefor the calendar year ending with orwithin the taxable year of the taxpayer andthat meet the rules of application de-scribed in section 3 of this revenue proce-dure.

.01 Unmodified box method. Under theunmodified box method, W–2 wages arecalculated by taking, without modifica-tion, the lesser of—

(A) The total entries in Box 1 of allForms W–2 filed with SSA by the tax-payer with respect to employees of thetaxpayer for employment by the tax-payer; or(B) The total entries in Box 5 of allForms W–2 filed with SSA by the tax-payer with respect to employees of thetaxpayer for employment by the tax-payer..02 Modified Box 1 method. Under the

Modified Box 1 method, the taxpayermakes modifications to the total entries inBox 1 of Forms W–2 filed with respect toemployees of the taxpayer. W–2 wagesunder this method are calculated as fol-lows—

(A) Total the amounts in Box 1 of allForms W–2 filed with SSA by the tax-

payer with respect to employees of thetaxpayer for employment by the tax-payer;(B) Subtract from the total in para-graph .02(A) of this section amountsincluded in Box 1 of Forms W–2 thatare not wages for Federal incometax withholding purposes, includingamounts that are treated as wages forpurposes of income tax withholdingunder section 3402(o) (for example,supplemental unemployment compen-sation benefits within the meaning ofRev. Rul. 90–72); and(C) Add to the amount obtained afterparagraph .02(B) of this section thetotal of the amounts that are reported inBox 12 of Forms W–2 with respect toemployees of the taxpayer for employ-ment by the taxpayer and that are prop-erly coded D, E, F, G, and S..03 Tracking wages method. Under

the tracking wages method, the taxpayeractually tracks total wages subject toFederal income tax withholding andmakes appropriate modifications. W–2wages under this method are calculatedas follows—

(A) Total the amounts of wages subjectto Federal income tax withholding thatare paid to employees of the taxpayerfor employment by the taxpayer andthat are reported on Forms W–2 filedwith SSA by the taxpayer for the cal-endar year; and(B) Add to the amount obtained afterparagraph .03(A) of this section thetotal of the amounts that are reported inBox 12 of Forms W–2 with respect toemployees of the taxpayer for employ-ment by the taxpayer and that are prop-erly coded D, E, F, G, and S.

SECTION 6. APPLICATION INCASE OF SHORT TAXABLE YEAR

.01 Special rule for taxpayers with ashort taxable year. In the case of a tax-payer with a short taxable year, subject tothe rules of application described in sec-tion 3 of this revenue procedure, the W–2wages of the taxpayer for the short taxableyear shall include only those wages paidduring the short taxable year to employeesof the taxpayer, only those elective defer-rals (within the meaning of section402(g)(3)) made during the short taxableyear by employees of the taxpayer, and


only compensation actually deferred un-der section 457 during the short taxableyear with respect to employees of the tax-payer. See §1.199A–2(b)(2)(iv)(C) of theregulations.

.02 Method required for a short tax-able year and modifications required inapplication of method. The W–2 wagesof a taxpayer with a short taxable yearshall be determined under the trackingwages method described in section 5.03of this revenue procedure. In applyingthe tracking wages method in the case ofa short taxable year, the taxpayer mustapply the method as follows—

(A) For purposes of section 5.03(A),the total amount of wages subject toFederal income tax withholding andreported on Form W–2 must includeonly those wages subject to Federalincome tax withholding that are actu-ally or constructively paid to employ-ees during the short taxable year andreported on Form W–2 for the calendaryear ending with or within that shorttaxable year (or, for a short taxableyear that does not contain a calendaryear ending with or within such shorttaxable year, wages subject to Federalincome tax withholding that are actu-ally or constructively paid to employ-ees during the short taxable year andreported on Form W–2 for the calendaryear containing such short taxableyear); and(B) For purposes of section 5.03(B),only the portion of the total amountsreported in Box 12, Codes D, E, F, G,and S on Forms W–2, that are actuallydeferred or contributed during the shorttaxable year are included in W–2wages.

SECTION 7. EFFECTIVE DATE

This revenue procedure applies to tax-able years ending after December 31, 2017.

SECTION 8. DRAFTINGINFORMATION

The principal authors of this revenueprocedure are Andrew Holubeck andMikhail Zhidkov of the Office of the As-sociate Chief Counsel (Tax Exempt andGovernment Entities) and Frank J. Fisherand Benjamin H. Weaver of the Office ofthe Associate Chief Counsel (Pass-throughs & Special Industries). However,other personnel from the Treasury Depart-ment and the IRS participated in its devel-opment. For further information regardingthis revenue procedure contact AndrewHolubeck or Mikhail Zhidkov at (202)317-4774, or Frank J. Fisher or BenjaminH. Weaver at (202) 317-6850.

Update for Weighted AverageInterest Rates, Yield Curves,and Segment Rates

Notice 2018–65

This notice provides guidance on thecorporate bond monthly yield curve, thecorresponding spot segment rates used un-der § 417(e)(3), and the 24-month averagesegment rates under § 430(h)(2) of theInternal Revenue Code. In addition, thisnotice provides guidance as to the interestrate on 30-year Treasury securities under§ 417(e)(3)(A)(ii)(II) as in effect for planyears beginning before 2008 and the 30-year Treasury weighted average rate un-der § 431(c)(6)(E)(ii)(I).

YIELD CURVE AND SEGMENT RATES

Section 430 specifies the minimumfunding requirements that apply to single-employer plans (except for CSEC plansunder § 414(y)) pursuant to § 412. Section430(h)(2) specifies the interest rates thatmust be used to determine a plan’s targetnormal cost and funding target. Under thisprovision, present value is generally de-

termined using three 24-month averageinterest rates (“segment rates”), each ofwhich applies to cash flows during speci-fied periods. To the extent provided under§ 430(h)(2)(C)(iv), these segment ratesare adjusted by the applicable percentageof the 25-year average segment rates forthe period ending September 30 of theyear preceding the calendar year in whichthe plan year begins.1 However, an elec-tion may be made under § 430(h)(2)(D)(ii) to use the monthly yield curve inplace of the segment rates.

Notice 2007–81, 2007–44 I.R.B. 899,provides guidelines for determining themonthly corporate bond yield curve, andthe 24–month average corporate bondsegment rates used to compute the targetnormal cost and the funding target. Con-sistent with the methodology specified inNotice 2007–81, the monthly corporatebond yield curve derived from July 2018data is in Table 2018–7 at the end of thisnotice. The spot first, second, and thirdsegment rates for the month of July 2018are, respectively, 3.15, 4.20, and 4.47.

The 24–month average segment ratesdetermined under § 430(h)(2)(C)(i) through(iii) must be adjusted pursuant to § 430(h)(2)(C)(iv) to be within the applicable mini-mum and maximum percentages of the cor-responding 25-year average segment rates.For plan years beginning before 2021, theapplicable minimum percentage is 90%and the applicable maximum percentageis 110%. The 25-year average segmentrates for plan years beginning in 2017and 2018 were published in Notice2016 –54, 2016 – 40 I.R.B. 429, and No-tice 2017–50, 2017– 41 I.R.B. 280, re-spectively.

24-MONTH AVERAGE CORPORATEBOND SEGMENT RATES

The three 24-month average corporatebond segment rates applicable for August2018 without adjustment for the 25-yearaverage segment rate limits are as follows:

24-Month Average Segment Rates Without 25-Year Average Adjustment

Applicable Month First Segment Second Segment Third SegmentAugust 2018 2.21 3.77 4.45

1Pursuant to § 433(h)(3)(A), the 3rd segment rate determined under § 430(h)(2)(C) is used to determine the current liability of a CSEC plan (which is used to calculate the minimum amountof the full funding limitation under § 433(c)(7)(C)).


Based on § 430(h)(2)(C)(iv), the 24-month averages applicable for August

2018, adjusted to be within the applicableminimum and maximum percentages of

the corresponding 25-year average seg-ment rates, are as follows:

Adjusted 24-Month Average Segment Rates

For Plan YearsBeginning In

Applicable Month FirstSegment

SecondSegment

ThirdSegment

2017 August 2018 4.16 5.72 6.48

2018 August 2018 3.92 5.52 6.29

30-YEAR TREASURY SECURITIESINTEREST RATES

Section 431 specifies the minimumfunding requirements that apply to mul-tiemployer plans pursuant to § 412. Sec-tion 431(c)(6)(B) specifies a minimumamount for the full-funding limitation de-scribed in § 431(c)(6)(A), based on theplan’s current liability. Section 431(c)(6)(E)(ii)(I) provides that the interest rate

used to calculate current liability for thispurpose must be no more than 5 percentabove and no more than 10 percent belowthe weighted average of the rates of inter-est on 30-year Treasury securities duringthe four-year period ending on the last daybefore the beginning of the plan year.Notice 88–73, 1988–2 C.B. 383, providesguidelines for determining the weightedaverage interest rate. The rate of intereston 30-year Treasury securities for July

2018 is 3.01 percent. The Service deter-mined this rate as the average of the dailydeterminations of yield on the 30-yearTreasury bond maturing in May 2048. Forplan years beginning in August 2018, theweighted average of the rates of intereston 30-year Treasury securities and thepermissible range of rates used to calcu-late current liability are as follows:

Treasury Weighted Average Rates

For Plan YearsBeginning In

30-Year TreasuryWeighted Average

Permissible Range90% to 105%

August 2018 2.86 2.57 to 3.00

MINIMUM PRESENT VALUESEGMENT RATES

In general, the applicable interest ratesunder § 417(e)(3)(D) are segment rates

computed without regard to a 24-monthaverage. Notice 2007–81 provides guide-lines for determining the minimum pres-ent value segment rates. Pursuant to thatnotice, the minimum present value seg-

ment rates determined for July 2018 are asfollows:

Minimum Present Value Segment Rates

Month First Segment Second Segment Third SegmentJuly 2018 3.15 4.20 4.47

DRAFTING INFORMATION

The principal author of this notice isTom Morgan of the Office of the Associ-

ate Chief Counsel (Tax Exempt and Gov-ernment Entities). However, other person-nel from the IRS participated in thedevelopment of this guidance. For further

information regarding this notice, contactMr. Morgan at 202-317-6700 or TonyMontanaro at 202-317-8698 (not toll-freenumbers).


Table 2018–7Monthly Yield Curve for July 2018

Derived from July 2018 Data

Maturity Yield Maturity Yield Maturity Yield Maturity Yield Maturity Yield

0.5 2.54 20.5 4.45 40.5 4.48 60.5 4.49 80.5 4.50

1.0 2.76 21.0 4.45 41.0 4.48 61.0 4.49 81.0 4.50

1.5 2.96 21.5 4.45 41.5 4.48 61.5 4.49 81.5 4.50

2.0 3.11 22.0 4.45 42.0 4.48 62.0 4.49 82.0 4.50

2.5 3.21 22.5 4.45 42.5 4.48 62.5 4.49 82.5 4.50

3.0 3.28 23.0 4.45 43.0 4.48 63.0 4.49 83.0 4.50

3.5 3.34 23.5 4.45 43.5 4.48 63.5 4.49 83.5 4.50

4.0 3.39 24.0 4.45 44.0 4.48 64.0 4.49 84.0 4.50

4.5 3.44 24.5 4.45 44.5 4.48 64.5 4.49 84.5 4.50

5.0 3.49 25.0 4.45 45.0 4.48 65.0 4.49 85.0 4.50

5.5 3.55 25.5 4.45 45.5 4.48 65.5 4.49 85.5 4.50

6.0 3.61 26.0 4.46 46.0 4.48 66.0 4.49 86.0 4.50

6.5 3.68 26.5 4.46 46.5 4.48 66.5 4.49 86.5 4.50

7.0 3.75 27.0 4.46 47.0 4.48 67.0 4.49 87.0 4.50

7.5 3.82 27.5 4.46 47.5 4.48 67.5 4.49 87.5 4.50

8.0 3.89 28.0 4.46 48.0 4.48 68.0 4.49 88.0 4.50

8.5 3.95 28.5 4.46 48.5 4.48 68.5 4.49 88.5 4.50

9.0 4.01 29.0 4.46 49.0 4.48 69.0 4.49 89.0 4.50

9.5 4.07 29.5 4.46 49.5 4.48 69.5 4.49 89.5 4.50

10.0 4.12 30.0 4.46 50.0 4.48 70.0 4.49 90.0 4.50

10.5 4.17 30.5 4.46 50.5 4.48 70.5 4.49 90.5 4.50

11.0 4.21 31.0 4.46 51.0 4.49 71.0 4.49 91.0 4.50

11.5 4.25 31.5 4.46 51.5 4.49 71.5 4.49 91.5 4.50

12.0 4.28 32.0 4.47 52.0 4.49 72.0 4.49 92.0 4.50

12.5 4.31 32.5 4.47 52.5 4.49 72.5 4.49 92.5 4.50

13.0 4.34 33.0 4.47 53.0 4.49 73.0 4.49 93.0 4.50

13.5 4.36 33.5 4.47 53.5 4.49 73.5 4.50 93.5 4.50

14.0 4.38 34.0 4.47 54.0 4.49 74.0 4.50 94.0 4.50

14.5 4.39 34.5 4.47 54.5 4.49 74.5 4.50 94.5 4.50

15.0 4.41 35.0 4.47 55.0 4.49 75.0 4.50 95.0 4.50

15.5 4.42 35.5 4.47 55.5 4.49 75.5 4.50 95.5 4.50

16.0 4.43 36.0 4.47 56.0 4.49 76.0 4.50 96.0 4.50

16.5 4.43 36.5 4.47 56.5 4.49 76.5 4.50 96.5 4.50

17.0 4.44 37.0 4.47 57.0 4.49 77.0 4.50 97.0 4.50

17.5 4.44 37.5 4.47 57.5 4.49 77.5 4.50 97.5 4.50

18.0 4.45 38.0 4.47 58.0 4.49 78.0 4.50 98.0 4.50

18.5 4.45 38.5 4.47 58.5 4.49 78.5 4.50 98.5 4.50

19.0 4.45 39.0 4.47 59.0 4.49 79.0 4.50 99.0 4.50

19.5 4.45 39.5 4.48 59.5 4.49 79.5 4.50 99.5 4.50

20.0 4.45 40.0 4.48 60.0 4.49 80.0 4.50 100.0 4.50


Part IV. Items of General InterestNotice of proposedrulemaking and notice ofpublic hearing QualifiedBusiness Income Deduction

REG–107892–18

AGENCY: Internal Revenue Service(IRS), Treasury.

ACTION: Notice of proposed rulemakingand notice of public hearing.

SUMMARY: This document containsproposed regulations concerning the de-duction for qualified business income un-der section 199A of the Internal RevenueCode (Code). The regulations will affectindividuals, partnerships, S corporations,trusts, and estates engaged in domestictrades or businesses. The proposed regu-lations also contain an anti-avoidance ruleunder section 643 of the Code to treatmultiple trusts as a single trust in certaincases. This document also provides noticeof a public hearing on these proposedregulations.

DATES: Written or electronic commentsmust be received by October 1, 2018. Out-lines of topics to be discussed at the publichearing scheduled for October 16, 2018,at 10 a.m. must be received by October 1,2018. If no outlines of topics are receivedby October 1, 2018, public hearing will becancelled.

ADDRESSES: Send submissions to CC:PA:LPD:PR (REG–107892–18), Room5203, Internal Revenue Service, P.O. Box7604, Ben Franklin Station, Washington,D.C., 20044. Submissions may be hand-delivered Monday through Friday be-tween the hours of 8 a.m. and 4 p.m.to CC:PA:LPD:PR (REG–107892–18),Courier’s Desk, Internal Revenue Service,1111 Constitution Avenue, N.W., Wash-ington, D.C., 20224, or via the FederaleRulemaking Portal at www.regulations-.gov (indicate IRS and REG–107892–18).The public hearing will be held in theAuditorium, Internal Revenue Service,1111 Constitution Avenue, NW., Wash-ington, DC.

FOR FURTHER INFORMATION CON-TACT: Concerning the proposed regula-tions, Vishal R. Amin, Frank J. Fisher, orWendy L. Kribell at (202) 317-6850 orAdrienne M. Mikolashek at 202-317-5279; concerning submissions of com-ments and outlines of topics for the publichearing, Regina Johnson at (202) 317-6901 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

The collection of information con-tained in this notice of proposed rulemak-ing has been submitted to the Office ofManagement and Budget for review inaccordance with the Paperwork ReductionAct of 1995 (44 U.S.C. 3507(d)). TheDepartment of the Treasury (Treasury De-partment) and the IRS request commenton the assumptions, methodology, andburden estimates related to this informa-tion collection. Comments on the collec-tion of information should be sent to theOffice of Management and Budget, Attn:Desk Officer for the Department of theTreasury, Office of Information and Reg-ulatory Affairs, Washington, DC 20503,with copies to the Internal Revenue Ser-vice, Attn: IRS Reports Clearance Officer,SE:CAR:MP:T:T:SP, Washington, DC20224. Comments on the collection ofinformation should be received by Octo-ber 15, 2018.

Comments are specifically requestedconcerning:

Whether the proposed collection of in-formation is necessary for the proper per-formance of the IRS, including whetherthe information will have practical utility;

The accuracy of the estimated burdenassociated with the proposed collection ofinformation;

How the quality, utility, and clarity ofthe information to be collected may beenhanced;

How the burden of complying with theproposed collection of information maybe minimized, including through the ap-plication of automated collection tech-niques or other forms of information tech-nology; and

Estimates of capital or start-up costsand costs of operation, maintenance, and

purchase of service to provide informa-tion.

Details of the estimated collection bur-den can be found in Section I.J. of theSpecial Analyses section later in this doc-ument.

The collection of information requiredby this proposed regulation is in proposed§ 1.199A–4 and proposed § 1.199A–6.The collection of information in proposed§ 1.199A–4 is required for taxpayers thatchoose to aggregate two or more trades orbusinesses. The collection of informationin proposed § 1.199A–6 is required forpassthrough entities that report section199A information to their owners or ben-eficiaries. It is necessary to report the in-formation to the IRS in order to ensurethat taxpayers properly report in accor-dance with the rules of the proposed reg-ulations the correct amount of deductionunder section 199A. The collection of in-formation is necessary to ensure tax com-pliance.

The likely respondents are individualswith qualified business income from morethan one trade or business as well as mostpartnerships, S corporations, trusts, andestates that have qualified business in-come.

Estimated total annual reporting bur-den: 25 million hours.

Estimated average annual burden hoursper respondent will vary from 30 minutesto 20 hours, depending on individual cir-cumstances, with an estimated average of2.5 hours.

Estimated number of respondents: 10million.

Estimated annual frequency of re-sponses: annually.

Estimated monetized burden: Usingthe IRS’s taxpayer compliance cost esti-mates, taxpayers who are self-employedwith multiple businesses are estimated tohave a monetization rate of $39 per hour.Pass-throughs that issue K-1s have a mon-etization rate of $53 per hour. (See “Tax-payer Compliance Costs for Corporationsand Partnerships: A New Look,” Contos,et. al. IRS Research Bulletin (2012) p. 5for a description of the model.)

An agency may not conduct or spon-sor, and a person is not required to re-spond to, a collection of information un-


less it displays a valid control numberassigned by the Office of Managementand Budget.

Books or records relating to a collec-tion of information must be retained aslong as their contents may become mate-rial in the administration of any internalrevenue law. Generally, tax returns andtax return information are confidential, asrequired by section 6103.

Background

This document contains proposedamendments to the Income Tax Regula-tions (26 CFR part 1) under sections 199Aand 643 of the Code.

I. Section 199A

Section 199A was enacted on Decem-ber 22, 2017, by § 11011 of “An Act toprovide for reconciliation pursuant to ti-tles II and V of the concurrent resolutionon the budget for fiscal year 2018,” P.L.115–97 (TCJA), and was amended onMarch 23, 2018, retroactively to January1, 2018, by § 101 of Division T of theConsolidated Appropriations Act, 2018,P.L. 115–141, (2018 Act). Section 199Aapplies to taxable years beginning after2017 and before 2026.

Section 199A provides a deduction of upto 20 percent of income from a domesticbusiness operated as a sole proprietorship orthrough a partnership, S corporation, trust,or estate (section 199A deduction). The sec-tion 199A deduction may be taken by indi-viduals and by some estates and trusts. Asection 199A deduction is not available forwage income or for business income earnedthrough a C corporation. For taxpayerswhose taxable income exceeds a statutorily-defined amount (threshold amount), section199A may limit the taxpayer’s section 199Adeduction based on (i) the type of trade orbusiness engaged in by the taxpayer, (ii) theamount of W–2 wages paid with respect tothe trade or business (W–2 wages), and/or(iii) the unadjusted basis immediately afteracquisition (UBIA) of qualified propertyheld for use in the trade or business (UBIAof qualified property). These statutory limi-tations are subject to phase-in rules basedupon taxable income above the thresholdamount.

Section 199A also allows individualsand some trusts and estates (but not cor-

porations) a deduction of up to 20 percentof their combined qualified real estate in-vestment trust (REIT) dividends and qual-ified publicly traded partnership (PTP) in-come, including qualified REIT dividendsand qualified PTP income earned throughpassthrough entities. This component ofthe section 199A deduction is not limitedby W–2 wages or UBIA of qualified prop-erty.

The section 199A deduction is thelesser of (1) the sum of the combinedamounts described in the prior two para-graphs or (2) an amount equal to 20 per-cent of the excess (if any) of taxable in-come of the taxpayer for the taxable yearover the net capital gain of the taxpayerfor the taxable year.

Additionally, section 199A(g) providesthat specified agricultural or horticulturalcooperatives may claim a special entity-level deduction that is substantially simi-lar to the domestic production activitiesdeduction under former section 199.

Finally, the statute expressly grants theSecretary authority to prescribe such reg-ulations as are necessary to carry out thepurposes of section 199A (section 199A(f)(4)), and provides specific grants of author-ity with respect to: the treatment of acquisi-tions, dispositions, and short-tax years (sec-tion 199A(b)(5)); certain payments topartners for services rendered in a non-partner capacity (section 199A(c)(4)(C));the allocation of W–2 wages and UBIA ofqualified property (section 199A(f)(1)(A)(iii)); restricting the allocation of items andwages under section 199A and such report-ing requirements as the Secretary deter-mines appropriate (section 199A(f)(4)(A));the application of section 199A in the caseof tiered entities (section 199A(f)(4)(B);preventing the manipulation of the deprecia-ble period of qualified property using trans-actions between related parties (section199A(h)(1)); and determining the UBIA ofqualified property acquired in like-kind ex-changes or involuntary conversions (section199A(h)(2)).

II. Section 643

Part I of subchapter J of chapter 1 ofthe Code provides rules related to the tax-ation of estates, trusts, and beneficiaries.For various subparts of part I of subchap-ter J, sections 643(a), 643(b), and 643(c)

define the terms distributable net income(DNI), income, and beneficiary, respec-tively. Sections 643(d) through 643(i)(other than section 643(f)) provide addi-tional rules. Section 643(f) grants the Sec-retary authority to treat two or more trustsas a single trust for purposes of subchapterJ if (1) the trusts have substantially thesame grantors and substantially the sameprimary beneficiaries and (2) a principalpurpose of such trusts is the avoidance ofthe tax imposed by chapter 1 of the Code.Section 643(f) further provides that, forthese purposes, spouses are treated as asingle person.

Explanation of Provisions

The purpose of these proposed regula-tions is to provide taxpayers with computa-tional, definitional, and anti-avoidance guid-ance regarding the application of section199A. These proposed regulations containsix substantive sections, §§ 1.199A–1through 1.199A–6, each of which providesrules relevant to the calculation of the sec-tion 199A deduction. Additionally, the pro-posed regulations would establish anti-abuse rules under section 643(f) to preventtaxpayers from establishing multiple non-grantor trusts or contributing additional cap-ital to multiple existing non-grantor trusts inorder to avoid Federal income tax, includingabuse of section 199A. This Explanation ofProvisions describes each of the proposedregulation sections in turn.

I. Proposed § 1.199A–1: OperationalRules

Section 1.199A–1 of the proposed reg-ulations (proposed § 1.199A–1) providesguidance on the determination of the sec-tion 199A deduction. For simplicity, theproposed regulations use the term individ-ual when referring to an individual, trust,estate, or other person eligible to claim thesection 199A deduction. The term rele-vant passthrough entity (RPE) is used todescribe passthrough entities that directlyoperate the trade or business or passthrough the trade or business’ items ofincome, gain, loss, or deduction fromlower-tier RPEs to the individual.

Proposed § 1.199A–1(b) contains def-initions applicable for section 199A and§§ 1.199A–1 through 1.199A–6. Pro-posed § 1.199A–1(c) provides guidance


on the computation of the section 199Adeduction for individuals with taxable in-come at or below the threshold amount.Proposed § 1.199A–1(d) provides guid-ance on the computation of the section199A deduction for individuals with tax-able income above the threshold amount,including individuals with taxable incomewithin a phase-in range above the thresh-old amount. Proposed § 1.199A–1(e) pro-vides special rules related to the section199A deduction.

A. Defined terms

Defined terms in proposed § 1.199A–1(b) include aggregated trade or business,applicable percentage, phase-in range,qualified business income (QBI), QBIcomponent, qualified PTP income, quali-fied REIT dividends, reduction amount,RPE, specified service trade or business(SSTB), threshold amount, total QBIamount, UBIA of qualified property, andW–2 wages.

Proposed § 1.199A–1(b) also definestrade or business for purposes of section199A and proposed §§ 1.199A–1 through1.199A–6. Neither the statutory text ofsection 199A nor the legislative historyprovides a definition of trade or businessfor purposes of section 199A. Multiplecommenters stated that section 162 is themost appropriate definition for purposesof section 199A. Although the term tradeor business is defined in more than oneprovision of the Code, the Department ofthe Treasury (Treasury Department) andthe IRS agree with commenters that forpurposes of section 199A, section 162(a)provides the most appropriate definitionof a trade or business. This is based on thefact that the definition of trade or businessunder section 162 is derived from a largebody of existing case law and administra-tive guidance interpreting the meaning oftrade or business in the context of a broadrange of industries. Thus, the definition ofa trade or business under section 162 pro-vides for administrable rules that are ap-propriate for the purposes of section 199Aand which taxpayers have experience ap-plying and therefore defining trade orbusiness as a section 162 trade or businesswill reduce compliance costs, burden, andadministrative complexity.

The proposed regulations extend thedefinition of trade or business for pur-poses of section 199A beyond section 162in one circumstance. Solely for purposesof section 199A, the rental or licensing oftangible or intangible property to a relatedtrade or business is treated as a trade orbusiness if the rental or licensing and theother trade or business are commonlycontrolled under proposed § 1.199A–4(b)(1)(i). It is not uncommon that forlegal or other non-tax reasons taxpayersmay segregate rental property from oper-ating businesses. This rule allows taxpay-ers to aggregate their trades or businesseswith the associated rental or intangibleproperty under proposed § 1.199A–4 ifall of the requirements of proposed§ 1.199A–4 are met. In addition, this rulemay prevent taxpayers from improperlyallocating losses or deductions away fromtrades or businesses that generate incomethat is eligible for a section 199A deduc-tion.

B. Computation of the section 199Adeduction for individuals with taxableincome below the threshold amount

1. Basic computational rules

An individual with income attributableto one or more domestic trades or busi-nesses, other than as a result of owningstock of a C corporation or engaging inthe trade or business of being an em-ployee, and with taxable income (beforecomputing the section 199A deduction) ator below the threshold amount, is entitledto a section 199A deduction equal to thelesser of (i) 20 percent of the QBI (gen-erally defined as the net amount of quali-fied items of income, gain, deduction, andloss with respect to a qualified trade orbusiness of the taxpayer) from the indi-vidual’s trades or businesses plus 20 per-cent of the individual’s combined quali-fied REIT dividends and qualified PTPincome or (ii) 20 percent of the excess (ifany) of the individual’s taxable incomeover the individual’s net capital gain. Pro-posed § 1.199A–1(c) contains guidanceon calculating the amount of the deduc-tion in these circumstances. If an individ-ual’s combined QBI is negative or com-bined qualified REIT dividends and PTPincome is less than zero, proposed

§ 1.199A–1(c)(2) provides rules for thecarryover of the losses.

2. Carryover loss rules for negative totalQBI amounts

If an individual has multiple trades orbusinesses, the individual must calculatethe QBI from each trade or business andthen net the amounts. Section 199A(c)(2)provides that, for purposes of section199A, if the net QBI with respect to qual-ified trades or businesses of the taxpayerfor any taxable year is less than zero, suchamount shall be treated as a loss from aqualified trade or business in the succeed-ing taxable year. Proposed § 1.199A–1(c)(2)(i) repeats this rule and providesthat the section 199A carryover rules donot affect the deductibility of the lossesfor purposes of other provisions of theCode.

3. Carryover loss rules if combinedqualified REIT dividends and qualifiedPTP income is less than zero

One commenter stated it was not clearwhether, if a taxpayer has an overall lossfrom combined qualified REIT dividendsand qualified PTP income (because a lossfrom a PTP exceeds REIT dividends andPTP income), the negative amount shouldbe netted against any net positive QBI(regardless of source), or whether the neg-ative amount should be segregated andsubject to its own loss carryforward ruledistinct from but analogous to the QBIloss carryforward rule. Section 199A con-templates that qualified REIT dividendsand qualified PTP income are computedand taken into account separately fromQBI and should not affect QBI. If overalllosses attributable to qualified REIT divi-dends and qualified PTP income were net-ted against QBI, these losses would affectQBI. Therefore, a separate loss carryfor-ward rule is needed to segregate an overallloss attributable to qualified REIT divi-dends and qualified PTP income fromQBI. Additionally, commenters have ex-pressed concern that losses in excess ofincome could create a negative section199A deduction, a result incompatiblewith the statute. Accordingly, proposed§ 1.199A–1(c)(2)(ii) provides that if anindividual has an overall loss after quali-


fied REIT dividends and qualified PTPincome are combined, the portion of theindividual’s section 199A deduction re-lated to qualified REIT dividends andqualified PTP income is zero for the tax-able year. In addition, the overall lossdoes not affect the amount of the taxpay-er’s QBI. Instead, such overall loss is car-ried forward and must be used to offsetcombined qualified REIT dividends andqualified PTP income in the succeedingtaxable year or years for purposes of sec-tion 199A.

C. Computation of the section 199Adeduction for individuals with taxableincome above the threshold amount

Proposed § 1.199A–1(d) addresses thecalculation of the section 199A deductionfor individuals with taxable income abovethe threshold amount. All of the rules re-lating to the REIT/PTP component of thesection 199A deduction applicable to in-dividuals with taxable income at or belowthe threshold amount also apply to indi-viduals with taxable income above thethreshold amount. The QBI component ofthe section 199A deduction, however, issubject to limitations for individuals withtaxable income exceeding the thresholdamount. These limitations include the ex-clusion or reduction of items from anSSTB and limitations based on the W–2wages of the trade or business or a com-bination of the W–2 wages and the UBIAof qualified property. Proposed § 1.199A–1(d) provides guidance on the applicationof these limitations.

Proposed § 1.199A–1(d)(2)(i) addressesthe limitation or exclusion from QBI forSSTBs. SSTBs are specified service tradesor businesses as defined in section 199A(d)(2) and proposed § 1.199A–5 (see part V. ofthe Explanation of Provisions). If an indi-vidual’s taxable income is above the thresh-old amount but within the phase–in rangethen the individual must calculate an appli-cable percentage that limits the QBI, W–2wages, and UBIA of qualified property froman SSTB that are used to calculate the indi-vidual’s section 199A deduction. If the in-dividual’s taxable income is above thephase-in range, then no amount of QBI,W–2 wages, or UBIA of qualified propertyfrom an SSTB can be used by the individual

in calculating the individual’s section 199Adeduction.

Proposed § 1.199A–1(d)(2)(iv) ad-dresses the limitations on QBI based onW–2 wages and UBIA of qualified prop-erty. An individual must determine theW–2 wages and the UBIA of qualifiedproperty attributable to each trade or busi-ness contributing to the individual’s com-bined QBI under the rules of proposed§ 1.199A–2. The W–2 wages and UBIAof qualified property amounts are com-pared to QBI in order to determine anindividual’s QBI component for eachtrade or business.

After determining the QBI for eachtrade or business, the individual mustcompare 20 percent of that trade or busi-ness’ QBI to the alternative limitations forthat trade or business. The limitation towhich the 20 percent of QBI is comparedis the greater of 50 percent of the W–2wages attributable to the trade or businessor 25 percent of those W–2 wages plus 2.5percent of the UBIA of qualified propertyfor that trade or business. If 20 percent ofthe QBI of the trade or business is greaterthan the relevant alternative limitation, theQBI component is limited in the calcula-tions under the proposed regulations to theamount of the alternative limitation. If anindividual’s taxable income is within thephase-in range and 20 percent of QBI isgreater than either of the limitationamounts, the individual’s QBI componentfor the trade or business is instead equal to20 percent of QBI reduced by the reduc-tion amount as described in proposed§ 1.199A–1(d)(2)(iv)(B).

One commenter noted that, if com-bined QBI from all of an individual’strades or businesses is greater than zero,but the individual’s QBI from one or moretrades or businesses is less than zero, themechanics of how the loss should be off-set against the QBI income for purposesof calculating the section 199A deductionare unclear. How such a loss is allocatedmatters in situations in which an individ-ual has taxable income above the thresh-old amount and more than one trade orbusiness with positive QBI. The com-menter suggested that a “netting” ap-proach best reflects Congress’s intent, andthat the absence of a netting approachwould lead to inconsistent and counterin-tuitive results that Congress did not in-

tend. The Treasury Department and theIRS agree that a netting approach is con-templated by the carryforward rule of sec-tion 199A(c)(2) and is necessary to ensureresults consistent with the intent of section199A. Accordingly, proposed § 1.199A–1(d)(2)(iii) provides that, if an individualhas QBI of less than zero from one tradeor business, but has overall QBI greaterthan zero when all of the individual’strades or businesses are taken together,then the individual must offset the netincome in each trade or business that pro-duced net income with the net loss fromeach trade or business that produced netloss before the individual applies the lim-itations based on W–2 wages and UBIAof qualified property. The individual mustapportion the net loss among the trades orbusinesses with positive QBI in propor-tion to the relative amounts of QBI insuch trades or businesses. Then, for pur-poses of applying the limitation basedon W–2 wages and UBIA of qualifiedproperty, the net gain or income withrespect to each trade or business (asoffset by the apportioned losses) is thetaxpayer’s QBI with respect to that tradeor business. The W–2 wages and UBIAof qualified property from the trades orbusinesses which produced negativeQBI are not taken into account for pur-poses of proposed § 1.199A–1(d) andare not carried over into the subsequentyear. The Treasury Department and theIRS request comments on the approachdescribed above.

D. Special rules

Proposed § 1.199A–1(e) incorporatesspecial rules contained in sections 199Aand 6662. Section 199A(f)(1) providesthat in the case of a partnership or Scorporation, section 199A is applied at thepartner or shareholder level. The proposedregulations provide that the section 199Adeduction has no effect on the adjustedbasis of the partner’s interest in the part-nership. With respect to S corporations, thesection 199A deduction has no effect on theadjusted basis of a shareholder’s stock in anS corporation or the S corporation’s accu-mulated adjustments account.

The proposed regulations provide thatthe deduction under section 199A doesnot reduce net earnings from self-


employment under section 1402 or netinvestment income under section 1411.Therefore, both sections 1402 and 1411are calculated as though there is no sec-tion 199A deduction.

Section 199A(f)(1)(C) provides that, inthe case of a taxpayer with QBI fromwithin the Commonwealth of Puerto Rico,if such income is taxable under section 1for a taxable year, then for purposes ofdetermining QBI of such individual forsuch taxable year, the term “UnitedStates” shall include the Commonwealthof Puerto Rico. Proposed § 1.199A–1(e)(3) repeats this statutory language.

Section 199A(f)(2) provides that forpurposes of determining alternative mini-mum taxable income under section 55,QBI shall be determined without regardto any adjustments under sections 56through 59. To clarify that the section199A deduction does not result in individ-uals being subject to the alternative min-imum tax, proposed § 1.199A–1(e)(4)provides that, for purposes of determiningalternative minimum taxable income un-der section 55, the deduction allowed un-der section 199A(a) for a taxable yearshall be equal in amount to the deductionallowed under section 199A(a) in deter-mining taxable income for that taxableyear.

Section 6662(a) provides a penaltyfor an underpayment of tax required tobe shown on a return. Under section6662(b)(2), the penalty applies to theportion of any underpayment that is at-tributable to a substantial understate-ment of income tax. Section 6662(d)(1)defines substantial understatement of in-come tax, which is generally an under-statement that exceeds the greater of 10percent of the tax required to be shownon the return or $5,000. Section6662(d)(1)(C) provides a special rule inthe case of any taxpayer who claims thededuction allowed under section 199Afor the taxable year, which requires thatsection 6662(d)(1)(A) is applied by sub-stituting “5 percent” for “10 percent.”Proposed § 1.199A–1(e)(5) cross-re-ferences this rule.

Section 199A(b)(7) provides that in thecase of any qualified trade or business of apatron of a specified agricultural or horti-cultural cooperative, the amount deter-mined under section 199A(b)(2) with re-

spect to such trade or business shall bereduced by the lesser of (A) 9 percent ofso much of the qualified business in-come with respect to such trade or busi-ness as is properly allocable to qualifiedpayments received from such coopera-tive, or (B) 50 percent of so much of theW–2 wages with respect to such trade orbusiness as are so allocable. Proposed§ 1.199A–1(e)(6) repeats this statutorylanguage.

II. Proposed § 1.199A–2: Determinationof W–2 Wages and the UBIA ofQualified Property

As described in part I.C. of this Expla-nation of Provisions, if an individual’staxable income exceeds the thresholdamount, section 199A(b)(2)(B) imposes alimit on the section 199A deduction basedon the greater of either (i) the W–2 wagespaid, or (ii) the W–2 wages paid andUBIA of qualified property attributable toa trade or business. This part of this Ex-planation of Provisions describes the rulesin proposed § 1.199A–2 regarding the de-termination of W–2 wages and UBIA ofqualified property.

A. W–2 wages attributable to a trade orbusiness

The W–2 wage rules of proposed§ 1.199A–2 generally follow the rules un-der former section 199. Section 199,which was repealed by the TCJA, pro-vided for a deduction with respect to cer-tain domestic production activities andcontained a W–2 wage limitation similarto the one in section 199A. The legislativetext of the W–2 wage limitation in section199A is modeled on the text of formersection 199, and both taxpayers and theIRS have developed experience in apply-ing those W–2 wage rules for over a de-cade. The regulations under former sec-tion 199 provided rules to determine W–2wages, which provide a useful startingpoint in developing the W–2 wage rulesunder section 199A, including rules on thedefinition of W–2 wages, wages paid bypersons other than the common–law em-ployer, and methods for calculating W–2wages.

The Treasury Department and theIRS have received comments concern-

ing whether amounts paid to workers whoreceive Forms W–2 from third party pay-ors (such as professional employer orga-nizations, certified professional employerorganizations, or agents under section3504) that pay these wages to workers onbehalf of their clients and report wages onForms W–2, with the third party payor asthe employer listed in Box c of the FormsW–2, may be included in the W–2 wagesof the clients of third party payors. Inorder for wages reported on a Form W–2to be included in the determination ofW–2 wages of a taxpayer, the FormW–2 must be for employment by thetaxpayer. The regulations under formersection 199, specifically § 1.199 –2(a)(2), addressed this issue, providingthat, since employees of the taxpayer aredefined in the regulations as includingonly common law employees of the tax-payer and officers of a corporate tax-payer, taxpayers may take into accountwages reported on Forms W–2 issued byother parties provided that the wagesreported on the Forms W–2 were paid toemployees of the taxpayer for employ-ment by the taxpayer.

Proposed § 1.199A–2(b)(2)(ii) pro-vides a rule for wages paid by a personother than the common law employer thatis substantially similar to the rule in§ 1.199–2(a)(2). Specifically, the pro-posed regulations provide that, in deter-mining W–2 wages, a person may takeinto account any W–2 wages paid by an-other person and reported by the otherperson on Forms W–2 with the other per-son as the employer listed in Box c of theForms W–2, provided that the W–2 wageswere paid to common law employees orofficers of the person for employment bythe person. In such cases, the person pay-ing the W–2 wages and reporting the W–2wages on Forms W–2 is precluded fromtaking into account such wages for pur-poses of determining W–2 wages withrespect to that person. Persons that payand report W–2 wages on behalf of orwith respect to others can include certifiedprofessional employer organizations un-der section 7705, statutory employers un-der section 3401(d)(1), and agents undersection 3504. Under this rule, personswho otherwise qualify for the deductionunder section 199A are not limited in ap-plying the deduction merely because they


use a third party payor to pay and reportwages to their employees. However,with respect to individuals who taxpay-ers assert are their common law employ-ees for purposes of section 199A, tax-payers are reminded of their duty to filereturns and apply the tax law on a con-sistent basis.

Unlike former section 199, the W–2wage limitation in section 199A appliesseparately for each trade or business. Ac-cordingly, proposed § 1.199A–2 providesthat, in the case of W–2 wages that areallocable to more than one trade or busi-ness, the portion of the W–2 wages allo-cable to each trade or business is deter-mined to be in the same proportion to totalW–2 wages as the deductions associatedwith those wages are allocated among theparticular trades or businesses. Section199A(b)(4) also requires that to be takeninto account, W–2 wages must be prop-erly allocable to QBI. W–2 wages areproperly allocable to QBI if the associatedwage expense is taken into account incomputing QBI.

Additionally, proposed § 1.199A–2(b)(4) restates the rule of section199A(f)(1)(A)(iii), which provides that, inthe case of a trade or business conductedby an RPE, a partner’s or shareholder’sallocable share of wages must be deter-mined in the same manner as the partner’sallocable share or a shareholder’s pro ratashare of wage expenses.

Consistent with section 199A(b)(5)and the legislative history of the TCJA,which direct the Secretary to provide rulesfor applying the W–2 wage limitation incases in which the taxpayer acquires, ordisposes of, a trade or business, themajor portion of a trade or business, or themajor portion of a separate unit of a tradeor business during the year, proposed§ 1.199A–2(b)(2)(iv)(B) provides rulesthat apply in the case of an acquisition ordisposition of a trade or business. SeeJoint Explanatory Statement of the Com-mittee of Conference, 38. Specifically,proposed § 1.199A–2(b)(2)(iv)(B)(1) pro-vides that, in the case of an acquisition ordisposition of a trade or business, the ma-jor portion of a trade or business, or themajor portion of a separate unit of a tradeor business that causes more than oneindividual or entity to be an employer ofthe employees of the acquired or disposed

of trade or business during the calendaryear, the W–2 wages of the individual orentity for the calendar year of the acqui-sition or disposition are allocated betweeneach individual or entity based on the pe-riod during which the employees of theacquired or disposed of trade or businesswere employed by the individual or entity,regardless of which permissible method isused for reporting predecessor and succes-sor wages on Form W–2. For this purpose,the period of employment is determinedconsistently with the principles for deter-mining whether an individual is an em-ployee described in proposed § 1.199A–2(b).

A notice of proposed revenue proce-dure, Notice 2018–64, 2018–35 IRB 347,which provides three methods for calcu-lating W–2 wages is being issued concur-rently with this notice of proposed rule-making. The three methods in the noticeare substantially similar to the methodsprovided in Rev. Proc. 2006–47, 2006–2C.B. 869, for purposes of calculating“paragraph (e)(1) wages” (that is, wagesdescribed in § 1.199–2(e)(1) issued underformer section 199). The first method (theunmodified Box method) allows for a sim-plified calculation while the second andthird methods (the modified Box 1 methodand the tracking wages method) providefor greater accuracy.

B. The UBIA of qualified property

Section 199A(b)(2)(B)(ii) provides analternative deduction limitation based on 25percent of W–2 Wages with respect to thequalified trade or business and 2.5 percentof the UBIA of qualified property. Proposed§ 1.199A–2 restates the statutory definitionsunder the qualified property rules, and pro-vides additional guidance.

1. General definition of UBIA ofqualified property

Proposed § 1.199A–2(c)(1) restates thedefinition of qualified property in section199A(b)(6)(A), which provides that“qualified property” means tangible prop-erty of a character subject to depreciationthat is held by, and available for use in, atrade or business at the close of the tax-able year, and which is used in the pro-duction of QBI, and for which the depre-

ciable period has not ended before theclose of the taxable year. Proposed§ 1.199A–2(c)(2) also restates the defini-tion of depreciable period in section199A(b)(6)(B), which provides that “de-preciable” period means the period begin-ning on the date the property is first placedin service by the taxpayer and ending onthe later of (a) the date 10 years after thatdate, or (b) the last day of the last full yearin the applicable recovery period thatwould apply to the property under section168(c), regardless of the application ofsection 168(g).

Because the applicable recovery periodunder section 168(c) of the property is notchanged by any additional first-year de-preciation deduction allowable under sec-tion 168, proposed § 1.199A–2(c)(2)(ii)also clarifies that the additional first-yeardepreciation deduction allowable undersection 168 (for example, under section168(k) or section 168(m)) does not affectthe applicable recovery period under sec-tion 168(c).

Proposed § 1.199A–2(c)(3) provides adefinition of UBIA. The Treasury Depart-ment and the IRS believe that existinggeneral principles used to define “unad-justed basis” in § 1.263(a)–3(h)(5) pro-vide a reasonable basis for an administra-ble rule that is appropriate for thepurposes of section 199A and that theiruse will reduce compliance costs, burden,and administrative complexity becausetaxpayers have experience applying them.In addition, the Treasury Department andthe IRS believe that “immediately afteracquisition” means as of the date the prop-erty is placed in service because section199A provides that “qualified property”must be used in the production of QBI. Inorder to be used in the production of QBI,the qualified property necessarily must beplaced in service. Determining UBIA asof the date the property is placed in ser-vice ensures consistency between pur-chased and produced qualified property,and reduces compliance costs, burden,and administrative complexity becausetaxpayers are already required to deter-mine that amount. Accordingly, proposed§ 1.199A–2 provides that the term“UBIA” means the basis as determinedunder section 1012 or other applicablesections of chapter 1, including subchap-ter O (relating to gain or loss on disposi-


tions of property), subchapter C (relatingto corporate distributions and adjust-ments), subchapter K (relating to partnersand partnerships), and subchapter P (relat-ing to capital gains and losses). UBIA isdetermined without regard to any adjust-ments described in section 1016(a)(2)or (3), any adjustments for tax creditsclaimed by the taxpayer (for example, un-der section 50(c)), or any adjustments forany portion of the basis for which thetaxpayer has elected to treat as an expense(for example, under sections 179, 179B,or 179C). Therefore, for purchased or pro-duced qualified property, UBIA generallywill be its cost under section 1012 as ofthe date the property is placed in service.For qualified property contributed to apartnership in a section 721 transactionand immediately placed in service, UBIAgenerally will be its basis under section723. For qualified property contributed toan S corporation in a section 351 transac-tion and immediately placed in service,UBIA generally will be its basis undersection 362. Further, for property inher-ited from a decedent and immediatelyplaced in service by the heir, the UBIAgenerally will be its fair market value atthe time of the decedent’s death under sec-tion 1014. However, proposed § 1.199A–2(c)(3) provides that UBIA does reflect thereduction in basis for the percentage of thetaxpayer’s use of property for the taxableyear other than in the taxpayer’s trade orbusiness.

2. Partnership special basis adjustments

After the enactment of the TCJA, theTreasury Department and the IRS receivedcomments requesting guidance as towhether partnership special basis adjust-ments under sections 734(b) or 743(b) con-stitute qualified property for purposes ofsection 199A. Treating partnership specialbasis adjustments as qualified propertycould result in inappropriate duplication ofUBIA of qualified property (if, for example,the fair market value of the property has notincreased and its depreciable period has notended). Accordingly, proposed § 1.199A–2(c)(1)(iii) provides that partnership specialbasis adjustments are not treated as separatequalified property.

3. Property transferred with a principalpurpose of increasing section 199Adeduction

Qualified property includes deprecia-ble property used during the taxable yearin the production of QBI and held by, andavailable for use in, the trade or businessat the close of the taxable year. However,it would be inconsistent with the purposesof section 199A to permit trades or busi-nesses to transfer or acquire property atthe end of the year merely to manipulatethe UBIA of qualified property attribut-able to the trade or business. Therefore,pursuant to the authority granted to theSecretary under section 199A(f)(4), pro-posed § 1.199A–2(c)(1)(iv) provides thatproperty is not qualified property if theproperty is acquired within 60 days of theend of the taxable year and disposed ofwithin 120 days without having been usedin a trade or business for at least 45 daysprior to disposition, unless the taxpayerdemonstrates that the principal purpose ofthe acquisition and disposition was a pur-pose other than increasing the section199A deduction.

4. Like-kind exchanges and involuntaryconversions

Section 199A does not provide rules todetermine UBIA for qualified property inthe case of an exchange of property undersection 1031 (like-kind exchange) or in-voluntary conversion under section 1033.However, section 199A(h)(2) specificallyinstructs the Secretary to do so. The Trea-sury Department and the IRS believe thatexisting general principles used for like-kind exchanges and involuntary conver-sions under § 1.168(i)–(6) provide a use-ful analogy for administrable rules that areappropriate for the purposes of section199A and that their use will reduce com-pliance costs, burden, and administrativecomplexity because taxpayers have experi-ence applying them. Accordingly, proposed§ 1.199A–2(c)(2)(iii) generally follows therules of § 1.168(i)–6 to provide that quali-fied property that is acquired in a like–kind exchange, as defined in § 1.168(i)–6(b)(11), or in an involuntary conver-sion, as defined in § 1.168(i)– 6(b)(12),is treated as replacement Modified Acceler-ated Cost Recovery System (MACRS)

property as defined in § 1.168(i)–6(b)(1)whose depreciable period generally is de-termined as of the date the relinquishedproperty was first placed in service. Ac-cordingly, subject to one exception, pro-posed § 1.199A–2(c)(2)(iii) providesthat, for purposes of determining thedepreciable period, the date the ex-changed basis in the replacement quali-fied property is first placed in service bythe trade or business is the date onwhich the relinquished property wasfirst placed in service by the individualor RPE and the date the excess basis inthe replacement qualified property isfirst placed in service by the individualor RPE is the date on which the replace-ment qualified property was first placedin service by the individual or RPE. Asa result, the depreciable period undersection 199A for the exchanged basis ofthe replacement qualified property willend before the depreciable period for theexcess basis of the replacement qualifiedproperty ends.

The exception is that proposed § 1.199A–2(c)(2)(iii)(C) provides that, for purposesof determining the depreciable period, ifthe individual or RPE makes an electionunder § 1.168(i)–6(i)(1) (the election notto apply § 1.168(i)–6)), the date the ex-changed basis and excess basis in the re-placement qualified property are firstplaced in service by the trade or businessis the date on which the replacement qual-ified property is first placed in service bythe individual or RPE, with UBIA deter-mined as of that date. In this case, thedepreciable periods under section 199Afor the exchanged basis and the excessbasis of the replacement qualified prop-erty will end on the same date.

Thus, unless the exception applies,qualified property acquired in a like–kindexchange or involuntary conversion willhave two separate placed in service datesunder the proposed regulations: for pur-poses of determining the UBIA of theproperty, the relevant placed in servicedate will be the date the acquired propertyis actually placed in service; for purposesof determining the depreciable period ofthe property, the relevant placed in servicedate generally will be the date the relin-quished property was first placed in ser-vice. The proposed regulations contain anexample illustrating these rules.


5. Other nonrecognition transactions

The Treasury Department and the IRShave received comments requesting guid-ance on the application of the qualifiedproperty rules to nonrecognition trans-fers involving transferred basis propertywithin the meaning of section 7701(a)(43)(transferred basis transactions). For exam-ple, taxpayers and practitioners requestedguidance on how to determine the depre-ciable period of the property if a partner-ship conducts a trade or business andqualified property is contributed to thattrade or business in a nonrecognitiontransfer under section 721(a). Also of rel-evance in the context of non-recognitiontransfers, section 199A(h)(1) grants theSecretary anti-abuse authority to applyrules similar to the rules under section179(d)(2) (which can restrict the expens-ing of certain assets in transferred basistransactions) to prevent the manipulationof the depreciable period of qualifiedproperty using transactions between re-lated parties.

The Treasury Department and the IRSbelieve that existing general principlesused for transferred basis transactions un-der § 168(i)(7) provide a useful analogyfor administrable rules that are appropri-ate for the purposes of section 199A andthat their use will reduce compliancecosts, burden, and administrative com-plexity because taxpayers have experienceapplying them. Accordingly, proposed§ 1.199A–2(c)(2)(iv) provides that, forpurposes of determining the depreciableperiod, if an individual or RPE (the trans-feree) acquires qualified property in atransaction described in section 168(i)(7)(B), the transferee determines the date onwhich the qualified property was firstplaced in service using a two-step ap-proach. First, for the portion of the trans-feree’s UBIA of the qualified propertythat does not exceed the transferor’sUBIA of such property, the date such por-tion was first placed in service by thetransferee is the date on which the trans-feror first placed the qualified property inservice. Second, for the portion of thetransferee’s UBIA of the qualified prop-erty that exceeds the transferor’s UBIA ofsuch property, if any, such portion istreated as separate qualified property thatthe transferee first placed in service on the

date of the transfer. Thus, qualified prop-erty acquired in these non-recognitiontransactions will have two separate placedin service dates under the proposed regu-lations: for purposes of determining theUBIA of the property, the relevant placedin service date will be the date the ac-quired property is placed in service by thetransferee (for instance, the date the part-nership places in service property re-ceived in a section 721 transaction); forpurposes of determining the depreciableperiod of the property, the relevant placedin service date generally will be the datethe transferor first placed the property inservice (for instance, the date the partnerplaced the property in service in his or hersole proprietorship). The proposed regula-tions contain an example illustrating theserules.

The Treasury Department and theIRS request comments concerning ap-propriate methods for accounting fornon-recognition transactions, includingrules to prevent the manipulation of thedepreciable period of qualified propertyusing transactions between related par-ties.

6. Redetermination of UBIA andsubsequent improvements to qualifiedproperty

The Treasury Department and the IRShave received comments requesting guid-ance on the treatment of subsequent im-provements to qualified property. Subse-quent improvements to qualified propertyare generally treated as a separate item ofproperty under section 168(i)(6). TheTreasury Department and the IRS do notbelieve a different approach is necessaryfor purposes of section 199A. Accord-ingly, proposed § 1.199A–2(c)(1)(ii) pro-vides that, in the case of any addition to,or improvement of, qualified property thatis already placed in service by the tax-payer, such addition or improvement istreated as separate qualified property thatthe taxpayer first placed in service on thedate such addition or improvement isplaced in service by the taxpayer for pur-poses of determining the depreciable pe-riod of the qualified property. For exam-ple, if a taxpayer acquired and placed inservice a machine on March 26, 2018, andthen incurs additional capital expenditures

to improve the machine in May 2020, andplaces such improvements in service onMay 27, 2020, the taxpayer has two qual-ified properties: the machine acquired andplaced in service on March 26, 2018, andthe improvements to the machine incurredin May 2020 and placed in service on May27, 2020.

7. Allocation of UBIA of qualifiedproperty by RPEs

In the case of a trade or business con-ducted by an RPE, section 199A(f) pro-vides that a partner’s or shareholder’s al-locable share of the UBIA of qualifiedproperty is determined in the same man-ner as the partner’s allocable share orshareholder’s pro rata share of deprecia-tion. Proposed § 1.199A–2(a)(3) providesthat, in the case of qualified property heldby an RPE, each partner’s or sharehold-er’s share of the UBIA of qualified prop-erty is an amount that bears the sameproportion to the total UBIA of qualifiedproperty as the partner’s or shareholder’sshare of tax depreciation bears to the en-tity’s total tax depreciation attributable tothe property for the year. In the case ofqualified property of a partnership thatdoes not produce tax depreciation duringthe year (for example, property that hasbeen held for less than 10 years but whoserecovery period has ended), each partner’sshare of the UBIA of qualified property isbased on how gain would be allocated tothe partners pursuant to sections 704(b)and 704(c) if the qualified property weresold in a hypothetical transaction for cashequal to the fair market value of the qual-ified property. In the case of qualifiedproperty of an S corporation that does notproduce tax depreciation during the year,each shareholder’s share of the UBIA ofthe qualified property is a share of theUBIA proportionate to the ratio of sharesin the S corporation held by the share-holder over the total shares of the S cor-poration.

III. Proposed § 1.199A–3: QBI,Qualified REIT Dividends, QualifiedPTP Income

Proposed § 1.199A–3 restates the def-initions in section 199A(c) and providesadditional guidance on the determination


of QBI, qualified REIT dividends, andqualified PTP income.

A. QBI

Section 199A(c)(1) provides that theterm “QBI” means, for any taxable year,the net amount of qualified items of in-come, gain, deduction, and loss attribut-able to any qualified trade or business ofthe taxpayer. QBI does not include anyqualified REIT dividends or qualified PTPincome. Section 199A(c)(3)(A) providesthat the term “qualified items of income,gain, deduction, and loss” means items ofincome, gain, deduction, and loss to theextent such items are (i) effectively con-nected with the conduct of a trade or busi-ness within the United States (within themeaning of section 864(c), determined bysubstituting “qualified trade or business(within the meaning of section 199A)” for“nonresident alien individual or a foreigncorporation” or for “a foreign corpora-tion” each place it appears), and (ii) in-cluded or allowed in determining taxableincome for the taxable year. Section199A(c)(3)(B) provides a list of items thatare not taken into account as qualifieditems of income, gain, deduction, andloss, including capital gain or loss, divi-dends, interest income other than interestincome properly allocable to a trade orbusiness, amounts received from an annu-ity other than in connection with a trade orbusiness, certain items described in sec-tion 954, and items of deduction or lossproperly allocable to these items. Section199A(c)(4) provides that QBI does notinclude reasonable compensation paid tothe taxpayer by any qualified trade orbusiness of the taxpayer for services ren-dered with respect to the trade or business,any guaranteed payment described in sec-tion 707(c) paid to a partner for servicesrendered with respect to the trade or busi-ness, and to the extent provided in regu-lations, any payment described in section707(a) to a partner for services renderedwith respect to the trade or business.

i. Treatment of section 751 gain

The Treasury Department and the IRShave received comments stating that it isunclear whether gain or loss that is treatedas ordinary income under section 751

should be QBI if the section 751 incomemeets all of the other requirements to beQBI. This uncertainty is caused becausesection 199A(e)(5) lists: (i) the taxpayer’sallocable share of the QBI from a publiclytraded partnership and (ii) income de-scribed in section 751(a) as separate cat-egories of qualified publicly traded part-nership income, which could be read toimply that income described in section751 is not QBI. Section 1.199–5(e), is-sued under former section 199, specifi-cally included section 751(a) or (b) gainsas domestic production gross receipts.

The Treasury Department and the IRSdo not view the statutory reference to sec-tion 751(a) gain as qualified PTP incometo exclude section 751 gain from beingQBI, but rather view such reference asclarifying the rules for PTPs. Accord-ingly, proposed § 1.199A–3(b)(1)(i) clar-ifies that any gain attributable to assets ofa partnership giving rise to ordinary in-come under section 751(a) or (b) is con-sidered attributable to the trades or busi-nesses conducted by the partnership, andtherefore, may constitute QBI if the otherrequirements of section 199A and pro-posed § 1.199A–3 are satisfied.

ii. Guaranteed payments for the use ofcapital

Because guaranteed payments for theuse of capital under section 707(c) aredetermined without regard to the incomeof the partnership, proposed § 1.199A–3(b)(1)(ii) provides that such paymentsare not considered attributable to a tradeor business, and thus do not constituteQBI. However, the partnership’s relatedexpense for making the guaranteed pay-ments may constitute QBI if the otherrequirements are satisfied.

iii. Section 481 adjustments

Section 1.199–8(g), issued under for-mer section 199, provides rules on howsection 481(a) adjustments are taken intoaccount for purposes of former section199. Similarly, proposed § 1.199A–3(b)(1)(iii) provides that section 481 ad-justments attributable to a trade or busi-ness, whether positive or negative, andarising in a taxable year ending after De-cember 31, 2017, are treated as attribut-

able to that trade or business. Accord-ingly, such section 481 adjustments willconstitute QBI to the extent the require-ments of section 199A, including pro-posed § 1.199A–3, are satisfied. Section481 adjustments arising in a taxable yearending before January 1, 2018, do notconstitute QBI.

iv. Previously suspended losses

Several sections of the Code, includingsections 465, 469, 704(d), and 1366(d),provide for disallowance of losses anddeductions in certain cases. Generally, thedisallowed amounts are suspended andcarried forward to the following year, atwhich point they are re-tested and maybecome allowable. Proposed § 1.199A–3(b)(1)(iv) provides that, to the extent thatany previously disallowed losses or de-ductions are allowed in the taxable year,they are treated as items attributable to thetrade or business. However, losses or de-ductions that were disallowed for taxableyears beginning before January 1, 2018,are not taken into account for purposes ofcomputing QBI in a later taxable year.

v. Net operating losses

Generally, items giving rise to a netoperating loss are allowed in computingtaxable income in the year incurred. Be-cause those items would have been takeninto account in computing QBI in the yearincurred, the net operating loss should notbe treated as QBI in subsequent years.Otherwise, the same loss could be takeninto account in multiple tax years. How-ever, losses disallowed by section 461(l)give rise to a net operating loss withoutever having been allowable in computingtaxable income. Thus, if deductions aredisallowed by reason of 461(l), those dis-allowed deductions will not be included inthe QBI computation in the year incurred(because they are not includable in taxableincome), and, if the resulting net operatingloss also is not included in the QBI com-putation, the deduction would perma-nently escape the QBI rules. This resultwould be inappropriate. Accordingly, pro-posed § 1.199A–3(b)(1)(v) provides thatgenerally, a deduction under section 172for a net operating loss is not consideredattributable to a trade or business and


therefore, is not taken into account incomputing QBI. However, to the extentthe net operating loss is comprised ofamounts attributable to a trade or businessthat were disallowed under section 461(l),the net operating loss is considered attrib-utable to that trade or business, and willconstitute QBI to the extent the require-ments of section 199A, including pro-posed § 1.199A–3, are satisfied.

The Treasury Department and the IRSrequest comments regarding the interac-tion of section 199A and 461(l) generally.

vi. Requirement that an item beeffectively connected with a U.S. tradeor business

Section 199A applies to all noncorpo-rate taxpayers, whether such taxpayers aredomestic or foreign. Accordingly, section199A applies to both U.S. citizens andresident aliens as well as nonresidentaliens that have QBI. As noted previouslyin this Explanation of Provisions, QBIincludes items of income, gain, deduction,and loss to the extent such items are (i)included or allowed in determining tax-able income for the taxable year and (ii)effectively connected with the conduct ofa trade or business within the UnitedStates (within the meaning of section864(c), determined by substituting “qual-ified trade or business (within the meaningof section 199A)” for “nonresident alienindividual or a foreign corporation” or for“a foreign corporation” each place it ap-pears).

a. Summary of rules for generallydetermining whether income iseffectively connected with a UnitedStates trade or business

Section 864(c) provides rules that non-resident alien individuals and foreign cor-porations use to determine which items ofincome, gain, or loss are effectively con-nected with a United States trade or busi-ness. Section 873(a) permits nonresidentaliens to deduct expenses only if and tothe extent that they are connected with, orproperly allocable and apportioned to, in-come effectively connected with a UnitedStates trade or business.

Thus, for example, a U.S. partner of apartnership that operates a trade or busi-ness in both the United States and in a

foreign country would only include theitems of income, gain, deductions, andloss that would be effectively connectedwith a United States trade or business.Similarly, a shareholder of an S corpora-tion that is engaged in a trade or businessin both the United States and in a foreigncountry would only take into account theitems of income, gain, deduction, and lossthat would be effectively connected to theportion of the business conducted by the Scorporation in the United States, deter-mined by applying the principles of sec-tion 864(c).

In general, whether a nonresident alienis engaged in a trade or business withinthe United States, as opposed to a trade orbusiness conducted solely outside theUnited States, is based upon all the factsand circumstances, as developed throughcase law and other published guidance.Pursuant to section 875(1), a nonresidentalien is considered engaged in a trade orbusiness within the United States if thepartnership of which such individual is amember is so engaged.

Section 864(b) provides that the term“trade or business within the UnitedStates” includes (but is not limited to) theperformance of personal services withinthe United States at any time during thetaxable year, but excludes the perfor-mance of services described in section864(b)(1) and (2). Section 864(b)(1) cov-ers a limited set of nonresident aliens whoperform services in the United States onbehalf of foreign persons not otherwiseengaged in a U.S. trade or business, or onbehalf of U.S. persons through a foreignoffice, if the nonresident aliens are presentin the United States less than 90 daysduring the taxable year and their compen-sation does not exceed $3,000. Section864(b)(2) generally treats foreign persons,including partnerships, who are trading instocks, securities, and in commodities fortheir own account or through a broker orother independent agent as not engaged ina United States trade or business.

b. Application to section 199A

Although the cross reference in section199A(c)(3)(A)(i) to section 864 is limitedto paragraph (c) of that section, no incomederived from excluded services under sec-tion 864(b)(1) or (2) could ever be effec-

tively connected income in the hands of anonresident alien. Accordingly, section199A incorporates the specific rules re-garding the scope of the term “trade orbusiness in the United States” in deter-mining QBI. As such, if a trade or busi-ness is not engaged in a U.S. trade orbusiness by reason of section 864(b),items of income, gain, deduction, or lossfrom that trade or business will not beincluded in QBI because such itemswould not be effectively connected withthe conduct of a U.S. trade or business.

If a trade or business is determined tobe conducted in the United States, section864(c)(3) generally treats all income of anonresident alien from sources within theUnited States as effectively connectedwith the conduct of a U.S. trade or busi-ness. However, any income from sourceswithin the United States described in sec-tion 871(a)(1) or (h) and any gain or lossfrom the sale of capital assets are onlyeffectively connected if the income meetsrequirements of section 864(c)(2) and theregulations thereunder. Under section864(c)(4), income from sources withoutthe United States is generally not treatedas effectively connected with the conductof a U.S. trade or business unless an ex-ception under section 864(c)(4)(B) ap-plies. Thus, a trade or business’s foreignsource income, gain, or loss, (and anydeductions effectively connected withsuch foreign source income, gain, or loss)would generally not be included in QBI,unless the income meets an exception insection 864(c)(4)(B). Whether income isU.S. or foreign sourced is determined un-der sections 861, 862, 863, and 865, andthe regulations thereunder.

This rule does not mean that any itemthat is effectively connected with the con-duct of a trade or business with the UnitedStates is therefore QBI. As discussed pre-viously, the item must also be “with re-spect to” a trade or business. Certain pro-visions of the Code allow items to betreated as effectively connected, eventhough they are not with respect to a tradeor business. For example, section 871(d)allows a nonresident alien individual toelect to treat income from real property inthe United States that would not otherwisebe treated as effectively connected withthe conduct of a trade or business withinthe United Sates as effectively connected.


However, for purposes of section 199A, ifitems are not attributable to a trade orbusiness under 162, such items do notconstitute QBI.

Similarly, the fact that a deduction isallowed for purposes of computing effec-tively connected taxable income does notnecessarily mean that it is taken into ac-count for purposes of section 199A. Forexample, for purposes of computing effec-tively connected taxable income, section873(b) allows certain deductions, includ-ing for theft losses of property locatedwithin the United States and charitablecontributions allowed under section 170,to be taken into account regardless ofwhether they are connected with incomethat is effectively connected with the con-duct of a trade or business within theUnited States. However, for purposes ofsection 199A, these items would not betaken into account because section 199Aonly permits a deduction for income thatis both attributable to a trade or businessand that is also effectively connected in-come.

vii. Exclusion from QBI for certainitems

a. Treatment of section 1231 gainsand losses

Section 199A(c)(3)(B)(i) provides thatQBI does not include any item of short-term capital gain, short-term capital loss,long-term capital gain, or long-term capi-tal loss. The Treasury Department and theIRS have received comments requestingguidance on the extent to which gains andlosses subject to section 1231 may betaken into account in calculating QBI.Section 1231 provides rules under whichgains and losses from certain involuntaryconversions and the sale of certain prop-erty used in a trade or business are eithertreated as long-term capital gains or long-term capital losses, or not treated as gainsand losses from sales or exchanges ofcapital assets.

Section 199A(c)(3)(B)(i) excludes cap-ital gains or losses, regardless of whetherthose items arise from the sale or ex-change of a capital asset. The legislativehistory of section 199A provides that QBIdoes not include any item taken into ac-count in determining net long-term capital

gain or net long-term capital loss. Confer-ence Report page 30. Accordingly, pro-posed § 1.199A–3(b)(2)(ii)(A) clarifiesthat, to the extent gain or loss is treated ascapital gain or loss, it is not included inQBI. Specifically, if gain or loss is treatedas capital gain or loss under section 1231,it is not QBI. Conversely, if section 1231provides that gains or losses are nottreated as gains and losses from sales orexchanges of capital assets, section199A(c)(3)(B)(i) does not apply and thus,the gains or losses must be included inQBI (provided all other requirements aremet).

b. Interest Income.

Section 199A(c)(4)(C) provides thatQBI does not include any interest incomeother than interest income that is properlyallocable to a trade or business. The Trea-sury Department and the IRS believe thatinterest income received on working cap-ital, reserves, and similar accounts is notproperly allocable to a trade or business,and therefore should not be included inQBI, because such interest income, al-though held by a trade or business, issimply income from assets held for invest-ment. Accordingly, proposed § 1.199A–3(b)(2)(ii)(C) provides that interest in-come received on working capital,reserves, and similar accounts is not prop-erly allocable to a trade or business. Incontrast, interest income received on ac-counts or notes receivable for services orgoods provided by the trade or business isnot income from assets held for invest-ment, but income received on assets ac-quired in the ordinary course of trade orbusiness.

c. Reasonable compensation

Section 199A(c)(4)(A) provides thatQBI does not include “reasonable com-pensation paid to the taxpayer by anyqualified trade or business of the taxpayerfor services rendered with respect to thetrade or business.” Similarly, guaranteedpayments for services under section707(c) are excluded from QBI. The phrase“reasonable compensation” is a well-known standard in the context of S corpo-rations. Under Rev. Rul. 74–44, 1974–1C.B. 287, S corporations must pay

shareholder-employees “reasonable com-pensation for services performed” prior tomaking “dividend” distributions with re-spect to shareholder-employees’ stock inthe S corporation under section 1368. Seealso David E. Watson, P.C. v. UnitedStates, 668 F.3d 1008, 1017 (8th Cir.2012). The legislative history of section199A confirms that the reasonable com-pensation rule was intended to apply to Scorporations.

The Treasury Department and the IRShave received requests for guidance onwhether the phrase “reasonable compen-sation” within the meaning of section199A extends beyond the context of Scorporations for purposes of section199A. The Treasury Department and theIRS believe “reasonable compensation” isbest read as limited to the context fromwhich it derives: compensation of S cor-poration shareholders-employees. If rea-sonable compensation were to apply out-side of the context of S corporations, apartnership could be required to apply theconcept of reasonable compensation to itspartners, regardless of whether amountspaid to partners were guaranteed. Such aresult would violate the principle set forthin Rev. Rul. 69–184, 1969–1 CB 256,that a partner of a partnership cannot be anemployee of that partnership. There is noindication that Congress intended to changethis long-standing Federal income tax prin-ciple. Accordingly, proposed § 1.199A–3(b)(2)(ii)(H) provides that QBI does notinclude reasonable compensation paid by anS corporation but does not extend this ruleto partnerships. Because the trade or busi-ness of performing services as an employeeis not a qualified trade or business undersection 199A(d)(1)(B), wage income re-ceived by an employee is never QBI. Therule for reasonable compensation is merelya clarification that, even if an S corpora-tion fails to pay a reasonable wage toits shareholder-employees, the shareholder-employees are nonetheless prevented fromincluding an amount equal to reasonablecompensation in QBI.

d. Guaranteed payments

Section 199A(c)(4)(B) provides thatQBI does not include any guaranteed pay-ment described in section 707(c) paid by apartnership to a partner for services ren-


dered with respect to the trade or business.Proposed § 1.199A–3(b)(2)(ii)(I) restatesthis statutory rule and clarifies that thepartnership’s deduction for such guaran-teed payment is an item of QBI if it isproperly allocable to the partnership’strade or business and is otherwise deduct-ible for Federal income tax purposes. Itmay be unclear whether a guaranteed pay-ment to an upper-tier partnership for ser-vices performed for a lower-tier partner-ship is QBI for the individual partners ofthe upper-tier partnership if the upper-tierpartnership does not itself make a guaran-teed payment to its partners. Section199A(c)(4)(B) does not limit the term“partner” to an individual. Consequently,for purposes of the guaranteed paymentrule, a partner may be an RPE. Accord-ingly, proposed § 1.199A–3(b)(2)(ii)(I)clarifies that QBI does not include anyguaranteed payment described in section707(c) paid to a partner for services ren-dered with respect to the trade or business,regardless of whether the partner is anindividual or an RPE. Therefore, for thepurposes of this rule, a guaranteed pay-ment paid by a lower-tier partnership to anupper-tier partnership retains its characteras a guaranteed payment and is not in-cluded in QBI of a partner of the upper-tier partnership regardless of whether it isguaranteed to the ultimate recipient.

e. Section 707(a) payments

Section 199A(c)(4)(C) provides thatQBI does not include, to the extent pro-vided in regulations, any payment de-scribed in section 707(a) to a partner forservices rendered with respect to the tradeor business. Section 707(a) addresses ar-rangements in which a partner engageswith the partnership other than in its ca-pacity as a partner. Within the context ofsection 199A, payments under section707(a) for services are similar to, andtherefore, should be treated similarly as,guaranteed payments, reasonable com-pensation, and wages, none of which isincludable in QBI. In addition, consistentwith the tiered partnership rule for guar-anteed payments described previously, tothe extent an upper-tier RPE receives asection 707(a) payment, that incomeshould not constitute QBI to the partnersof the upper-tier entity. Accordingly, pro-

posed § 1.199A–3(b)(2)(ii)(J) providesthat QBI does not include any paymentdescribed in section 707(a) to a partner forservices rendered with respect to the tradeor business, regardless of whether thepartner is an individual or an RPE. TheTreasury Department and the IRS requestcomments on whether there are situationsin which it is appropriate to include sec-tion 707(a) payments in QBI.

viii. Allocation of items not clearlyattributable to a single trade orbusiness.

Proposed § 1.199A–3(b)(5) providesthat, if an individual or an RPE directlyconducts multiple trades or businesses,and has items of QBI that are properlyattributable to more than one trade orbusiness, the taxpayer or entity must allo-cate those items among the several tradesor businesses to which they are attribut-able using a reasonable method that isconsistent with the purposes of section199A. The chosen reasonable method foreach item must be consistently appliedfrom one taxable year to another and mustclearly reflect the income of each trade orbusiness. There are several different waysto allocate expenses, such as direct tracingor allocating based on gross income, butwhether these are reasonable depends onthe facts and circumstances of each tradeor business. The Treasury Department andthe IRS are considering whether “reason-able method” should be defined to includethe direct tracing method, allocationsbased on gross income, or other methods,within appropriate parameters. The Trea-sury Department and the IRS requestcomments on reasonable methods for theallocation of items not clearly attributableto a single trade or business and whetherany safe harbors may be appropriate.

B. Qualified REIT dividends andqualified PTP income

Proposed § 1.199A–3(c)(2) restates thestatutory provisions regarding qualifiedREIT dividends and provides additionalguidance relating to such dividends. Pur-suant to the regulatory authority conferredunder section 199A(f)(4), proposed§ 1.199A–3(c)(2)(ii) provides an anti-abuse rule to prevent dividend stripping

and similar transactions aimed at captur-ing qualified REIT dividends without hav-ing economic exposure to the REIT stockfor a meaningful period of time. The pro-posed anti-abuse rule incorporates theprinciples of section 246(c).

Proposed § 1.199A–3(c)(3) restates thestatutory provisions regarding qualifiedPTP income and provides additional guid-ance regarding such income. One com-menter questioned whether section 751income recognized upon the sale of aninterest in a PTP must meet the standardsfor QBI (such as the requirement that theincome be effectively connected with aU.S. trade or business) to qualify as qual-ified PTP income. Section 199A includesspecial rules exempting qualified PTP in-come from the W–2 wage and UBIA ofqualified property limitations. However,these statutory rules do not exempt qualifiedPTP income from the other QBI require-ments. Accordingly, proposed § 1.199A–3(c)(3)(ii) clarifies that the other rules appli-cable to the determination of QBI apply tothe determination of qualified PTP income.

IV. Proposed § 1.199A–4: AggregationRules

A. Overview

The proposed regulations incorporatethe rules under section 162 for determin-ing whether a trade or business exists forpurposes of section 199A. A taxpayer canhave more than one trade or business forpurposes of section 162. See § 1.446–1(d)(1). However, in most cases, a trade orbusiness cannot be conducted throughmore than one entity.

The Treasury Department and the IRShave received comments requesting thatthe regulations provide that taxpayers bepermitted to group or “aggregate” tradesor businesses under section 199A usingthe grouping rules described in § 1.469–4(grouping rules). Section 1.469–4 setsforth the rules for grouping a taxpayer’strade or business activities and rental ac-tivities for purposes of applying the pas-sive activity loss and credit limitationrules of section 469. Section 469 uses theterm “activities” in determining the appli-cation of the limitation rules under section469. In contrast, section 199A applies totrades or businesses. By focusing on ac-


tivity, the grouping rules may be bothunder and over inclusive in determiningwhat activities give rise to a trade or busi-ness for section 199A purposes.

Additionally, section 469 is a loss lim-itation rule used to prevent taxpayers fromsheltering passive losses with nonpassiveincome. The section 199A deduction isnot based on the level of a taxpayer’sinvolvement in the trade or business (thatis, both active and passive owners of atrade or business may be entitled to asection 199A deduction if they otherwisesatisfy the requirements of section 199Aand these proposed regulations). Compli-cating matters further, a taxpayer’s section469 groupings may include specified ser-vice trades or businesses, requiring sepa-rate rules to segregate the two categoriesof trades or businesses to calculate thesection 199A deduction.

Therefore, the grouping rules undersection 469 are not appropriate for deter-mining a trade or business for section199A purposes. Accordingly, the Trea-sury Department and the IRS are notadopting the section 469 grouping rules asthe means by which taxpayers can aggre-gate trades or businesses for purposes ofapplying section 199A.

Although it is not appropriate to applythe grouping rules under section 469 tosection 199A, the Treasury Departmentand the IRS agree with practitioners thatsome amount of aggregation should bepermitted. It is not uncommon for whatare commonly thought of as single tradesor businesses to be operated across multi-ple entities. Trades or businesses may bestructured this way for various legal, eco-nomic, or other non-tax reasons. The factthat businesses are operated across entitiesraises the question of whether, in definingtrade or business for purposes of section199A, section 162 trades or businessesshould be permitted or required to be ag-gregated or disaggregated, and if so,whether such aggregation or disaggrega-tion should occur at the entity level or theindividual level. Allowing taxpayers to ag-gregate trades or businesses offers taxpayers ameans of combining their trades or businessesfor purposes of applying the W–2 wage andUBIA of qualified property limitations andpotentially maximizing the deduction undersection 199A. If such aggregation is not per-mitted, taxpayers could be forced to incur

costs to restructure solely for tax purposes. Inaddition, business and non-tax law require-ments may not permit many taxpayers to re-structure their operations. Therefore, proposed§ 1.199A–4 permits the aggregation of sepa-rate trades or businesses, provided certain re-quirements are satisfied.

The Treasury Department and the IRSare aware that many commenters wereconcerned with having multiple regimesfor grouping (that is, under sections 199A,1411, and 469). Accordingly, commentsare requested on the aggregation methoddescribed in proposed § 1.199A–4, in-cluding whether this would be an appro-priate grouping method for purposes ofsections 469 and 1411, in addition to sec-tion 199A.

B. Aggregation rules

Under proposed § 1.199A–4, aggrega-tion is permitted but is not required. How-ever, an individual may aggregate tradesor businesses only if the individual candemonstrate that the requirements in pro-posed § 1.199A–4(b)(1) are satisfied.First, consistent with other provisions inthe proposed regulations, each trade orbusiness must itself be a trade or businessas defined in § 1.199A–1(b)(13).

Second, the same person, or group ofpersons, must directly or indirectly, own amajority interest in each of the businessesto be aggregated for the majority of thetaxable year in which the items attribut-able to each trade or business are includedin income. All of the items attributable tothe trades or businesses must be reportedon returns with the same taxable year(not including short years). Proposed§ 1.199A–4(b)(3) provides rules allowingfor family attribution. Because the pro-posed rules look to a group of persons,non-majority owners may benefit from thecommon ownership and are permitted toaggregate. The Treasury Department andthe IRS considered certain reporting re-quirements in which the majority owneror group of owners would be required toprovide information about all of the otherpass-through entities in which they held amajority interest. Due to the complexityand potential burden on taxpayers of suchan approach, proposed § 1.199A–4 doesnot provide such a reporting requirement.The Treasury Department and the IRS re-

quest comments on whether a reporting orother information sharing requirementshould be required.

Third, none of the aggregated trades orbusinesses can be an SSTB. Proposed§ 1.199A–5 addresses SSTBs and tradesor businesses with SSTB income.

Fourth, individuals and trusts must es-tablish that the trades or businesses meetat least two of three factors, which dem-onstrate that the businesses are in fact partof a larger, integrated trade or business.These factors include: (1) the businessesprovide products and services that are thesame (for example, a restaurant and a foodtruck) or they provide products and ser-vices that are customarily provided to-gether (for example, a gas station and acar wash); (2) the businesses share facili-ties or share significant centralized busi-ness elements (for example, common per-sonnel, accounting, legal, manufacturing,purchasing, human resources, or informa-tion technology resources); or (3) thebusinesses are operated in coordinationwith, or reliance on, other businesses inthe aggregated group (for example, supplychain interdependencies).

C. Individuals

An individual is permitted to aggregatetrades or businesses operated directly andtrades or businesses operated throughRPEs. Individual owners of the sameRPEs are not required to aggregate in thesame manner.

An individual directly engaged in atrade or business must compute QBI, W–2wages, and UBIA of qualified property foreach trade or business before applying theaggregation rules. If an individual has ag-gregated two or more trades or businesses,then the combined QBI, W–2 wages, andUBIA of qualified property for all aggre-gated trades or businesses is used for pur-poses of applying the W–2 wage andUBIA of qualified property limitations de-scribed in proposed § 1.199A–1(d)(2)(iv).

D. RPEs

RPEs must compute QBI, W–2 wages,and UBIA of qualified property for eachtrade or business. An RPE must provide itsowners with information regarding QBI,


W–2 wages, and UBIA of qualified propertyattributable to its trades or businesses.

The Treasury Department and the IRSconsidered permitting aggregation by anRPE in a tiered structure. The TreasuryDepartment and the IRS considered sev-eral approaches to tiered structures, in-cluding permitting only the operating en-tity to aggregate the trades or businessesor permitting each tier to add to the ag-gregated trade or business from a lower–tier, provided that the combined aggre-gated trade or business otherwise satisfiedthe requirements of proposed § 1.199A–4(b)(1) had the businesses all been ownedby the lower-tier entity. The Treasury De-partment and the IRS are concerned thatthe reporting requirements needed for ei-ther of these rules would be overly com-plex for both taxpayers and the IRS toadminister. In addition, because the sec-tion 199A deduction is in all cases takenat the individual level, it should not bedetrimental, and in fact may provideflexibility to taxpayers, to provide foraggregation at only one level. The Trea-sury Department and the IRS requestcomments on the proposed approach totiered structures and the reporting nec-essary to allow an individual to demon-strate to which trades or businesses hisor her QBI, W–2 wages, and UBIA ofqualified property are attributable forpurposes of calculating his or her sec-tion 199A deduction.

E. Reporting and consistency

Proposed § 1.199A–4(c)(1) requiresthat once multiple trades or businesses areaggregated into a single aggregated tradeor business, individuals must consistentlyreport the aggregated group in subsequenttax years. Proposed § 1.199A–4(c)(1)provides rules for situations in which theaggregation rules are no longer met aswell as rules for when a newly created oracquired trade or business can be added toan existing aggregated group.

Proposed § 1.199A–4(c)(2)(i) providesreporting and disclosure requirements forindividuals that choose to aggregate, in-cluding identifying information abouteach trade or business that constitutes apart of the aggregated trade or business.Proposed § 1.199A–4(c)(2)(ii) allows theCommissioner to disaggregate trades or

businesses if an individual fails to makethe required aggregation disclosure. TheTreasury Department and the IRS requestcomments as to whether it is administra-ble to create a standard under which tradesor businesses will be disaggregated by theCommissioner and what that standardmight be.

V. Proposed § 1.199A–5: SpecifiedService Trade or Business and the Tradeor Business of Performing Services asan Employee

Section 199A(c)(1) provides that onlyitems attributable to a qualified trade orbusiness are taken into account in deter-mining the section 199A deduction forQBI. Section 199A(d)(1) provides that a“qualified trade or business” means anytrade or business other than (A) an SSTB,or (B) the trade or business of performingservices as an employee.

A. SSTB

This part V.A. explains the provisionsunder proposed § 1.199A–5 relating toSSTBs. First, the effect of classification asan SSTB is discussed. Second, the excep-tions for taxpayers below the thresholdamount and a de minimis exception aredescribed. Third, guidance is provided onthe meaning of the activities listed in thedefinition of SSTB. Fourth, the rules fordetermining whether a trade or business istreated as part of an SSTB are described.Finally, rules regarding classification asan employee for purposes of section 199Aare discussed.

1. Effect of being an SSTB

a. General rule

Consistent with section 199A, pro-posed § 1.199A–5(a)(2) provides that, un-less an exception applies, if a trade orbusiness is an SSTB, none of its items areto be taken into account for purposes ofdetermining a taxpayer’s QBI. In the caseof an SSTB conducted by an entity, suchas a partnership or an S corporation, if it isdetermined that the trade or business is anSSTB, none of the income from that tradeor business flowing to an owner ofthe entity is QBI, regardless of whetherthe owner participates in the specified ser-

vice activity. Therefore, a direct or indi-rect owner of a trade or business engagedin an SSTB is treated as engaged in theSSTB for purposes of section 199A re-gardless of whether the owner is passiveor participated in the SSTB. Similarly,none of the W–2 wages or UBIA of qual-ified property will be taken into accountfor purposes of section 199A. For exam-ple, because the field of athletics is anSSTB, if a partnership owns a profes-sional sports team, the partners’ distrib-utive shares of income from the partner-ship’s athletics trade or business is not QBI,regardless of whether the partners partici-pate in the partnership’s trade or business.Proposed § 1.199A–5 contains further ex-amples illustrating the operation of this rule.

b. Exceptions to the general rule

Under section 199A(d)(3), individualswith taxable income below the thresholdamount are not subject to a restrictionwith respect to SSTBs. Therefore, if anindividual or trust has taxable income be-low the threshold amount, the individualor trust is eligible to receive the deductionunder section 199A notwithstanding that atrade or business is an SSTB. As de-scribed in part I.C of this Explanation ofProvisions, the exclusion of QBI, W–2wages, and UBIA of qualified propertyfrom the computation of the section 199Adeduction is subject to a phase-in for in-dividuals with taxable income within thephase-in range. The application of thisphase-in is determined at the individual,trust, or estate level, which may not bewhere the trade or business is operated.Therefore, if a partnership or an S corpo-ration operates an SSTB, the applicationof the threshold does not depend on thepartnership or S corporation’s taxable in-come but rather, the taxable income of theindividual partner or shareholder claimingthe section 199A deduction. For example,if the partnership’s taxable income is lessthan the threshold amount, but each of thepartnership’s individual partners have in-come that exceeds the threshold amountplus $50,000 ($100,000 in the case of ajoint return) then none of the partners mayclaim a section 199A deduction with re-spect to any income from the partner-ship’s SSTB.


An RPE conducting an SSTB may notknow whether the taxable income of anyof its equity owners is below the thresholdamount. However, the RPE is best posi-tioned to make the determination as towhether its trade or business is an SSTB.Therefore, reporting rules under proposed§ 1.199A–6(b)(3)(B) requires each RPEto determine whether it conducts an SSTBand disclose that information to its part-ners, shareholders, or owners. With re-spect to each trade or business, once it isdetermined that a trade or business is anSSTB, it remains an SSTB and cannot beaggregated with other trades or business. Inthe case of a trade or business conducted byan individual, such as a sole proprietorship,disregarded entity, or grantor trust, the de-termination of whether the business is anSSTB is made by the individual.

Section 199A defines an SSTB to in-clude any trade or business that “involvesthe performance of services in” a specifiedservice activity. Although the statute, readliterally, does not suggest that a certainquantum of specified service activity is nec-essary to find an SSTB, the Treasury De-partment and the IRS believe that requiringall taxpayers to evaluate and quantify anyamount of specified service activity wouldcreate administrative complexity and undueburdens for both taxpayers and the IRS.Therefore, analogous to the regulations un-der section 448, it is appropriate to providea de minimis rule, under which a trade orbusiness will not be considered to be anSSTB merely because it provides a smallamount of services in a specified serviceactivity.

Accordingly, proposed § 1.199A–5(c)(1)provides that a trade or business (deter-mined before the application of the aggre-gation rules in proposed § 1.199A–4) is notan SSTB if the trade or business has grossreceipts of $25 million or less (in a taxableyear) and less than 10 percent of the grossreceipts of the trade or business are attribut-able to the performance of services in anSSTB. For trades or business with grossreceipts greater than $25 million (in a tax-able year), a trade or business is not anSSTB if less than 5 percent of the grossreceipts of the trade or business are attribut-able to the performance of services in anSSTB.

2. Definition of specified service trade orbusiness

The definition of an SSTB set forth insection 199A incorporates, with modifica-tions, the text of section 1202(e)(3)(A).The text of section 1202(e)(3)(A) substan-tially tracks the definition of “qualifiedpersonal service corporation” under sec-tion 448. Therefore, consistent with ordi-nary rules of statutory construction, theguidance in proposed § 1.199A–5(b) isinformed by existing interpretations andguidance under both sections 1202 and448 when relevant. However, existingguidance under those sections is sparseand the scope and purpose of those sec-tions and section 199A are different. TheTreasury Department and the IRS alsonote that, unlike sections 1202(e)(3)(A)and 448, the purpose of section 199A is toprovide a deduction based on the charac-ter of the taxpayer’s trade or business.Distinct guidance for section 199A is war-ranted. Therefore, the guidance in pro-posed § 1.199A–5(b) applies only to sec-tion 199A, not sections 1202 and 448.

a. Guidance on the meaning of the listedactivities

Section 199A(d)(2)(A) provides thatan SSTB is any trade or business de-scribed in section 1202(e)(3)(A) (appliedwithout regard to the words “engineering[and] architecture”) or that would be sodescribed if the term “employees or own-ers” were substituted for “employees”therein. Section 199A(d)(2)(B) providesthat an SSTB is any trade or business thatinvolves the performance of services thatconsist of investing and investment man-agement, trading, or dealing in securities(as defined in section 475(c)(2)), partner-ship interests, or commodities (as definedin section 475(e)(2)).

Section 1202 provides an exclusionfrom gross income for some or all of thegain on the sale of certain qualified smallbusiness stock. Section 1202 generally re-quires that, for stock to be qualified smallbusiness stock, the corporation must beengaged in a qualified trade or business.Section 1202(e)(3) provides that, for pur-poses of section 1202(e), the term “qual-ified trade or business” means any trade orbusiness other than any trade or business

involving the performance of services inthe fields of health, law, engineering, ar-chitecture, accounting, actuarial science,performing arts, consulting, athletics, fi-nancial services, brokerage services, orany trade or business where the principalasset of such trade or business is the rep-utation or skill of 1 or more of its employ-ees; any banking, insurance, financing,leasing, investing, or similar business; anyfarming business (including the businessof raising or harvesting trees); any busi-ness involving the production or extrac-tion of products of a character with re-spect to which a deduction is allowableunder section 613 or 613A; and any busi-ness of operating a hotel, motel, restau-rant, or similar business.

Thus, after application of the modifica-tions described in section 199A(d)(2)(A),the definition of an SSTB for purposes ofsection 199A is (1) any trade or businessinvolving the performance of services inthe fields of health, law, accounting, actu-arial science, performing arts, consulting,athletics, financial services, brokerage ser-vices, or any trade or business where theprincipal asset of such trade or business isthe reputation or skill of one or more of itsemployees or owners, and (2) any trade orbusiness that involves the performance ofservices that consist of investing andinvestment management, trading, or deal-ing in securities (as defined in section475(c)(2)), partnership interests, or com-modities (as defined in section 475(e)(2)).

The Treasury Department and the IRShave received comments requesting guid-ance on the meaning and scope of thevarious trades or businesses described inthe preceding paragraph. The TreasuryDepartment and the IRS agree with com-menters that guidance with respect tothese trades or businesses is necessary forseveral reasons. Most importantly, section199A is a new Code provision intended tobenefit a wide range of businesses, andtaxpayers need certainty in determiningwhether their trade or business generatesincome that is eligible for the section199A deduction. As previously discussed,given the differing scope, objectives, and,in some respects, language of sections199A, 448, and 1202, the guidance undersections 1202(e)(3)(A) and 448(d)(2) isnot an appropriate substitute for clear anddistinct guidance governing what consti-


tutes an SSTB under section 199A. Inparticular, some SSTBs are listed in sec-tion 1202(e)(3)(A), but not listed in sec-tion 448(d)(2), such as athletics, financialservices, brokerage services, and anytrade or business where the principal assetof such trade or business is the reputationor skill of one or more of its employeesor owners. In addition, some activitiesare mentioned only in 199A, such asinvestment management, trading, anddealing. As described in the remainderof this part V.A.2., proposed § 1.199A–5(b) provides guidance on the definitionof an SSTB based on the plain meaningof the statute, past interpretations ofsubstantially similar language in otherCode provisions, and other indicia oflegislative intent.

i. SSTBs listed in section 199A(d)(2)(A)

The definition of an SSTB under sec-tion 199A is substantially similar to thelist of service trades or businesses pro-vided in section 448(d)(2)(A) and§ 1.448–1T(e)(4)(i), as the legislative his-tory notes. See Joint Explanatory State-ment of the Committee of Conference,footnotes 44–46. Section 448 prohibitscertain taxpayers from computing taxableincome under the cash receipts and dis-bursements method of accounting. Undersection 448, qualified personal servicecorporations generally are not subject tothe prohibition from using the cashmethod. Section 448(d)(2) defines theterm qualified personal service corpora-tion to include certain employee-ownedcorporations, substantially all of the activ-ities of which involve the performance ofservices in the fields of health, law, engi-neering, architecture, accounting, actuar-ial science, performing arts, or consulting.The regulations under section 448(d)(2),found in § 1.448–1T(e)(4)(i), provide ad-ditional guidance on several of the terms,including health, performing arts, andconsulting. In addition, there have beenseveral court opinions, technical advicememoranda, and private letter rulings in-terpreting the various fields listed in sec-tion 448(d)(2) and § 1.448–1T(e)(4)(i).

In general, the guidance under section448(d)(2) emphasizes the direct provisionof services by the employees of a trade orbusiness, rather than the application of

capital. Commenters have suggested thatthe regulations under section 448 serve asa reasonable starting point for defining anSSTB for purposes of section 199A. How-ever, commenters also noted that the ob-jectives and included categories of tradesor businesses within section 448 and sec-tion 199A are different. Consistent withordinary rules of statutory constructionand the legislative history of section199A, proposed § 1.199A–5(b) drawsupon the existing guidance under section448(d)(2) when appropriate for purposesof section 199A. Proposed § 1.199A–5(b)generally follows the guidance issued un-der section 448(d)(2) with some modifi-cations. In certain instances, the principlesof section 448(d)(2) provide useful anal-ogies in defining the particular fields listedin section 1202(e)(3)(A) (as modified bysection 199A(d)(2)(A)) for purposes ofsection 199A.

In addition, section 1202(e)(3)(A)also includes “any trade or businesswhere the principal asset of such tradeor business is the reputation or skill of 1or more of its employees.” Section199A(d)(2)(A) modifies this clause byadding the words “or owners” to theend, to read as follows: “any trade orbusiness where the principal asset ofsuch trade or business is the reputationor skill of 1 or more of its employees orowners.” The meaning of this clause isbest determined by examining the lan-guage of section 1202(e)(3)(A) in lightof the purpose of section 199A.

Case law under section 448 providesthat whether a service is performed in aqualifying field under section 448(d)(2) isto be decided by examining all relevantindicia and is not controlled by state li-censing laws. See Rainbow Tax Serv., Inc.v. Commissioner, 128 T.C. 42 (2007);Kraatz & Craig Surveying Inc. v. Com-missioner, 134 T.C. 167 (2010). This ap-proach also is appropriate for section199A purposes. Additionally, states canwidely vary in what they require in termsof licensure or certification. The TreasuryDepartment and the IRS believe that theFederal tax law should not treat similarlysituated taxpayers differently based on aparticular state’s decision that for con-sumer protection purposes or otherwise, aparticular business type requires a licenseor certification. Thus, proposed § 1.199A–

5(b) does not adopt a bright-line licensingrule for purposes of determining whethera trade or business is within a certain fieldfor purposes of section 199A.

a. Health

Proposed § 1.199A–5(b)(2)(ii) is in-formed by the definition of “health” undersection 448 and provides that the term “per-formance of services in the field of health”means the provision of medical services byphysicians, pharmacists, nurses, dentists,veterinarians, physical therapists, psycholo-gists, and other similar healthcare profes-sionals who provide medical services di-rectly to a patient. The performance ofservices in the field of health does not in-clude the provision of services not directlyrelated to a medical field, even though theservices may purportedly relate to the healthof the service recipient. For example, theperformance of services in the field of healthdoes not include the operation of healthclubs or health spas that provide physicalexercise or conditioning to their customers,payment processing, or research, testing,and manufacture and/or sales of pharmaceu-ticals or medical devices.

b. Law

Proposed § 1.199A–5(b)(2)(iii) isbased on the ordinary meaning of “ser-vices in the field of law” and provides thatthe term “performance of services in thefield of law” means the provision of ser-vices by lawyers, paralegals, legal arbitra-tors, mediators, and similar professionalsin their capacity as such. The performanceof services in the field of law does notinclude the provision of services that donot require skills unique to the field oflaw, for example, the provision of servicesin the field of law does not include theprovision of services by printers, deliveryservices, or stenography services.

c. Accounting

Proposed § 1.199A–5(b)(2)(iv) isbased on the ordinary meaning of “ac-counting” and provides that the term “per-formance of services in the field of ac-counting” means the provision of servicesby accountants, enrolled agents, returnpreparers, financial auditors, and similar


professionals in their capacity as such.Provision of services in the field of ac-counting is not limited to services requir-ing state licensure as a certified publicaccountant (CPA). The aim of proposed§ 1.199A–5(b)(2)(iv) is to capture thecommon understanding of accounting,which includes tax return and bookkeep-ing services, even though the provision ofsuch services may not require the sameeducation, training, or mastery of account-ing principles as a CPA. The field of ac-counting does not include payment pro-cessing and billing analysis.

d. Actuarial science

Proposed § 1.199A–5(b)(2)(v) is basedon the ordinary meaning “actuarial sci-ence” and provides that the term “perfor-mance of services in the field of actuarialscience” means the provision of servicesby actuaries and similar professionals intheir capacity as such. Accordingly, thefield of actuarial science does not includethe provision of services by analysts,economists, mathematicians, and statisti-cians not engaged in analyzing or assess-ing the financial costs of risk or uncer-tainty of events.

e. Performing arts

Proposed § 1.199A–5(b)(2)(vi) is in-formed by the definition of “performingarts” under section 448 and provides thatthe term “performance of services in thefield of the performing arts” means theperformance of services by individualswho participate in the creation of perform-ing arts, such as actors, singers, musi-cians, entertainers, directors, and similarprofessionals performing services in theircapacity as such. The performance of ser-vices in the field of performing arts doesnot include the provision of services thatdo not require skills unique to the creationof performing arts, such as the mainte-nance and operation of equipment or fa-cilities for use in the performing arts. Sim-ilarly, the performance of services in thefield of the performing arts does not in-clude the provision of services by personswho broadcast or otherwise disseminatevideo or audio of performing arts to thepublic.

f. Consulting

Proposed § 1.199A–5(b)(2)(vii) is in-formed by the definition of “consulting”under section 448 and provides that theterm “performance of services in the fieldof consulting” means the provision of pro-fessional advice and counsel to clients toassist the client in achieving goals andsolving problems. Consulting includesproviding advice and counsel regardingadvocacy with the intention of influencingdecisions made by a government or gov-ernmental agency and all attempts to in-fluence legislators and other governmentofficials on behalf of a client by lobbyistsand other similar professionals perform-ing services in their capacity as such. Theperformance of services in the field ofconsulting does not include the perfor-mance of services other than advice andcounsel. This determination is made basedon all the facts and circumstances of aperson’s business.

Additionally, the Treasury Departmentand the IRS are aware of the concernnoted by commenters that in certain kindsof sales transactions it is common forbusinesses to provide consulting servicesin connection with the purchase of goodsby customers. For example, a companythat sells computers may provide custom-ers with consulting services relating to thesetup, operation, and repair of the com-puters, or a contractor who remodelshomes may provide consulting prior toremodeling a kitchen. As described previ-ously in this Explanation of Provisions,proposed § 1.199A–5(c) provides a deminimis rule, under which a trade or busi-ness is not an SSTB if less than 10 percentof the gross receipts (5 percent if the grossreceipts are greater than $25 million) ofthe trade or business are attributable to theperformance of services in a specified ser-vice activity. However, this de minimisrule may not provide sufficient relief forcertain trades or business that provide an-cillary consulting services. The TreasuryDepartment and the IRS believe that if atrade or business involves the selling ormanufacturing of goods, and such trade orbusiness provides ancillary consulting ser-vices that are not separately purchased orbilled, then such trades or businesses are notin a trade or business in the field of consult-ing. Accordingly, proposed § 1.199A–

5(b)(2)(vii) provides that the field of con-sulting does not include consulting that isembedded in, or ancillary to, the sale ofgoods if there is no separate payment for theconsulting services.

g. Athletics

The field of athletics is not listed insection 448(d)(2), and there is little guid-ance on its meaning as used in section1202(e)(3)(A). However, commentersnoted, and the Treasury Department andthe IRS agree, that among the servicesspecified in section 199A(d)(2)(A) thefield of athletics is most similar to the fieldof performing arts. Accordingly, proposed§ 1.199A–5(b)(2)(viii) provides that theterm “performance of services in the fieldof athletics” means the performances ofservices by individuals who participatein athletic competition such as athletes,coaches, and team managers in sportssuch as baseball, basketball, football, soc-cer, hockey, martial arts, boxing, bowling,tennis, golf, skiing, snowboarding, trackand field, billiards, and racing. The per-formance of services in the field of athlet-ics does not include the provision of ser-vices that do not require skills unique toathletic competition, such as the mainte-nance and operation of equipment or fa-cilities for use in athletic events. Simi-larly, the performance of services in thefield of athletics does not include the pro-vision of services by persons who broad-cast or otherwise disseminate video or au-dio of athletic events to the public.

h. Financial services

Commenters requested guidance as towhether financial services includes bank-ing. These commenters noted that section1202(e)(3)(A) includes the term financialservices, but that banking in separatelylisted in section 1202(e)(3)(B) which sug-gests that banking is not included as partof financial services in section 1202(e)(3)(A). The Treasury Department and theIRS agree with such commenters that thissuggests that financial services should bemore narrowly interpreted here. There-fore, proposed § 1.199A–5(b)(2)(ix) lim-its the definition of financial services toservices typically performed by finan-cial advisors and investment bankers


and provides that the field of financialservices includes the provision of finan-cial services to clients including manag-ing wealth, advising clients with respectto finances, developing retirement plans,developing wealth transition plans, theprovision of advisory and other similarservices regarding valuations, mergers,acquisitions, dispositions, restructurings(including in title 11 or similar cases),and raising financial capital by under-writing, or acting as the client’s agent inthe issuance of securities, and similarservices. This includes services pro-vided by financial advisors, investmentbankers, wealth planners, and retirementadvisors and other similar professionals,but does not include taking deposits ormaking loans.

i. Brokerage services

Proposed § 1.199A–5(b)(2)(x) uses theordinary meaning of “brokerage services”and provides that the field of brokerageservices includes services in which a per-son arranges transactions between a buyerand a seller with respect to securities (asdefined in section 475(c)(2)) for a com-mission or fee. This includes services pro-vided by stock brokers and other similarprofessionals, but does not include ser-vices provided by real estate agents andbrokers, or insurance agents and brokers.

j. Any trade or business where theprincipal asset of such trade or businessis the reputation or skill of 1 or more ofits employees or owners

Guidance on the meaning of the “rep-utation or skill” clause in section1202(e)(3)(A) is limited to dicta in onecase. In John P. Owen v. Commissioner,T.C. Memo 2012–21, the Tax Court ex-amined whether Mr. Owen, whose busi-ness was insurance, was entitled to bene-fits under section 1202 with respect to thesale of his interest in a corporation con-ducting such business. Under the factsdescribed in the case, the corporation hadextensive training programs and salesstructures, but primarily relied on the ser-vices of independent contractors (includ-ing Mr. Owen) in conducting its business.Although the Tax Court acknowledgedthat the business’ success was due to Mr.

Owen’s efforts, it found that the principalasset of the company in question was thetraining program and sales structure of thebusiness rather than Mr. Owen’s services.

The Treasury Department and the IRSreceived several comments regarding themeaning of the “reputation or skill”clause. Commenters described potentialmethods to give maximum effect to theliteral language of the reputation or skillclause by describing ways to (1) deter-mine the extent to which the reputation orskill of employees or owners constitutesan asset of the business under Federal taxaccounting principles, and (2) measurewhether such an asset is in fact the prin-cipal asset of the business.

One commenter suggested using anactivity-based standard under which noservice-based businesses would qualifyfor the section 199A deduction. An SSTBdefinition this broad would not comportwith the statute and would deny a section199A deduction to businesses that thestatute does not appear to exclude. If the“reputation or skill” clause was intendedto exclude all service businesses fromsection 199A, there would have been noreason to enumerate specific types of busi-nesses in section 199A(d)(2); that lan-guage would be pure surplusage. A broadservice-based test would also fail to pro-vide a clear classification of businessesthat combine services with sales of prod-ucts, such as plumbing and HVAC ser-vices, if those businesses sell goods orequipment in the course of providing ser-vices. Therefore, the Treasury Departmentand the IRS do not believe it is consistentwith the text, structure, or purpose of sec-tion 199A to exclude all service busi-nesses above the threshold amount fromqualifying for the section 199A deduction.

Another commenter described a bal-ance sheet test that would compare thevalue of assets other than goodwill andworkforce in place to the value of suchgoodwill and workforce in place. Thecommenter acknowledged that such a testcould also be broader than Congress in-tended. In addition, the commenter notedthat such a test could easily lead to strangeand unintuitive results, and may be diffi-cult to apply in the case of small busi-nesses that do not maintain audited finan-cial statements and would both be ripe forabuse, and could potentially result in

many legal disputes between taxpayersand the IRS.

Finally, one commenter described astandard based on whether the trade orbusiness involves the provision of highly-skilled services. The commenter arguedthat the primary benefit of a standard likethis is that it would harmonize the mean-ing of the reputation or skill phrase withthe trades or businesses listed in section1202(e)(3)(A), each of which involve theprovision of services by professionalswho either received a substantial amountof training (for example, doctors, nurses,lawyers, and accountants), or who haveotherwise achieved a high degree of skillin a given field (for example, professionalathletes or performing artists).

Congress enacted section 199A to pro-vide a deduction from taxable income totrades or businesses conducted by soleproprietorships and passthrough entitiesthat do not benefit from the income taxrate reduction afforded to C corporationsunder the TCJA. The Treasury Depart-ment and the IRS are concerned that abroad definition of the “reputation orskill” phrase that relied on a balance sheettest or numerical ratios would have sev-eral consequences inconsistent with theintent of section 199A. Testing businessesbased on metrics, some of them subjec-tive, that change over time could result ininappropriate year-over-year tax conse-quences and lead to distorted decision-making. As the commenters noted, suchmechanical tests pose administrative dif-ficulties and fail to provide taxpayers withneeded certainty regarding the tax lawnecessary for conducting their businessaffairs. Most significantly, such mechani-cal rules might prevent trades or busi-nesses that Congress intended to be eligi-ble for the section 199A deduction fromclaiming the section 199A deduction.

In sum, the Treasury Department andthe IRS believe that the “reputation orskill” clause as used in section 199A wasintended to describe a narrow set of tradesor businesses, not otherwise covered bythe enumerated specified services, inwhich income is received based directlyon the skill and/or reputation of employ-ees or owners. Additionally, the TreasuryDepartment and the IRS believe that “rep-utation or skill” must be interpreted in amanner that is both objective and admin-


istrable. Thus, proposed § 1.199A–5(b)(2)(xiv) limits the meaning of the“reputation or skill” clause to fact patternsin which the individual or RPE is engagedin the trade or business of: (1) receivingincome for endorsing products or services,including an individual’s distributiveshare of income or distributions from anRPE for which the individual provides en-dorsement services; (2) licensing or receiv-ing income for the use of an individual’simage, likeness, name, signature, voice,trademark, or any other symbols associatedwith the individual’s identity, including anindividual’s distributive share of income ordistributions from an RPE to which an in-dividual contributes the rights to use theindividual’s image; or (3) receiving appear-ance fees or income (including fees or in-come to reality performers performing asthemselves on television, social media, orother forums, radio, television, and othermedia hosts, and video game players). Pro-posed § 1.199A–5(b)(4) contains two exam-ples illustrating the application of this defi-nition. The Treasury Department and theIRS request comments on this rule, the clar-ity of definitions for the statutorily enumer-ated trades or businesses that are SSTBsunder section 199A(d)(2)(A), and the ac-companying examples.

ii. SSTBs described in 199A(d)(2)(B)

As mentioned previously, section 199A(d)(2)(B) provides that an SSTB also includesany trade or business that involves the per-formance of services that consist of invest-ing and investment management, trading, ordealing in securities (as defined in section475(c)(2)), partnership interests, or com-modities (as defined in section 475(e)(2)).This rule does not appear in section1202(e)(3)(A) or section 448(d)(2).

Section 475(c)(2) provides a detailedlist of interests treated as securities, in-cluding stock in a corporation; ownershipinterests in widely held or publicly tradedpartnerships or trusts; notes, bonds, de-bentures, or other evidences of indebted-ness; interest rate, currency, or equity no-tional principal contracts; evidences of aninterest in, or derivative financial instru-ments in any of the foregoing securities orany currency, including any option, for-ward contract, short position, or any sim-ilar financial instruments; and certain

hedges with respect to any such securities.Section 475(e)(2) provides a similarly de-tailed list of property treated as a com-modity, including any commodity whichis actively traded (within the meaning ofsection 1092(d)(1)) or any notional prin-cipal contract with respect to any suchcommodity, evidences of an interest in, orderivative financial instruments in any ofthe foregoing commodities, and certainhedges with respect to any such commod-ities.

a. Investing and investmentmanagement

Proposed § 1.199A–5(b)(2)(xi) usesthe ordinary meaning of “investing andinvestment management” and providesthat any trade or business that involves the“performance of services that consist ofinvesting and investment management”means a trade or business that earns feesfor investment, asset management ser-vices, or investment management servicesincluding providing advice with respect tobuying and selling investments. The per-formance of services that consist of in-vesting and investment managementwould include a trade or business thatreceives either a commission, a flat fee, oran investment management fee calculatedas a percentage of assets under manage-ment. The performance of services of in-vesting and investment management doesnot include directly managing real prop-erty.

b. Trading

Proposed § 1.199A–5(b)(2)(xii) pro-vides that any trade or business involvingthe “performance of services that consistof trading” means a trade or business oftrading in securities, commodities, or part-nership interests. Whether a person is atrader is determined by taking into ac-count the relevant facts and circum-stances. Factors that have been consideredrelevant to determining whether a personis a trader include the source and type ofprofit generally sought from engaging inthe activity regardless of whether the ac-tivity is being provided on behalf of cus-tomers or for a taxpayer’s own account.See Endicott v. Commissioner, T.C.Memo 2013–199; Nelson v. Commis-

sioner, T.C. Memo 2013–259, King v.Commissioner, 89 T.C. 445 (1987). A per-son that is a trader under these principleswill be treated as performing the servicesof trading for purposes of section199A(d)(2)(B).

c. Dealing in securities, partnershipinterests, and commodities

For purposes of proposed § 1.199A–5(b)(2)(xiii), the “performance of servicesthat consist of dealing in securities (asdefined in section 475(c)(2))” means reg-ularly purchasing securities from and sell-ing securities to customers in the ordinarycourse of a trade or business or regularlyoffering to enter into, assume, offset, as-sign, or otherwise terminate positions insecurities with customers in the ordinarycourse of a trade or business. For purposesof the preceding sentence, a taxpayer thatregularly originates loans in the ordinarycourse of a trade or business of makingloans but engages in no more than negli-gible sales of the loans is not dealingin securities for purposes of section199A(d)(2). See § 1.475(c)–1(c)(2) and(4) for the definition of negligible sales.

For purposes of proposed § 1.199A–5(b)(2)(xiii), “the performance of servicesthat consist of dealing in partnership in-terests” means regularly purchasing part-nership interests from and selling partner-ship interests to customers in the ordinarycourse of a trade or business or regularlyoffering to enter into, assume, offset, as-sign, or otherwise terminate positions inpartnership interests with customers in theordinary course of a trade or business.

For purposes of proposed § 1.199A–5(b)(2)(xiii), “the performance of servicesthat consist of dealing in commodities (asdefined in section 475(e)(2))” means reg-ularly purchasing commodities from andselling commodities to customers in theordinary course of a trade or business orregularly offering to enter into, assume,offset, assign, or otherwise terminate po-sitions in commodities with customers inthe ordinary course of a trade or business.

3. Defining what is included in an SSTB

The Treasury Department and the IRSare aware that some taxpayers have con-templated a strategy to separate out parts


of what otherwise would be an integratedSSTB, such as the administrative func-tions, in an attempt to qualify those sepa-rated parts for the section 199A deduction.Such a strategy is inconsistent with thepurpose of section 199A. Therefore, inaccordance with section 199A(f)(4), in or-der to carry out the purposes of section199A, proposed § 1.199A–5(c)(2) pro-vides that an SSTB includes any trade orbusiness with 50 percent or more commonownership (directly or indirectly) that pro-vides 80 percent or more of its property orservices to an SSTB. Additionally, if atrade or business has 50 percent or morecommon ownership with an SSTB, to theextent that the trade or business providesproperty or services to the commonly-owned SSTB, the portion of the property orservices provided to the SSTB will betreated as an SSTB (meaning the incomewill be treated as income from an SSTB).For example, A, a dentist, owns a dentalpractice and also owns an office building. Arents half the building to the dental practiceand half the building to unrelated persons.Under proposed § 1.199A–5(c)(2), the rent-ing of half of the building to the dentalpractice will be treated as an SSTB.

Additionally, proposed § 1.199A–5provides a rule that if a trade or business(that would not otherwise be treated asan SSTB) has 50 percent or more com-mon ownership with an SSTB andshared expenses, including wages oroverhead expenses with the SSTB, it istreated as incidental to an SSTB and,therefore, as an SSTB, if the trade orbusiness represents no more than fivepercent of gross receipts of the com-bined business.

B. Trade or business of performingservices as an employee

Under section 199(d)(1)(B), the tradeor business of performing services as anemployee is not a qualified trade or busi-ness. Unlike an SSTB, there is no thresh-old amount that applies to the trade orbusiness of performing services as an em-ployee. Thus, wage or compensation in-come earned by any employee is not eli-gible for the section 199A deduction nomatter the amount.

1. Definition

An individual is an employee for Fed-eral employment tax purposes if he or shehas the status of an employee under theusual common law and statutory rules ap-plicable in determining the employer-employee relationship. Guides for deter-mining employment status are foundin §§ 31.3121(d)–1, 31.3306(i)–1, and31.3401(c)–1. As stated in the regulations,generally, the common law relationship ofemployer and employee exists when theperson for whom the services are per-formed has the right to direct and controlthe individual who performs the services,not only as to the result to be accom-plished by the work but also as to thedetails and means by which that result isaccomplished. That is, an employee issubject to the direction and control of theemployer not only as to what shall bedone but how it shall be done. In thisconnection it is not necessary that the em-ployer actually direct or control the man-ner in which the services are performed; itis sufficient if he or she has the right to doso.

In addition, the regulations and section3401(c) state, generally, that an officer ofa corporation (including an S Corpora-tion) is an employee of the corporation.However, an officer of a corporation whodoes not perform any services or performsonly minor services in his or her capacityas officer and who neither receives nor isentitled to receive, directly or indirectly,any remuneration is not considered to bean employee of the corporation. Whetheran officer’s services are minor is a ques-tion of fact that depends on the nature ofthe services, the frequency and duration oftheir performance, and the actual and po-tential importance or necessity of the ser-vices in relation to the conduct of thecorporation’s business. See Rev. Rul. 74–390.

To provide clarity, proposed § 1.199A–5(d) provides a general rule that incomefrom the trade or business of performingservices as an employee refers to all wages(within the meaning of section 3401(a)) andother income earned in a capacity as anemployee, including payments described in§ 1.6041–2(a)(1) (other than payments toindividuals described in section 3121(d)(3))and § 1.6041–2(b)(1). If an individual de-

rives income in the course of a trade orbusiness that is not described in section3401(a), § 1.6041–2(a)(1) (other than pay-ments to individuals described in section3121(d)(3)), or § 1.6041–2(b)(1), that indi-vidual is not considered to be in the trade orbusiness of performing services as an em-ployee with regard to such income.

2. Presumption for former employees

Section 199A provides that the trade orbusiness of providing services as an em-ployee is not eligible for the section 199Adeduction. Therefore, taxpayers and prac-titioners noted that it may be beneficial foremployees to treat themselves as indepen-dent contractors or as having an equityinterest in a partnership or S corporationin order to benefit from the deduction un-der section 199A.

Section 530(b) of the Revenue Act of1978 (P.L. 95–600), as amended by sec-tion 9(d)(2) of P.L. 96–167, section 1(a)of P.L. 96–541, and section 269(c) of P.L.97–248, provides a prohibition againstregulations and rulings on employmentstatus for purposes of employment taxes.Specifically, section 530(b) provides thatno regulation or revenue ruling shall bepublished before the effective date of anylaw clarifying the employment status ofindividuals for purposes of the employ-ment taxes by the Treasury Department(including the IRS) with respect to theemployment status of any individual forpurposes of the employment taxes. Sec-tion 530(c) of the Revenue Act of 1978provides that, for purposes of section 530,the term “employment tax” means any taximposed by subtitle C of the Internal Rev-enue Code of 1954, and the term “employ-ment status” means the status of an indi-vidual, under the usual common law rulesapplicable in determining the employer-employee relationship as an employee oras an independent contractor (or other in-dividual who is not an employee). Theselongstanding rules of section 530 of theRevenue Act of 1978 limit the ability ofthe IRS to impose employment tax liabil-ity on employers for misclassifying em-ployees as independent contractors but donot preclude challenging a worker’s statusfor purposes of section 199A, an incometax provision under subtitle A of the Code.


Therefore, proposed § 1.199A–5(d)(3)provides that for purposes of section199A, if an employer improperly treats anemployee as an independent contractor orother non-employee, the improperly clas-sified employee is in the trade or businessof performing services as an employeenotwithstanding the employer’s improperclassification. This issue is particularlyimportant in the case of individuals whocease being treated as employees of anemployer, but subsequently provide sub-stantially the same services to the em-ployer (or a related entity) but claim to doso in a capacity other than as an employee.However, it would not be appropriate toprovide that someone who formerly wasan employee of an employer is now “lesslikely” to be respected as an independentcontractor. Such a rule would not treatsimilarly-situated taxpayers similarly: twoindividuals who have a similar relation-ship with a company and each claim to betreated as independent contractors wouldbe treated differently depending on anyprior employment history with the com-pany. Therefore, proposed § 1.199A–5(d)(3) does not provide any new or dif-ferent standards to be properly classifiedas an independent contractor or owner of abusiness. Instead, proposed § 1.199A–5(d)(3) contains a presumption that ap-plies in certain situations to ensure thatindividuals properly substantiate their sta-tus.

Specifically, proposed § 1.199A–5(d)(3)provides that, solely for purposes of section199A(d)(1)(B) and the regulations thereun-der, an individual who was treated as anemployee for Federal employment tax pur-poses by the person to whom he or sheprovided services, and who is subsequentlytreated as other than an employee by suchperson with regard to the provision of sub-stantially the same services directly or indi-rectly to the person (or a related person), ispresumed to be in the trade or business ofperforming services as an employee withregard to such services. This presumptionmay be rebutted only upon a showing by theindividual that, under Federal tax rules, reg-ulations, and principles (including common-law employee classification rules), the indi-vidual is performing services in a capacityother than as an employee. This presump-tion applies regardless of whether the indi-vidual provides services directly or indi-

rectly through an entity or entities. Thispresumption is solely for purposes of sec-tion 199A and does not otherwise changethe employment tax classification of theindividual. Section 199A is in subtitle Aof the Code, and this rule does not applyfor purposes of any other subtitle, in-cluding subtitle C. Accordingly, thisrule does not implicate section 530(b) ofthe Revenue Act of 1978. Proposed§ 1.199A–5(d)(3)(ii) contains three ex-amples illustrating this rule.

VI. Proposed § 1.199A–6: Special Rulesfor RPEs, PTPs, Trusts, and Estates

Proposed § 1.199A–6 provides guid-ance that certain specified entities (for ex-ample, RPEs, PTPs, trusts, and estates)may need to follow for purposes of com-puting the entities’ or their owners’ sec-tion 199A deductions.

A. Computational steps for RPEs andPTPs

Although RPEs cannot take the section199A deduction at the RPE level, eachRPE must determine and report the infor-mation necessary for its direct and indirectowners to determine their own section199A deduction. Proposed § 1.199A–6(b)follows the rules applicable to individualswith taxable income above the thresholdamount set forth in § 1.199A–1(d) in di-recting RPEs to determine what amountsand information to report to their ownersand the IRS, including QBI, W–2 wages,the UBIA of qualified property for eachtrade or business directly engaged in, andwhether any of its trades or businesses areSSTBs. RPEs must also determine andreport qualified REIT dividends and qual-ified PTP income received directly by theRPE. Proposed § 1.199A–6(b)(3) then re-quires each RPE to report this informationon or with the Schedules K-1 issued to theowners. RPEs must report this informa-tion regardless of whether a taxpayer isbelow the threshold. The Treasury Depart-ment and the IRS request comments onwhether it is administrable to provide aspecial rule that if none of the owners ofthe RPE have taxable income above thethreshold amount, the RPE does not needto determine and report W–2 wages,UBIA of qualified property, or whether

the trade or business is an SSTB. Al-though such a rule would relieve an RPEof an unnecessary burden, the RPE wouldneed to have knowledge of the ultimateowner’s taxable income.

The definition of an RPE does not in-clude a PTP. However, PTPs must still de-termine and report QBI under the rules ofproposed § 1.199A–3 for each trade or busi-ness in which the PTP is engaged andwhether those trades or businesses areSSTBs. A PTP must also determine whetherit has received any qualified REIT dividendsor qualified PTP income or loss from an-other PTP. These items must be reported onor with the Schedule K–1. A PTP is notrequired to determine or report W–2 wagesor the UBIA of qualified property.

B. Application to trusts, estates, andbeneficiaries

Proposed § 1.199A–6(d) contains spe-cial rules for applying section 199A totrusts and decedents’ estates. To the extentthat a grantor or another person is treatedas owning all or part of a trust undersections 671 through 679 (grantor trust),including qualified subchapter S trusts(QSSTs) with respect to which the bene-ficiary has made an election under section1361(d), the owner will compute its QBIwith respect to the owned portion of thetrust as if that QBI had been receiveddirectly by the owner.

In the case of a section 199A deductionclaimed by a non-grantor trust or estate,section 199A(f)(1)(B) applies rules simi-lar to the rules under former section199(d)(1)(B)(i) for the apportionment ofW–2 wages and the apportionment ofUBIA of qualified property. In the caseof a non-grantor trust or estate, the QBIand expenses properly allocable to thebusiness, including the W–2 wages rele-vant to the computation of the wage lim-itation, and relevant UBIA of depreciableproperty must be allocated among thetrust or estate and its various beneficiaries.Specifically, proposed § 1.199A–6(d)(3)(ii) provides that each beneficiary’s shareof the trust’s or estate’s W–2 wages isdetermined based on the proportion of thetrust’s or estate’s DNI that is deemed tobe distributed to that beneficiary for thattaxable year. Similarly, the proportionof the entity’s DNI that is not deemed


distributed by the trust or estate willdetermine the entity’s share of the QBIand W–2 wages. In addition, if the trustor estate has no DNI in a particulartaxable year, any QBI and W–2 wagesare allocated to the trust or estate, andnot to any beneficiary.

In addition, proposed § 1.199A–6(d)(3)(ii) provides that, to the extent thetrust’s or estate’s UBIA of qualified prop-erty is relevant to a trust or estate and anybeneficiary, the trust’s or estate’s UBIA ofqualified property will be allocated amongthe trust or estate and its beneficiaries inthe same proportion as DNI of the trust orestate is allocated. This is the case regard-less of how any depreciation or depletiondeductions resulting from the same prop-erty may be allocated under section 643(c)among the trust or estate and its benefi-ciaries for purposes other than section199A.

Under section 199A, the thresholdamount is determined at the trust levelwithout taking into account any distri-bution deductions. Commenters havenoted that taxpayers could circumventthe threshold amount by dividing assetsamong multiple trusts, each of whichwould claim its own threshold amount.This result is inappropriate and incon-sistent with the purpose of section199A. Therefore, proposed § 1.199A–6(d)(3)(v) provides that trusts formed orfunded with a significant purpose of re-ceiving a deduction under section 199Awill not be respected for purposes ofsection 199A.

The Treasury Department and the IRSrequest comments with respect to whethertaxable recipients of annuity and unitrustinterests in charitable remainder trusts andtaxable beneficiaries of other split-interesttrusts may be eligible for the section 199Adeduction to the extent that the amountsreceived by such recipients includeamounts that may give rise to the deduc-tion. Such comments should include ex-planations of how amounts that may giverise to the section 199A deduction wouldbe identified and reported in the variousclasses of income of the trusts received bysuch recipients and how the excise taxrules in section 664(c) would apply tosuch amounts.

VII. Proposed § 1.643(f)–1: Anti-avoidance Rules for Multiple Trusts

As described in section VI B of theExplanation of Provisions, under section199A, the threshold amount is determinedat the trust level without taking into accountany distribution deductions. Therefore, tax-payers could circumvent the thresholdamount by dividing assets among multipletrusts, each of which would claim its ownthreshold amount. This result is inappropri-ate and inconsistent with the purpose ofsection 199A and general trust principles.

To address this and other concerns re-garding the abusive use of multiple trusts,proposed § 1.643(f)–1 confirms the appli-cability of section 643(f). As noted in partII of the Background, section 643(f) per-mits the Secretary to prescribe regulationsto prevent taxpayers from establishingmultiple non-grantor trusts or contributingadditional capital to multiple existing non-grantor trusts in order to avoid Federalincome tax. Proposed § 1.643(f)–1 pro-vides that, in the case in which two ormore trusts have substantially the samegrantor or grantors and substantially thesame primary beneficiary or beneficiaries,and a principal purpose for establishingsuch trusts or contributing additional cashor other property to such trusts is theavoidance of Federal income tax, thensuch trusts will be treated as a single trustfor Federal income tax purposes. For pur-poses of applying this rule, spouses aretreated as only one person and, accord-ingly, multiple trusts established for aprincipal purpose of avoiding Federal in-come tax may be treated as a single trusteven in cases where separate trusts areestablished or funded independently byeach spouse. Proposed § 1.643(f)–1 fur-ther provides examples to illustrate spe-cific situations in which multiple trustswill or will not be treated as a singletrust under this rule, including a situa-tion where multiple trusts are createdwith a principal purpose of avoiding thelimitations of section 199A. The appli-cation of proposed § 1.643(f)–1, how-ever, is not limited to avoidance of thelimitations under section 199A and pro-posed §§ 1.199A–1 through 1.199A– 6.

The rule in proposed § 1.643(f)–1would apply to any arrangement involvingmultiple trusts entered into or modified on

or after August 16, 2018. In the case ofany arrangement involving multiple trustsentered into or modified before August 16,2018, the determination of whether an ar-rangement involving multiple trusts issubject to treatment under section 643(f)will be made on the basis of the statuteand the guidance provided regarding thatprovision in the legislative history of sec-tion 643(f). Pending the publication offinal regulations, the position of the Trea-sury Department and the IRS is that therule in proposed § 1.643(f)–1 generallyreflects the intent of Congress regardingthe arrangements involving multiple truststhat are appropriately subject to treatmentunder section 643(f).

VIII. Specified Agricultural orHorticultural Cooperatives

In the TCJA and the 2018 Act, Con-gress provided special rules for applyingsection 199A in the case of specified ag-ricultural and horticultural cooperatives.The Treasury Department and the IRScontinue to study this area and intend toissue separate proposed regulations de-scribing rules for applying section 199Ato specified agricultural and horticulturalcooperatives and their patrons later thisyear. As provided in section 199A(g)(6),such regulations will generally be basedon the regulations applicable to coopera-tives and their patrons under former sec-tion 199 (as in effect before its repeal).The Treasury Department and the IRSanticipate that the regulations will providethat section 199A(g) applies only to thepatronage business of a relevant coopera-tive. The proposed regulations will alsoprovide more information for taxpayersthat must apply the reduction under sec-tion 199A(b)(7), which is a special rulewith respect to income received from co-operatives.

Availability of IRS Documents

IRS notices cited in this preamble aremade available by the Superintendent ofDocuments, U.S. Government PrintingOffice, Washington, DC 20402.

Proposed Effective/Applicability Date

Section 7805(b)(1)(A) and (B) of theCode generally provide that no temporary,


proposed, or final regulation relating tothe internal revenue laws may apply toany taxable period ending before the ear-liest of (A) the date on which such regu-lation is filed with the Federal Register,or (B) in the case of a final regulation, thedate on which a proposed or temporaryregulation to which the final regulationrelates was filed with the Federal Regis-ter. However, section 7805(b)(2) providesthat regulations filed or issued within 18months of the date of the enactment of thestatutory provision to which they relateare not prohibited from applying to tax-able periods prior to those described insection 7805(b)(1). Furthermore, section7805(b)(3) provides that the Secretarymay provide that any regulation may takeeffect or apply retroactively to preventabuse.

Accordingly, proposed §§ 1.199A–1through 1.199A–6 generally are proposedto apply to taxable years ending after thedate of publication of a Treasury decisionadopting these rules as final regulations inthe Federal Register. However, taxpayersmay rely on the rules set forth in proposed§§ 1.199A–1 through 1.199A–6, in theirentirety, until the date a Treasury decisionadopting these regulations as final regula-tions is published in the Federal Register.In addition, to prevent abuse of section199A and the regulations thereunder, theanti-abuse rules of proposed §§ 1.199A–2(c)(1)(iv), 1.199A–3(c)(2)(B), 1.199A–5(c)(2), 1.199A–5(c)(3), 1.199A–5(d)(3),and 1.199A–6(d)(3)(v) are proposed to ap-ply to taxable years ending after December22, 2017, the date of enactment of theTCJA. Finally, the provisions of proposed§ 1.643–1, which prevent abuse of the Codegenerally through the use of trusts, are pro-posed to apply to taxable years ending afterAugust 16, 2018.

Section 199A(f)(1) provides that sec-tion 199A applies at the partner or S cor-poration shareholder level, and that eachpartner or shareholder takes into accountsuch person’s allocable share of eachqualified item. Section 199A(c)(3) pro-vides that the term “qualified item” meansitems that are effectively connected with aU.S. trade or business, and “included orallowed in determining taxable incomefrom the taxable year.” Section 199A ap-plies to taxable years beginning after De-cember 31, 2017. However, there is no

statutory requirement under section 199Athat a qualified item arise after December31, 2017.

Section 1366(a) generally providesthat, in determining the income tax of ashareholder for the shareholder’s taxableyear in which the taxable year of the Scorporation ends, the shareholder’s prorata share of the corporation’s items istaken into account. Similarly, section706(a) generally provides that, in comput-ing the taxable income of a partner for ataxable year, the partner includes items ofthe partnership for any taxable year of thepartnership ending within or with the part-ner’s taxable year. Therefore, incomeflowing to an individual from a partner-ship or S corporation is subject to the taxrates and rules in effect in the year of theindividual in which the entity’s yearcloses, not the year in which the itemactually arose.

Accordingly, for purposes of determin-ing QBI, W–2 wages, and UBIA of qual-ified property, the effective dates provi-sions provide that if an individual receivesQBI, W–2 wages, or UBIA of qualifiedproperty from an RPE with a taxable yearthat begins before January 1, 2018, andends after December 31, 2017, such itemsare treated as having been incurred by theindividual during the individual’s tax yearduring which such RPE taxable year ends.

Special Analyses

I. Regulatory Planning and Review –Economic Analysis

Executive Orders 13563 and 12866 di-rect agencies to assess costs and benefitsof available regulatory alternatives and, ifregulation is necessary, to select regula-tory approaches that maximize net bene-fits (including potential economic, envi-ronmental, public health and safetyeffects, distributive impacts, and equity).Executive Order 13563 emphasizes theimportance of quantifying both costs andbenefits, of reducing costs, of harmoniz-ing rules, and of promoting flexibility.

These proposed regulations have beendesignated as subject to review under Ex-ecutive Order 12866 pursuant to theMemorandum of Agreement (April 11,2018) between the Treasury Departmentand the Office of Management and Budget(OMB) regarding review of tax regula-

tions. The Treasury Department has deter-mined that the proposed rulemaking issubject to review as economically signif-icant under section 1(c) of the Memoran-dum of Agreement, and OMB concurswith this designation. Accordingly, theseproposed regulations have been reviewedby the Office of Management and Budget.For more detail on the economic analysis,please refer to the following analysis.

A. Overview

Congress enacted section 199A to pro-vide individuals, estates, and trusts a de-duction of up to 20 percent of QBI fromdomestic businesses, which includestrades or businesses operated as a soleproprietorship or through a partnership, Scorporation, trust, or estate. As stated inthe Explanation of Provisions, these pro-posed regulations are necessary to providetaxpayers with computational, defini-tional, and anti-avoidance guidance re-garding the application of section 199A.The proposed regulations provide guid-ance to taxpayers for purposes of calcu-lating the section 199A deduction. Theyprovide clarity for taxpayers in determiningtheir eligibility for the deduction and theamount of the allowed deduction. Amongother benefits, this clarity helps ensure thattaxpayers all calculate the deduction in asimilar manner, which encourages decision-making that is economically efficient con-tingent on the provisions of the overallCode.

The proposed regulations containseven sections, six proposed under section199A (proposed §§ 1.199A–1 through1.199A–6) and one proposed under sec-tion 643(f) (proposed § 1.643(f)–1).Each of proposed §§ 1.199A–1 through1.199A– 6 provides rules relevant to thesection 199A deduction and proposed§ 1.643(f)–1 would establish anti-abuserules to prevent taxpayers from estab-lishing multiple non-grantor trusts orcontributing additional capital to multi-ple existing non-grantor trusts in orderto avoid Federal income tax, includingabuse of section 199A. This economicanalysis describes the economic benefitsand costs of each of the seven sectionsof the proposed regulations.


B. Baseline

The analysis in this section comparesthe proposed regulation to a no-actionbaseline reflecting anticipated Federal in-come tax-related behavior in the absenceof these proposed regulations.

C. Economic Analysis of Proposed§ 1.199A–1

1. Background

Because the section 199A deduction hasnot previously been available, a large num-ber of the relevant terms and necessary cal-culations taxpayers are currently required toapply under the statute can benefit fromgreater specificity. For example, the stat-ute uses the term trade or business torefer to the enterprise whose incomewould be potentially eligible for the de-duction but does not define what consti-tutes a trade or business for purposes ofsection 199A; the proposed regulationsprovide that taxpayers should generallyapply the definition of a trade or busi-ness provided by section 162(a). Thedefinition of trade or business in pro-posed § 1.199A–1 is extended beyondthe section 162 definition if a taxpayerchooses to aggregate businesses underthe rules of proposed § 1.199A– 4. Inaddition, solely for purposes of section199A, the rental or licensing of propertyto a related trade or business is treatedas a trade or business if the rental orlicensing and the other trade or businessare commonly controlled under pro-posed § 1.199A– 4(b)(1)(i). The pro-posed regulations also make clear thatthe section 199A deduction is allowedwhen calculating alternative minimumtaxable income of individuals.

Because the section 199A deductionhas multiple components that may interactin determining the deduction, it is alsovaluable to lay out rules for calculatingthe deduction since the statute does notprovide each of those particulars.

Alternative approaches the TreasuryDepartment and the IRS could have pro-posed would be to remain silent on ad-ditional definitional specificities and toallow post-limitation netting in calculat-ing the section 199A deduction. TheTreasury Department and the IRS con-

cluded these approaches would likelygive rise to less economically efficienttax-related decisions than would relyingon statutory language alone and requireor leave open the possibility of post-limitation netting.

2. Anticipated benefits of proposed§ 1.199A–1

The Treasury Department and the IRSexpect that the definitions and guidance pro-vided in § 1.199A–1 will implement the199A deduction in an economically efficientmanner. An economically efficient tax sys-tem generally aims to treat income derivedfrom similar economic decisions similarlyin order to reduce incentives to makechoices based on tax rather than market in-centives. In this context, the principal ben-efit of proposed § 1.199A–1 is to reducetaxpayer uncertainty regarding the calcula-tion of the section 199A deduction relativeto an alternative scenario in which no suchregulations were issued. In the absence ofthe clarifications in proposed § 1.199A–1regarding, for example, the definition of aneligible trade or business, similarly situatedtaxpayers might interpret the statutory rulesof section 199A differently, given the stat-ute’s limited prescription of the implemen-tation details. In addition, without these reg-ulations it is likely that many taxpayersimpacted by section 199A would take onmore (or less) than the optimal level of riskin allocating resources within or across theirbusinesses. Both of these actions would giverise to economic inefficiencies. The pro-posed regulations would provide a uniformsignal to businesses and thus lead taxpayersto make decisions that are more economi-cally efficient contingent on the overallCode. As an example, proposed § 1.199A–1prescribes the steps taxpayers must take tocalculate the QBI deduction in a mannerthat avoids perverse incentives for shiftingwages and capital assets across businesses.The statute does not address the ordering forhow the W–2 wages and UBIA of qualifiedproperty limitations should be applied whentaxpayers have both positive and negativeQBI from different businesses. The pro-posed regulations clarify that in such casesthe negative QBI should offset positive QBIprior to applying the wage and capital lim-itations. For taxpayers who would have as-sumed in the alternate that negative QBI

offsets positive QBI after applying the wageand capital limitations, the proposed ap-proach weakens the incentive to shift W–2wage labor or capital (in the form of quali-fied property) from one business to anotherto maximize the section 199A deduction.

To illustrate this, consider a taxpayerwho is above the statutory threshold andowns two non-service sector businesses,A and B. A has net qualified income of$10,000, while B has net qualified incomeof -$5,000. Suppose that A paid $3,000 inW–2 wages, B paid $1,000 in W–2 wages,and neither business has tangible capital.If negative QBI offsets positive QBI afterapplying the wage and capital limitations,then A generates a tentative deduction of$1,500, while B generates a tentative de-duction of –$1,000, for a total deductionof $500. After moving B’s W–2 wages toA, A’s tentative deduction rises to $2,000,while B’s remains -$1,000, increasing thetotal deduction to $1,000. If, on the otherhand, negative QBI offsets positive QBIprior to applying the wage and capitallimitations (as in the proposed regula-tions), then A and B have combined in-come of $5,000, and the total deduction is$1,000 because the wage and capital lim-itations are non-binding. After movingB’s wages to A, the total deduction re-mains $1,000. Thus, an incentive to shiftwages arises if negative QBI offsets pos-itive QBI after applying the wage andcapital limitations. By taking the oppositeapproach, proposed § 1.199A–1 reducesincentives for such tax-motivated, eco-nomically inefficient reallocations of la-bor (or capital) relative to a scenario inwhich offsets were taken after wage andcapital limitations were applied.

3. Anticipated costs of proposed§ 1.199A–1

The Treasury Department and the IRS donot anticipate any meaningful economicdistortions to be induced by proposed§ 1.199A–1 and request comment regardingthis anticipated impact. However, changesto the collective paperwork burden arisingfrom this and other sections of these regu-lations are discussed in section J, Antici-pated impacts on administrative and com-pliance costs, of this analysis.


D. Economic Analysis of Proposed§ 1.199A–2

1. Background

Section 199A provides a deduction of upto 20 percent of the taxpayer’s income fromqualifying trades or businesses. Taxpayerswith incomes above a threshold amountcannot enjoy the full 20 percent deductionunless they determine that their businessespay a sufficient amount of wages and/ormaintain a sufficient stock of tangible capi-tal, among other requirements.

Because this deduction has not previ-ously been available, proposed § 199A–2provides greater specificity than is avail-able from the statute regarding the defini-tions of W–2 wages and UBIA of quali-fied property (that is, depreciable capitalstock) relevant to this aspect of the deduc-tion. For example, the proposed regula-tions make clear that property thatis transferred or acquired within a specifictimeframe with a principal purpose of in-creasing the section 199A deduction is notconsidered qualified property for purposesof the section 199A deduction. In addi-tion, proposed § 1.199A–2 generally fol-lows prior guidance for the former section199 deduction in determining which W–2wages are relevant for section 199A pur-poses, with additional rules for allocatingwages amongst multiple trades or busi-nesses. In these and other cases, the pro-posed regulations generally aim, withinthe context of the legislative language andother tax considerations, to ensure thatonly genuine business income is eligiblefor the section 199A deduction, and toreduce business compliance costs andgovernment administrative costs.

Alternative approaches would be to re-main silent or to choose different defini-tions of W–2 wages or qualified propertyfor the purposes of claiming the deduc-tion. The Treasury Department and theIRS rejected these alternatives as beinginconsistent with other definitions or re-quirements under the Code and thereforeunnecessarily costly for taxpayers to com-ply with and the IRS to administer.


The Treasury Department and IRS ex-pect that proposed § 1.199A–2 will imple-

ment the 199A deduction in an economi-cally efficient manner. For example,proposed § 1.199A–2 will discouragesome inefficient transfers of capital giventhe statute’s silence regarding the circum-stances in which certain property transferswould or would not be considered undersection 199A. Specifically, the proposedrules make clear that property transferredor acquired within a specific timeframewith a principal purpose of increasing thesection 199A deduction is not consideredqualified for purposes of the 199A deduc-tion.

The proposed regulations will also re-duce taxpayer uncertainty regarding theimplementation of the section 199A de-duction relative to a scenario in which noregulations were issued. In the absence ofsuch clarification, similarly situated tax-payers would likely interpret the section199A deduction differently to the extentthat the statute does not adequately spec-ify the particular implementation issuesaddressed by 199A-2; and as a result, tax-payers might take on more (or less) thanthe optimal level of risk in their interpre-tations. The proposed regulations wouldlead taxpayers to make decisions thatwere more economically efficient, condi-tional on the overall Code.

3. Anticipated costs of proposed§ 1.199A––2

The Treasury Department and the IRSdo not anticipate any meaningful eco-nomic distortions to be induced by pro-posed § 1.199A–2, and request commentregarding this anticipated impact. How-ever, changes to the collective paperworkburden arising from this and other sec-tions of these regulations are discussed insection J, Anticipated impacts on admin-istrative and compliance costs, of thisanalysis.

E. Economic Analysis of Proposed§ 1.199A–3

1. Background

Section 199A provides a deduction ofup to 20 percent of the taxpayer’s incomefrom qualifying trades or businesses. Inthe absence of legislative and regulatoryconstraints, taxpayers would have an in-centive to count as income some income

that, from an economic standpoint, did notaccrue specifically from qualifying eco-nomic activity. The proposed regulationsclarify what does and does not constituteQBI for purposes of the 199A deduction,providing greater implementation speci-ficity than provided by the statute. Be-cause guaranteed payments for capital, forexample, are not at risk in the same way asother forms of income, they might reason-ably be excluded from QBI. Similarly,Treasury proposes that income that is aguaranteed payment, but which is filteredthrough a tiered partnership in order toavoid being labeled as such, should betreated similarly to guaranteed paymentsin general and therefore excluded fromQBI. This principle applies to other formsof income that similarly represent incomethat either is not at risk or does not flowfrom the specific economic value pro-vided by a qualifying trade or business,such as returns on investments of workingcapital. The proposed regulations defineand clarify the types of income that mightreasonably be considered QBI, within theconstraints of the legislation.


The Treasury Department and IRS ex-pect that proposed § 1.199A–3 regulationswill implement the 199A deduction in aneconomically efficient manner. For exam-ple, 199A–3 will discourage the creationof tiered partnerships purely for the pur-poses of increasing the section 199A de-duction. In the absence of regulation,some taxpayers would likely create tieredpartnerships under which a lower-tierpartnership would make a guaranteed pay-ment to an upper-tier partnership, and theupper-tier partnership would pay out thisincome to its partners without guarantee-ing it. Such an organizational structurewould likely be economically inefficientbecause it was, apparently, createdsolely for tax minimization purposesand not for reasons related to efficienteconomic decision-making.

The Treasury Department and the IRSfurther expect that the proposed regula-tions will reduce uncertainty over whetherparticular forms of income do or do notconstitute QBI relative to a scenario inwhich no regulations were issued. In the


absence of regulations, taxpayers wouldstill need to determine what income isconsidered QBI and similarly situated tax-payers might interpret the statutory rulesdifferently and pursue income-generatingactivities based on different assumptionsabout whether that income would qualifyfor QBI. Proposed § 1.199A–3 providesclearer guidance for how to determineQBI, helping to ensure that taxpayers faceuniform incentives when making eco-nomic decisions, a tenet of economic ef-ficiency.

3. Anticipated costs of proposed§ 1.199A–3 relative to the baseline

The Treasury Department and the IRSdo not anticipate any meaningful eco-nomic distortions to be induced by pro-posed § 1.199A–3, and request commentregarding this anticipated impact. How-ever, changes to the collective paperworkburden arising from this and other sec-tions of these regulations are discussed insection J, Anticipated impacts on admin-istrative and compliance costs, of thisanalysis.

F. Economic Analysis of Proposed§ 1.199A–4

1. Background

Businesses may organize either as Ccorporations, which are owned by stock-holders, or in a form generally called apassthrough, which may take one of sev-eral legal forms including sole proprietor-ships, under which there does not exist aclear separation between the owners andthe business’s decision-makers. Each or-ganizational structure, in some circum-stance, may be economically efficient, de-pending on the risk profile, informationasymmetries, and decision-making chal-lenges pertaining to the specific businessand on the risk preferences and economicsituations of the individual owners. Aneconomically efficient tax system wouldkeep the choice among organizationalstructures neutral contingent on the provi-sions of the corporate income tax.

This principle of neutral tax treatmentfurther applies to the various organiza-tional structures that qualify as pass-throughs. Many passthrough business en-tities are connected through ownership,

management, or shared decision-making.The proposed aggregation rule allows in-dividuals to aggregate their trades or busi-nesses for the purposes of calculating thesection 199A deduction. It thus helps en-sure that significant choices over owner-ship and management relationships withinbusinesses are not chosen solely to in-crease the section 199A deduction.

An alternative approach would be notto allow aggregation for purposes ofclaiming the deduction. The Treasury De-partment and the IRS decided to allowaggregation in the specified circumstancesto minimize or avoid distortions in orga-nizational form that could arise if aggre-gation were not allowed.


The Treasury Department and the IRSexpect that the aggregation guidance pro-vided in proposed § 1.199A–4 will imple-ment the 199A deduction in an economi-cally efficient manner. Economic taxprinciples are called into play here be-cause a large number of businesses thatcould commonly be thought of as a singletrade or business actually may be dividedacross multiple entities for legal or eco-nomic reasons. Allowing taxpayers to ag-gregate trades or businesses offers taxpay-ers a means of putting together what theythink of as their trade or business for thepurposes of claiming the deduction undersection 199A without otherwise changingownership and management structures. Ifsuch aggregation were not permitted, certaintaxpayers would restructure solely for taxpurposes, with the resulting structures lead-ing to less efficient economic decision-making.

3. Anticipated costs of proposed§ 1.199A–4

The proposed regulations require com-mon majority ownership to apply the ag-gregation rule. If no aggregation were al-lowed, taxpayers would have to combinebusinesses to calculate the deductionbased on the combined income, wages,and capital. The majority ownershipthreshold may thus encourage owners toconcentrate their ownership in order tobenefit from the aggregation rule. The ad-

ditional costs of the proposed regulationswould be limited to those owners whowould find merging entities too costlybased on other market conditions, but un-der these regulations may find it beneficialto increase their ownership share in orderto aggregate their businesses and maxi-mize their QBI deduction.

Changes to the collective paperworkburden arising from proposed § 1.199A–4and other sections of these regulations arediscussed in section J, Anticipated impactson administrative and compliance costs,of this analysis. The Treasury Departmentand the IRS request comments regardingthese and other potential costs arisingfrom the regulations.

G. Economic Analysis of Proposed§ 1.199A–5

1. Background

Section 199A provides a deduction ofup to 20 percent of the taxpayer’s incomefrom qualifying trades or businesses. Inthe absence of legislative and regulatoryconstraints, taxpayers have an incentive toreceive labor income as income earned asa an independent contractor or throughownership of an RPE, even though thisincome may not derive from the risk-bearing or decision-making efficienciesthat are unique to being an independentcontractor or to owning an equity interestin an RPE. The Act provided several pro-visions that bear on this distinction.

Proposed § 1.199A–5 provides guid-ance on what trades or businesses wouldbe characterized as an SSTB under eachtype of services trade or business listed inthe legislative text. In addition, proposed§ 1.199A–5 provides an exception to theSSTB exclusion if the trade or businessonly earns a small fraction of its grossincome from specified service activities(de minimis exception). Finally, the pro-posed regulations state that former em-ployees providing services as independentcontractors to their former employer willbe presumed to be acting as employeesunless they provide evidence that they areproviding services in a capacity other thanan employee.

An alternative approach to the de mi-nimis exception would be to require busi-nesses or their owners to trigger the SSTB


exclusion regardless of the share of grossincome from specified service activities.The Treasury Department concluded thatproviding a de minimis exception is nec-essary to avoid very small amounts ofSSTB activity within a trade or businessmaking the entire trade or business ineli-gible for the deduction, an outcome that isinefficient in the context of section 199A.


The Treasury Department and the IRSexpect that proposed § 1.199A–5 will im-plement the 199A deduction in an eco-nomically efficient manner. To this end,proposed § 1.199A–5 clarifies the defini-tion of an SSTB. In the absence of suchclarification, similarly situated taxpayersmight interpret the legislative text differ-ently, leading some taxpayers to invest inparticular businesses under the assump-tion income earned from that entity waseligible for the deduction while other tax-payers might forgo that investment due tothe opposite assumption. These disparateinvestment signals generate economic in-efficiencies. The proposed regulations re-duce this inefficiency relative to a sce-nario in which no regulation providing ade minimis exception was issued.

Furthermore, in the absence of the pro-posed regulations, some owners of busi-nesses may find it advantageous to sepa-rate their business activity into SSTB andnon-SSTB businesses in order to receivethe section 199A deduction on their non-SSTB activity. The proposed regulationswould disallow this behavior by statingthat a taxpayer that provides property orservices to an SSTB that is commonly-owned will have the portion of property orservices provided to the SSTB treated asattributable to an SSTB. Additionallywithout these regulations, some busi-nesses may have an incentive to pay aportion of their employees as independentcontractors. Either of these actions wouldentail some loss of economic efficiencydue to changes in businesses’ decision-making structures based on tax incentives.They may also inefficiently provide incen-tives to change employment relationshipsin favor of independent contractors. Theproposed regulations help to avoid thesesources of inefficiency.


In addition to the statutory thresholdamount, below which SSTB status is notrelevant, proposed § 1.199A–5 provides ade minimis rule with tiered-thresholds ofgross revenues arising from specified ser-vice activity in determining whether atrade or business with a smaller amount ofspecified service activity is classified as anSSTB. This threshold may cause busi-nesses near the cutoff to decrease theirspecified service activities or increasetheir non-specified service activities toavoid being classified as an SSTB. Addi-tionally, the de minimis rule may encour-age smaller entities engaged in SSTBs tomerge with larger entities not engaged inan SSTB. The economic costs of thesemergers are difficult to quantify.

Changes to the collective paperworkburden arising from § 1.199A–5 and othersections of these regulations are discussedin section J, Anticipated impacts on ad-ministrative and compliance costs, of thisanalysis. The Treasury Department andIRS request comment regarding these andother potential costs arising from the reg-ulations.

H. Economic Analysis of Proposed§ 1.199A–6

1. Background

The 199A deduction is reduced below20 percent for some businesses and tax-payers. The attributes that determine anysuch reduction must be determined by tax-payers claiming the section 199A deduc-tion. Proposed § 1.199A–6 provides rulesfor RPEs, PTPs, trusts, and estates rele-vant to making these determinations. Inparticular, RPEs are required to calculateand report their owners’ QBI, SSTB sta-tus, W–2 wages, UBIA of qualified prop-erty, REIT dividends, and PTP income.Similarly, PTPs must calculate and reporttheir owners’ QBI, SSTB status, REITdividends, and other PTP income.


The Treasury Department and IRS ex-pect that proposed § 1.199A–6 will im-plement the 199A deduction in an eco-

nomically efficient manner. As with otherproposed regulations discussed in thisAnalyses, a principal benefit of proposed§ 1.199A–6 is to increase the likelihoodthat all taxpayers interpret the statutoryrules of section 199A similarly. Addition-ally, we expect that requiring RPEs todetermine and report the information nec-essary to compute the section 199A de-duction will result in a more accurate anduniform application of the regulations andstatute relative to an alternative approachunder which individual owners wouldmost likely determine these items.


The Treasury Department and the IRSdo not anticipate any meaningful eco-nomic distortions to be induced by pro-posed § 1.199A–6, and request commenton these estimated impacts. However,changes to the collective paperwork bur-den arising from this and other sections ofthese regulations are discussed in sectionJ, Anticipated impacts on administrativeand compliance costs, of this analysis.

I. Economic Analysis of Proposed§ 1.643(f)–1

1. Background

Proposed § 1.643(f)–1 provides thattaxpayers cannot set up multiple trusts incertain cases with a principal purpose oftax avoidance, which would include theavoidance of the statutory thresholdamounts under section 199A.

2. Anticipated benefits of proposed§ 1.643(f)–1 relative to the baseline

The Treasury Department and IRS ex-pect that the proposed § 1.643(f)–1 willimplement the 199A deduction in an eco-nomically efficient manner. Because pro-posed § 1.643(f)–1 defines the manner inwhich trusts are subject to the thresholdamount where the statute is silent, theTreasury Department and the IRS antici-pate that the proposed regulations willlead to fewer resources being devoted tosetting up trusts in attempts to avoid thethreshold amount rules under section199A. If multiple trusts have substantiallythe same grantors and beneficiaries, and a


principal purpose for establishing suchtrusts or contributing additional cash orother property to such trusts is the avoid-ance of Federal income tax, then the var-ious trusts would be generally consideredone trust, including for section 199A pur-poses.

3. Anticipated costs of proposed§ 1.643(f)–1 relative to the baseline

The Treasury Department and the IRSdo not anticipate any meaningful eco-nomic distortions to be induced by pro-posed § 1.643(f)–1, and request commenton these estimated impacts. However,changes to the collective paperwork bur-den arising from this and other sections ofthese regulations are discussed in sectionJ, Anticipated impacts on administrativeand compliance costs, of this analysis.

J. Anticipated impacts onadministrative and compliance costs

1. Discussion

The proposed regulations have a num-ber of effects on taxpayers’ compliancecosts. Proposed § 1.199A–2 providesguidance in determining a taxpayer’sshare of W–2 wages and UBIA of quali-fied property. The Treasury Departmentand the IRS expect that this guidance re-duces the tax compliance costs of makingthis determination and reduces uncer-tainty. In the absence of the proposed reg-ulations, taxpayers would still need to de-termine how to allocate W–2 wages andUBIA of qualified property, among othercalculations. These regulations provideclear instructions for how to do this, sim-plifying the process of complying with thelaw.

Proposed § 1.199A–4 requires thatowners who decide to aggregate their tradesor businesses report the aggregation annu-ally. This reporting requirement adds to thetax compliance burden of these owners. Forowners who consider aggregating, theseregulations increase compliance costs be-cause the owners must calculate their deduc-tion for both disaggregated and aggregatedtrades or businesses to make the aggregationdecision. These additional compliance costswould be voluntary and accrue only to own-ers who find it beneficial to aggregate for the

purposes of calculating their section 199Adeduction.

Proposed § 1.199A–5 includes a re-quirement for former employees workingas independent contractors for their for-mer employer to show that their employ-ment relationship has changed in order tobe eligible for the section 199A deduction.The burden to substantiate employmentstatus exists without these proposed regu-lations; however, the proposed regulationmay increase these individuals’ compli-ance costs slightly.

Proposed § 1.199A–6 specifies thatRPEs must report relevant section 199Ainformation to owners. Due to these entityreporting requirements, the proposed reg-ulations will increase compliance costs forRPEs. These entities will need to keeprecords of new information relevant to thecalculation of their owners’ section 199Adeduction, such as QBI, W–2 wages,SSTB status, and UBIA of qualified prop-erty. This recordkeeping is costly. With-out these regulations, it is likely that onlysome RPEs would engage in this recordkeeping.

Proposed § 1.199A–6 reduces thecompliance burden on many individualsthat own RPEs relative a scenario inwhich no regulations were issued or reg-ulatory alternatives that assigned eachowner of an RPE the responsibility toacquire the required information were is-sued without any requirement for the RPEto provide such information. Under theproposed regulations, owners will receiveinformation pertaining to the section199A deduction from the RPE, such aswhether a given trade or business is anSSTB, whereas in the alternate they couldhave been required to make such determi-nations themselves.

Overall, it is likely to be more efficientfor RPEs, rather than individual owners,to keep records of section 199A deductioninformation. Therefore, the Treasury De-partment and the IRS expect that proposed§ 1.199A–6 will reduce compliance costson net and relative to these alternativescenarios.

2. Estimated effect on compliancecosts

As explained above, key provisions ofproposed §§ 1.199A–1 through 1.199A–6

will reduce compliance costs that taxpayerswould likely have incurred in the absence ofthe proposed rule. Most notably, the de mi-nimis rule of proposed § 1.199A–5 providesthat a trade or business will not be consid-ered to be an SSTB merely because it pro-vides a small amount of services in a spec-ified service activity. This provision isexpected to reduce compliance costs associ-ated with section 199A for millions of U.S.businesses. In addition, the aggregationrules will reduce overall costs for taxpayersbecause some taxpayers would restructuretheir business arrangements in order to re-ceive the benefit of the deduction. These andother discretionary choices by the TreasuryDepartment and the IRS in the proposedrule will substantially reduce taxpayers’compliance costs.

The Treasury Department and the IRSalso assessed the provisions of the pro-posed rule that could increase complianceburdens. Estimates of the change in an-nual reporting burden associated withthese proposed regulations are presentedhere and in further detail in the PaperworkReduction Act (PRA) section. The Trea-sury Department and the IRS estimate agross (not net) increase in total reportingburden of 25 million hours annually. Theestimates primarily reflect two effects ofthe regulations. First, the Treasury De-partment and the IRS project that approx-imately 1.2 million individuals with morethan one directly owned or pass-throughbusiness who voluntarily choose to aggre-gate will spend 0.66 hours annually com-plying with proposed § 1.199A–4. Sec-ond, the Treasury Department and the IRSproject that – in complying with the pro-posed § 1.199A–6 requirement to reportrelevant section 199A information to theirapproximately 8.8 million owners – RPEswill spend 2.75 hours annually per owner.These estimates do not include the de-crease in compliance costs to individualswho would no longer find it necessary tocompute the quantities detailed in pro-posed § 1.199A–6 because they wouldreceive this information from each RPE.Nor do these estimates reflect the decreasein compliance costs outlined above.

Valuations of the burden hours of $39/hour in the case of individuals makingaggregation decisions and $53/hour in thecase of RPEs reporting section 199A in-formation lead to a PRA–based estimate


of the gross reporting annualized costs totaxpayers of approximately $1.3 billionover ten years; this estimate does not ac-count for the provisions of the proposedregulations that will substantially reducecompliance costs. Because these estimatesassume that the costs are the same eachyear, the annualized costs do not vary withthe discount rate. It is possible that costswill be higher in the first years that thededuction is allowed and lower in future

years once taxpayers have more experi-ence with the calculations and reportingrequirements associated with the deduc-tion. Finally, the estimates reflect data forentities of a size and form expected to beimpacted by section 199A. More specifi-cally, because of the scope of the section199A deduction, the Treasury Departmentand the IRS expect the majority of af-fected entities to be largely small, andmedium in size.

The Treasury Department and the IRSsolicit comments on the assumptions andthe methodology used to calculate thecompliance costs imposed by the pro-posed regulations relative to the baseline.This includes, among other things, as-sumptions and methodology regarding thereporting burden per respondent, the num-ber of impacted entities, and the hourlylabor cost estimate for reporting.

Annualized Monetized Effecton Compliance Costs

from Proposed Regulations

Years 2018 to 2027(3% Discount Rate,

millions $2018)

Years 2018 to 2027(7% Discount Rate,

millions $2018)

Estimated Gross Costs $1,317 $1,317

Estimated Savings Not quantified Not quantified

K. Executive Order 13771.

The Treasury Department and the IRSrequest comment on the Executive Order13771 designation for these proposed reg-ulations. Details on the estimated costs ofthe proposed regulations can be found inthis economic analysis.

II. Regulatory Flexibility Act

It is hereby certified that the collectionsof information in proposed §§ 1.199A–4and 1.199A–6 will not have a significanteconomic impact on a substantial numberof small entities. Although the TreasuryDepartment and the IRS believe that theproposed regulations may affect a sub-stantial number of small entities, the eco-nomic impact on small entities as a resultof the collections of information in thisnotice of proposed rulemaking is not ex-pected to be significant.

The collection in proposed § 1.199A–4may apply to individuals and certain trustsor estates that can claim the section 199Adeduction and that choose to aggregatetwo or more trades or businesses for pur-poses of section 199A. If a taxpayer choosesto aggregate its trades or businesses, thetaxpayer, must include an attachment to itstax return identifying and describing eachtrade or business aggregated, describingchanges to the aggregated group, and pro-viding other information as the Commis-sioner may require in forms, instructions, orother published guidance. RPEs are notsubject to the collection in proposed§ 1.199A–4 because RPEs are not permitted

to aggregate trades or businesses. Aggrega-tion is not required by a person claiming thesection 199A deduction, and therefore thecollection of information in proposed§ 1.199A–4 is required only if the personchooses to aggregate multiple trades or busi-nesses. It is not known how many smallentities will choose to aggregate multipletrades or businesses, therefore a number ofaffected entities is not estimated at this time.

The small entities subject to the collec-tion of information in proposed § 1.199A–6are business entities formed as estates,trusts, partnerships, or S corporations thatconduct, directly or indirectly, one or moretrades or businesses. Proposed § 1.199A–6requires such an entity to attach a statementdescribing the QBI, W–2 wages, and UBIAof qualified property for each separate tradeor business to the Schedule K-1 requiredunder existing law to be issued to each ben-eficiary, partner, or shareholder. Althoughdata is not available to estimate the numberof small entities affected by the § 1.199A–6requirements, the Treasury Department andthe IRS believe that number would include asubstantial number of small entities.

As discussed elsewhere in this pream-ble, the reporting burden is estimated at 30minutes to 20 hours, depending on indi-vidual circumstances, with an estimatedaverage of 2.5 hours for all affected enti-ties, regardless of size. The burden onsmall entities is expected to be at thelower end of the range (30 minutes to 2.5hours). Using the IRS’s taxpayer compli-ance cost estimates, taxpayers who areself-employed with multiple businesses

are estimated to have a monetization rateof $39 per hour. Pass-throughs that issueK-1s have a monetization rate of $53 perhour.

For these reasons, the Treasury Depart-ment and the IRS have determined that thecollection of information in this notice ofproposed rulemaking will not have a sig-nificant economic impact. Accordingly, aregulatory flexibility analysis under theRegulatory Flexibility Act (5 U.S.C.chapter 6) is not required. Notwithstand-ing this certification, the Treasury Depart-ment and the IRS invite comments frominterested members of the public on boththe number of entities affected and theeconomic impact on small entities.

Pursuant to section 7805(f) of theCode, this notice of proposed rulemakinghas been submitted to the Chief Counselfor Advocacy of the Small Business Ad-ministration for comment on its impact onsmall business.

Comments and Requests for PublicHearing

The Treasury Department and the IRSrequest comments on all aspects of theproposed rules.

Before these proposed regulations areadopted as final regulations, considerationwill be given to any comments that aresubmitted timely to the IRS as prescribedin this preamble under the “Addresses”heading. All comments will be availableat www.regulations.gov or upon request.


Drafting Information

The principal authors of these regula-tions are Frank J. Fisher, Wendy L. Kri-bell, Adrienne M. Mikolashek, and Ben-jamin H. Weaver, Office of the AssociateChief Counsel (Passthroughs and SpecialIndustries). However, other personnelfrom the Treasury Department and theIRS participated in their development.

* * * * *

Proposed Amendments to theRegulations

Accordingly, 26 CFR part 1 is pro-posed to be amended as follows:

PART 1—INCOME TAXES

Paragraph 1. The authority citation forpart 1 are amended by adding sectionalauthorities for §§ 1.199A–1 through1.199A–6 and § 1.643(f) to read in part asfollows:

Authority: 26 U.S.C. 7805 * * *Section § 1.199A–1 also issued under

26 U.S.C. 199A(f)(4).Section § 1.199A–2 also issued under

26 U.S.C. 199A(b)(5), (f)(1)(A), (f)(4),and (h).

Section § 1.199A–3 also issued under26 U.S.C. 199A(c)(4)(C) and (f)(4).

Section § 1.199A–4 also issued under26 U.S.C. 199A(f)(4).

Section § 1.199A–5 also issued under26 U.S.C. 199A(f)(4).

Section § 1.199A–6 also issued under26 U.S.C. 199A(f)(1)(B) and (f)(4).

Section 1.643(f)–1 also issued under26 U.S.C. 643(f)

Par. 2. Section 1.199A–0 is added toread as follows:

§ 1.199A–0 Table of Contents.

This section lists the section headingsthat appear in §§ 1.199A–1 through1.199A–6.

§ 1.199A–1 Operational rules.

(a) Overview.(1) In general.(2) Usage of term individual.(b) Definitions.(1) Aggregated trade or business.(2) Applicable percentage.

(3) Phase-in range.(4) Qualified business income (QBI).(5) QBI component.(6) Qualified PTP income.(7) Qualified REIT dividends.(8) Reduction amount.(9) Relevant passthrough entity (RPE).(10) Specified service trade or business(SSTB).(11) Threshold amount.(12) Total QBI amount.(13) Trade or business.(14) Unadjusted basis immediately afterthe acquisition of qualified property(UBIA of qualified property).(15) W–2 Wages.(c) Computation of the section 199A de-duction for individuals with taxable in-come not exceeding threshold amount.(1) In general.(2) Carryover rules.(i) Negative total QBI amount.(ii) Negative combined qualified REITdividends/qualified PTP income.(3) Examples.(d) Computation of the section 199A de-duction for individuals with taxable in-come above the threshold amount.(1) In general.(2) QBI component.(i) SSTB exclusion.(ii) Aggregated trade or business.(iii) Netting and carryover.(A) Netting.(B) Carryover of negative total QBIamount.(iv) QBI component calculation.(A) General rule.(B) Taxpayers with taxable income withinphase-in range.(3) Carryover of negative combined qualifiedREIT dividends/qualified PTP income.(4) Examples.(e) Special rules.(1) Effect of deduction.(2) Self-employment tax and net invest-ment income tax.(3) Commonwealth of Puerto Rico.(4) Coordinated with alternative minimumtax.(5) Imposition of accuracy related penaltyon underpayments.(6) Reduction for income received fromcooperatives.(f) Effective/applicability date.(1) General rule.(2) Exception for non-calendar year RPE.

§ 1.199A–2 Determination of W–2Wages and unadjusted basis immediatelyafter acquisition of qualified property.

(a) Scope.(1) In general.(2) W–2 Wages.(3) UBIA of qualified property.(b) W–2 Wages.(1) In general.(2) Definition of W–2 Wages.(i) In general.(ii) Wages paid by a person other than acommon law employer.(iii) Requirement that wages must be re-ported on return filed with the Social Se-curity Administration.(A) In general.(B) Corrected return filed to correct a re-turn that was filed within 60 days of thedue date.(C) Corrected return filed to correct a re-turn that was filed later than 60 days afterthe due date.(iv) Methods for calculating W–2 Wages.(A) In general.(B) Acquisition or disposition of a trade orbusiness.(1) In general.(2) Acquisition or disposition.(C) Application in the case of a personwith a short taxable year.(1) In general.(2) Short taxable year that does not in-clude December 31.(D) Remuneration paid for services per-formed in the Commonwealth of PuertoRico.(3) Allocation of wages to trades or busi-nesses.(4) Allocation of wages to QBI.(5) Non-duplication rule.(c) UBIA of qualified property.(1) Qualified property.(i) In general.(ii) Improvements to qualified property.(iii) Adjustments under sections 734(b)and 743(b).(iv) Property acquired at end of year.(2) Depreciable period.(i) In general.(ii) Additional first-year depreciation un-der section 168.(iii) Qualified property acquired in trans-actions subject to section 1031 or section1033.


(iv) Qualified property acquired in trans-actions subject to section 168(i)(7).(3) Unadjusted basis immediately after ac-quisition.(4) Examples.(d) Effective/applicability date.(1) General rule.(2) Exceptions.(i) Anti-abuse rules.(ii) Non-calendar year RPE.

§ 1.199A–3 Qualified business income,qualified REIT dividends, and qualifiedPTP income.

(a) In general.(b) Definition of qualified business in-come.(1) In general.(i) Section 751 gain.(ii) Guaranteed payments for the use ofcapital.(iii) Section 481 adjustments.(iv) Previously disallowed losses(v) Net operating losses.(2) Qualified items of income, gain, de-duction, and loss.(i) In general.(ii) Items not taken into account.(3) Commonwealth of Puerto Rico.(4) Wages.(5) Allocation of items among multipledirectly-conducted trades or businesses.(c) Qualified REIT dividends and quali-fied PTP income.(1) In general.(2) Qualified REIT dividend.(3) Qualified PTP income.(i) In general.(ii) Special rules.(d) Effective/applicability date.(1) General rule.(2) Exceptions.(i) Anti-abuse rules.(ii) Non-calendar year RPE.§ 1.199A–4 Aggregation.(a) Scope and purpose.(b) Aggregation rules.(1) General rule.(2) Operating rules.(3) Family attribution.(c) Reporting and consistency.(1) In general.(2) Individual reporting.(i) Required annual disclosure.(ii) Failure to disclose.(d) Examples.(e) Effective/applicability date.

(1) General rule.(2) Exception for non-calendar year RPE.

§ 199A–5 Specified service trades orbusinesses and the trade or business ofperforming services as an employee.

(a) Scope and effect.(1) Scope.(2) Effect of being an SSTB.(3) Trade or business of performing ser-vices as an employee.(b) Definition of specified service trade orbusiness.(1) Listed SSTBs.(2) Additional rules for applying section199A(d)(2) and paragraph (b) of this sec-tion.(i) In general.(ii) Meaning of services performed in thefield of health.(iii) Meaning of services performed in thefield of law.(iv) Meaning of services performed in thefield of accounting.(v) Meaning of services performed in thefield of actuarial science.(vi) Meaning of services performed in thefield of performing arts.(vii) Meaning of services performed in thefield of consulting.(viii) Meaning of services performed inthe field of athletics.(ix) Meaning of services performed in thefield of financial services.(x) Meaning of services performed in thefield of brokerage services.(xi) Meaning of the provision of servicesin investing and investment management.(xii) Meaning of the provision of servicesin trading.(xiii) Meaning of the provision of servicesin dealing.(A) Dealing in securities.(B) Dealing in commodities.(C) Dealing in partnership interests.(xiv) Meaning of trade or business wherethe principal asset of such trade or busi-ness is the reputation or skill of one ormore of its employees or owners.(3) Examples.(c) Special rules.(1) De minimis rule.(i) Gross receipts of $25 million or less.(ii) Gross receipts of greater than $25 mil-lion.

(2) Services or property provided to anSSTB.(i) In general.(ii) Less than substantially all of propertyor services provided.(iii) 50 percent or more common owner-ship(iv) Example.(3) Incidental to specified service trade orbusiness.(i) In general.(ii) Example.(d) Trade or business of performing ser-vices as an employee.(1) In general.(2) Employer’s Federal employment taxclassification of employee immaterial.(3) Presumption that former employeesare still employees.(i) Presumption.(ii) Examples.(e) Effective/applicability date.(1) General rule.(2) Exceptions.(i) Anti-abuse rules.(ii) Non-calendar year RPE.

§ 1.199A–6 Relevant passthroughentities (RPEs), publicly tradedpartnerships (PTPs), trusts, and estates.

(a) Overview.(b) Computational and reporting rules forRPEs.(1) In general.(2) Computational rules.(3) Reporting rules for RPEs.(i) Trade or business directly engaged in.(ii) Other items.(iii) Failure to report information.(c) Computational and reporting rules forPTPs.(1) Computational rules.(2) Reporting rules.(d) Application to trusts, estates, and ben-eficiaries.(1) In general.(2) Grantor trusts.(3) Non-grantor trusts and estates.(i) Calculation at entity level.(ii) Allocation among trust or estate andbeneficiaries.(iii) Threshold amount.(iv) Electing small business trusts.(v) Anti-abuse rule for creation of multi-ple trusts to avoid exceeding the thresholdamount.


(vi) Example.(e) Effective/applicability date.(1) General rule.(2) Exceptions.(i) Anti-abuse rules.(ii) Non-calendar year RPE.


§ 1.199A–1 Operational rules.

(a) Overview—(1) In general. Thissection provides operational rules for cal-culating the section 199A(a) qualifiedbusiness income deduction (section 199Adeduction) under section 199A of the In-ternal Revenue Code (Code). This sectionrefers to the rules in §§ 1.199A–2 through1.199A–6. This paragraph (a) providesan overview of this section. Paragraph(b) of this section provides definitionsthat apply for purposes of section 199Aand §§ 1.199A–1 through 1.199A-6.Paragraph (c) of this section providescomputational rules and examples forindividuals whose taxable income doesnot exceed the threshold amount. Para-graph (d) of this section provides com-putational rules and examples for indi-viduals whose taxable income exceedsthe threshold amount. Paragraph (e) of thissection provides special rules for purposesof section 199A and §§ 1.199A––1 through1.199A–6. This section and §§ 1.199A–2through 1.199A–6 do not apply for pur-poses of calculating the deduction in section199A(g) for specified agricultural and hor-ticultural cooperatives.

(2) Usage of term individual. For pur-poses of applying the rules of §§ 1.199A–1through 1.199A–6, a reference to an indi-vidual includes a reference to a trust (otherthan a grantor trust) or an estate to the extentthat the section 199A deduction is deter-mined by the trust or estate under the rulesof § 1.199A–6.

(b) Definitions. For purposes of section199A and §§ 1.199A–1 through 1.199A-6,the following definitions apply:

(1) Aggregated trade or businessmeans two or more trades or businessesthat have been aggregated pursuant to§ 1.199A–4.

(2) Applicable percentage means, withrespect to any taxable year, 100 percentreduced (not below zero) by the percent-age equal to the ratio that the taxable

income of the individual for the taxableyear in excess of the threshold amount,bears to $50,000 (or $100,000 in the caseof a joint return).

(3) Phase-in range means a range oftaxable income, the lower limit of whichis the threshold amount, and the upperlimit of which is the threshold amountplus $50,000 (or $100,000 in the case of ajoint return).

(4) Qualified business income (QBI)means the net amount of qualified items ofincome, gain, deduction, and loss withrespect to any trade or business as deter-mined under the rules of § 1.199A–3(b).

(5) QBI component means the amountdetermined under paragraph (d)(2) of thissection.

(6) Qualified PTP income is defined in§ 1.199A–3(c)(3).

(7) Qualified REIT dividends are de-fined in § 1.199A–3(c)(2).

(8) Reduction amount means, with re-spect to any taxable year, the excessamount multiplied by the ratio that thetaxable income of the individual for thetaxable year in excess of the thresholdamount, bears to $50,000 (or $100,000 inthe case of a joint return). For purposes ofthis paragraph (b)(8), the excess amount is20 percent of QBI over the greater of 50percent of W–2 wages or the sum of 25percent of W–2 wages plus 2.5 percent ofthe UBIA of qualified property.

(9) Relevant passthrough entity (RPE)means a partnership (other than a PTP) oran S corporation that is owned, directly orindirectly by at least one individual, es-tate, or trust. A trust or estate is treated asan RPE to the extent it passes throughQBI, W–2 wages, UBIA of qualifiedproperty, qualified REIT dividends, orqualified PTP income.

(10) Specified service trade or business(SSTB) means a specified service trade orbusiness as defined in § 1.199A–5(b).

(11) Threshold amount means, for anytaxable year beginning before 2019,$157,500 (or $315,000 in the case of ataxpayer filing a joint return). In the caseof any taxable year beginning after 2018,the threshold amount is the dollar amountin the preceding sentence increased by anamount equal to such dollar amount, mul-tiplied by the cost-of-living adjustmentdetermined under section 1(f)(3) of theCode for the calendar year in which the

taxable year begins, determined by substi-tuting “calendar year 2017” for “calendaryear 2016” in section 1(f)(3)(A)(ii). Theamount of any increase under the preced-ing sentence is rounded as provided insection 1(f)(7) of the Code.

(12) Total QBI amount means the nettotal QBI from all trades or businesses(including the individual’s share of QBIfrom trades or business conducted byRPEs).

(13) Trade or business means a section162 trade or business other than the tradeor business of performing services as anemployee. In addition, rental or licensingof tangible or intangible property (rentalactivity) that does not rise to the level of asection 162 trade or business is never-theless treated as a trade or business forpurposes of section 199A, if the prop-erty is rented or licensed to a trade orbusiness which is commonly controlledunder § 1.199A– 4(b)(1)(i) (regardlessof whether the rental activity and thetrade or business are otherwise eligibleto be aggregated under § 1.199A–4(b)(1)).

(14) Unadjusted basis immediately afteracquisition of qualified property (UBIA ofqualified property) is defined in § 1.199A–2(c).

(15) W–2 wages means a trade or busi-ness’s W–2 wages properly allocable toQBI as defined in § 1.199A–2(b).

(c) Computation of the § 199A deduc-tion for individuals with taxable incomenot exceeding threshold amount—(1) Ingeneral. The section 199A deduction isdetermined for individuals with taxableincome for the taxable year that does notexceed the threshold amount by adding 20percent of the total QBI amount (includ-ing QBI attributable to an SSTB) and 20percent of the combined amount of qual-ified REIT dividends and qualified PTPincome (including the individual’s shareof qualified REIT dividends, and qualifiedPTP income from RPEs). That sum is thencompared to 20 percent of the amount bywhich the individual’s taxable income ex-ceeds net capital gain. The lesser of thesetwo amounts is the individual’s section199A deduction.

(2) Carryover rules—(i) Negative totalQBI amount. If the total QBI amount isless than zero, the portion of the individ-ual’s section 199A deduction related to


QBI is zero for the taxable year. The neg-ative total QBI amount is treated as neg-ative QBI from a separate trade or busi-ness in the succeeding taxable year of theindividual for purposes of section 199Aand this section. This carryover rule doesnot affect the deductibility of the loss forpurposes of other provisions of the Code.

(ii) Negative combined qualified REITdividends/qualified PTP income. If thecombined amount of REIT dividends andqualified PTP income is less than zero, theportion of the individual’s section 199Adeduction related to qualified REIT divi-dends and qualified PTP income is zerofor the taxable year. The negative com-bined amount must be carried forward andused to offset the combined amount ofREIT dividends and qualified PTP incomein the succeeding taxable year of the in-dividual for purposes of section 199A andthis section. This carryover rule does notaffect the deductibility of the loss for pur-poses of other provisions of the Code.

(3) Examples. The following examplesillustrate the provisions of this paragraph(c). For purposes of these examples, un-less indicated otherwise, assume that all ofthe trades or businesses are trades or busi-nesses as defined in paragraph (b)(1) ofthis section and all of tax items are effec-tively connected to a trade or businesswithin the United States within the mean-ing of section 864(c). Total taxable in-come does not include the section 199Adeduction.

Example 1 to paragraph (c)(3). A, an unmarriedindividual, owns and operates a computer repairshop as a sole proprietorship. The business generated$100,000 in net taxable income from operations in2018. A has no capital gains or losses. After allow-able deductions not relating to the business, A’s totaltaxable income for 2018 is $81,000. The business’sQBI is $100,000, the net amount of its qualifieditems of income, gain, deduction, and loss. A’s sec-tion 199A deduction for 2018 is equal to $16,200,the lesser of 20% of A’s QBI from the business($100,000 x 20% � $20,000) and 20% of A’s totaltaxable income for the taxable year ($81,000 x20% � $16,200).

Example 2 to paragraph (c)(3). Assume the samefacts as in Example 1 of this paragraph (c)(3), exceptthat A also has $7,000 in net capital gain for 2018and that, after allowable deductions not relating tothe business, A’s taxable income for 2018 is$74,000. A’s taxable income minus net capital gainis $67,000 ($74,000 - $7,000). A’s section 199Adeduction is equal to $13,400, the lesser of 20% ofA’s QBI from the business ($100,000 x 20% �$20,000) and 20% of A’s total taxable income minus

net capital gain for the taxable year ($67,000 x20% � $13,400).

Example 3 to paragraph (c)(3). B and C aremarried and file a joint individual income tax return.B earned $500,000 in wages as an employee of anunrelated company in 2018. C owns 100% of theshares of X, an S corporation that provides landscap-ing services. X generated $100,000 in net incomefrom operations in 2018. X paid C $150,000 inwages in 2018. B and C have no capital gains orlosses. After allowable deductions not related to X,B and C’s total taxable income for 2018 is $270,000.B’s and C’s wages are not considered to be incomefrom a trade or business for purposes of the section199A deduction. Because X is an S corporation, itsQBI is determined at the S corporation level. X’sQBI is $100,000, the net amount of its qualifieditems of income, gain, deduction, and loss. Thewages paid by X to C are considered to be a qualifieditem of deduction for purposes of determining X’sQBI. The section 199A deduction with respect to X’sQBI is then determined by C, X’s sole shareholder,and is claimed on the joint return filed by B and C.B and C’s section 199A deduction is equal to$20,000, the lesser of 20% of C’s QBI from thebusiness ($100,000 x 20% � $20,000) and 20% of Band C’s total taxable income for the taxable year($270,000 x 20% � $54,000).

Example 4 to paragraph (c)(3). Assume the samefacts as in Example 3 of this paragraph (c)(3) exceptthat B also earns $1,000 in qualified REIT dividendsand $500 in qualified PTP income in 2018, increas-ing taxable income to $271,500. B and C’s section199A deduction is equal to $20,300, the lesser of (i)20% of C’s QBI from the business ($100,000 x20% � $20,000) plus 20% of B’s combined quali-fied REIT dividends and qualified PTP income($1500 x 20% � $300) and (ii) 20% of B and C’stotal taxable for the taxable year ($271,500 x 20% �$54,300).

(d) Computation of the § 199A deduc-tion for individuals with taxable incomeabove threshold amount—(1) In general.The section 199A deduction is determinedfor individuals with taxable income forthe taxable year that exceeds the thresholdamount by adding the QBI component and20 percent of the combined amount ofqualified REIT dividends and qualifiedPTP income (including the individual’sshare of qualified REIT dividends andqualified PTP income from RPEs). Thatsum is then compared to 20 percent of theamount by which the individual’s taxableincome exceeds net capital gain. Thelesser of these two amounts is the individ-ual’s section 199A deduction.

(2) QBI component. An individual withtaxable income for the taxable year thatexceeds the threshold amount determinesthe QBI component using the followingcomputational rules, which are to be ap-plied in the order they appear.

(i) SSTB exclusion. If the individual’staxable income is within the phase-inrange, then only the applicable percentageof QBI, W–2 wages, and UBIA of quali-fied property for each SSTB is taken intoaccount for purposes of determining theindividual’s section 199A deduction. Ifthe individual’s taxable income exceedsthe phase-in range, then none of the indi-vidual’s share of QBI, W–2 wages, orUBIA of qualified property attributable toan SSTB may be taken into account forpurposes of determining the individual’ssection 199A deduction.

(ii) Aggregated trade or business. If anindividual chooses to aggregate trades orbusinesses under the rules of § 1.199A–4,the individual must combine the QBI,W–2 wages, and UBIA of qualified prop-erty of each trade or business within anaggregated trade or business prior to ap-plying the W–2 wages and UBIA of qual-ified property limitations described inparagraph (d)(2)(iv) of this section.

(iii) Netting and Carryover—(A) Net-ting. If an individual’s QBI from at leastone trade or business is less than zero, theindividual must offset the QBI attributableto each trade or business that produced netpositive QBI with the QBI from eachtrade or business that produced net nega-tive QBI in proportion to the relativeamounts of net QBI in the trades or busi-nesses with positive QBI. The adjustedQBI is then used in paragraph (d)(2)(iv) ofthis section. The W–2 wages and UBIA ofqualified property from the trades or busi-nesses which produced net negative QBIare not taken into account for purposes ofthis paragraph (d) and are not carried overto the subsequent year.

(B) Carryover of negative total QBIamount. If an individual’s QBI from alltrades or businesses combined is less thanzero, the QBI component is zero for thetaxable year. This negative amount istreated as negative QBI from a separatetrade or business in the succeeding taxableyear of the individual for purposes of sec-tion 199A and this section. This carryoverrule does not affect the deductibility of theloss for purposes of other provisions ofthe Code. The W–2 wages and UBIA ofqualified property from the trades or busi-nesses which produced net negative QBIare not taken into account for purposes of


this paragraph (d) and are not carried overto the subsequent year.

(iv) QBI component calculation—(A)General rule. Except as provided in para-graph (d)(iv)(B) of this section, the QBIcomponent is the sum of the amounts deter-mined under this paragraph (d)(2)(iv)(A) foreach trade or business. For each trade orbusiness (including trades or businesses op-erated through RPEs) the individual mustdetermine the lesser of—

(1) 20 percent of the QBI for that tradeor business; or

(2) The greater of—(i) 50 percent of W–2 wages with re-

spect to that trade or business, or(ii) the sum of 25 percent of W–2

wages with respect to that trade or busi-ness plus 2.5 percent of the UBIA of qual-ified property with respect to that trade orbusiness.

(B) Taxpayers with taxable incomewithin phase–in range. If the individual’staxable income is within the phase-in rangeand the amount determined under paragraph(d)(2)(iv)(A)(2) of this section for a trade orbusiness is less than the amount determinedunder paragraph (d)(2)(iv)(A)(1) of this sec-tion for that trade or business, the amountdetermined under paragraph (d)(2)(iv)(A) ofthis section for such trade or business ismodified. Instead of the amount determinedunder paragraph (d)(2)(iv)(A)(2) of this sec-tion, the QBI component for the trade orbusiness is the amount determined underparagraph (d)(2)(iv)(A)(1) of this section re-duced by the reduction amount as defined inparagraph (b)(8) of this section. This reduc-tion amount does not apply if the amountdetermined in paragraph (d)(2)(iv)(A)(2) ofthis section is greater than the amount de-termined under paragraph (d)(2)(iv)(A)(1)of this section (in which circumstance theQBI component for the trade or businesswill be the unreduced amount determined inparagraph (d)(2)(iv)(A)(1) of this section).

(3) Negative combined qualified REITdividends/qualified PTP income. If thecombined amount of REIT dividends andqualified PTP income is less than zero, theportion of the individual’s section 199Adeduction related to qualified REIT divi-dends and qualified PTP income is zerofor the taxable year. The negative com-bined amount must be carried forward andused to offset the combined amount ofREIT dividends/qualified PTP income in

the succeeding taxable year of the individ-ual for purposes of section 199A and thissection. This carryover rule does not af-fect the deductibility of the loss for pur-poses of other provisions of the Code.

(4) Examples. The following examplesillustrate the provisions of this paragraph(d). For purposes of these examples, un-less indicated otherwise, assume that all ofthe trades or businesses are trades or busi-nesses as defined in paragraph (b)(13) ofthis section, none of the trades or busi-nesses are SSTBs as defined in paragraph(b)(10) of this section and § 1.199A–5(b);and all of the tax items associated with thetrades or businesses are effectively con-nected to a trade or business within theUnited States within the meaning of sec-tion 864(c). Also assume that the taxpay-ers report no capital gains or losses orother tax items not specified in the exam-ples. Total taxable income does not in-clude the section 199A deduction.

Example 1 to paragraph (d)(4). D, an unmarriedindividual, owns several parcels of land that D man-ages and which are leased to several suburban air-ports for parking lots. The business generated$1,000,000 of QBI in 2018. The business paid nowages and the property was not qualified propertybecause it was not depreciable. After allowable de-ductions unrelated to the business, D’s total taxableincome for 2018 is $980,000. Because D’s taxableincome exceeds the applicable threshold amount,D’s section 199A deduction is subject to the W–2wage and UBIA of qualified property limitations.D’s section 199A deduction is limited to zero be-cause the business paid no wages and held no qual-ified property.

Example 2 to paragraph (d)(4). Assume thesame facts as in Example 1 of this paragraph (d)(4),except that D developed the land parcels in 2019,expending a total of $10,000,000 to build parkingstructures on each of the parcels, all of which isdepreciable. During 2020, D leased the parkingstructures and the land to the suburban airports. Dreports $4,000,000 of QBI for 2020. After allowabledeductions unrelated to the business, D’s total tax-able income for 2020 is $3,980,000. Because D’staxable income is above the threshold amount, theQBI component of D’s section 199A deduction issubject to the W–2 wage and UBIA of qualifiedproperty limitations. Because the business has noW–2 wages, the QBI component of D’s section199A deduction will be limited to the lesser of 20%of the business’s QBI or 2.5% of its UBIA of qual-ified property. Twenty percent of the $4,000,000 ofQBI is $800,000. Two and one-half percent ofthe $10,000,000 UBIA of qualified property is$250,000. The QBI component of D’s section 199Adeduction is thus limited to $250,000. D’s section199A deduction is equal to the lesser of (i) 20% ofthe QBI from the business as limited ($250,000) or(ii) 20% of D’s taxable income ($3,980,000 x 20%

� $796,000). Therefore, D’s section 199A deductionfor 2020 is $250,000.

Example 3 to paragraph (d)(4). E, an unmarriedindividual, is a 30% owner of LLC, which is classi-fied as a partnership for Federal income tax pur-poses. In 2018, the LLC has a single trade or busi-ness and reported QBI of $3,000,000. The LLC paidtotal W–2 wages of $1,000,000, and its total UBIAof qualified property is $100,000. E is allocated 30%of all items of the partnership. For the 2018 taxableyear, E reports $900,000 of QBI from the LLC. Afterallowable deductions unrelated to LLC, E’s taxableincome is $880,000. Because E’s taxable income isabove the threshold amount, the QBI component ofE’s section 199A deduction will be limited to thelesser of 20% of E’s share of LLC’s QBI or thegreater of the W–2 wage or UBIA of qualified prop-erty limitations. Twenty percent of E’s share of QBIof $900,000 is $180,000. The W–2 wage limitationequals 50% of E’s share of the LLC’s wages($300,000) or $150,000. The UBIA of qualifiedproperty limitation equals $75,750, the sum of 25%of E’s share of LLC’s wages ($300,000) or $75,000plus 2.5% of E’s share of UBIA of qualified property($30,000) or $750. The greater of the limitationamounts ($150,000 and $75,750) is $150,000. TheQBI component of E’s section 199A deduction isthus limited to $150,000, the lesser of 20% of QBI($180,000) and the greater of the limitations amounts($150,000). E’s section 199A deduction is equal tothe lesser of 20% of the QBI from the business aslimited ($150,000) or 20% of E’s taxable income($880,000 x 20% � $176,000). Therefore, E’s sec-tion 199A deduction is $150,000 for 2018.

Example 4 to paragraph (d)(4). F, an unmarriedindividual, owns a 50% interest in Z, an S corpora-tion for Federal income tax purposes that conducts asingle trade or business. In 2018, Z reported QBI of$6,000,000. Z paid total W–2 wages of $2,000,000,and its total UBIA of qualified property is $200,000.For the 2018 taxable year, F reports $3,000,000 ofQBI from Z. F is not an employee of Z and receivesno wages or reasonable compensation from Z. Afterallowable deductions unrelated to Z and a deductiblequalified net loss from a PTP of ($10,000), F’staxable income is $1,880,000. Because F’s taxableincome is above the threshold amount, the QBI com-ponent of F’s section 199A deduction will be limitedto the lesser of 20% of F’s share of Z’s QBI or (ii)the greater of the W–2 wage and UBIA of qualifiedproperty limitations. Twenty percent of F’s share ofQBI of $3,000,000 is $600,000. The W–2 wagelimitation equals 50% of F’s share of Z’s W–2 wages($1,000,000) or $500,000. The UBIA of qualifiedproperty limitation equals $252,500, the sum of 25%of F’s share of Z’s W–2 wages ($1,000,000) or$250,000 plus 2.5% of E’s share of UBIA of quali-fied property ($100,000) or $2,500. The greater ofthe limitation amounts ($500,000 and $252,500) is$500,000. The QBI component of F’s section 199Adeduction is thus limited to $500,000, the lesser of20% of QBI ($600,000) and the greater of the limi-tations amounts ($500,000). F reported a qualifiedloss from a PTP and has no qualified REIT dividend.F does not net the ($10,000) loss against QBI. In-stead, the portion of F’s section 199A deductionrelated to qualified REIT dividends and qualifiedPTP income is zero for 2018. F’s section is 199A


deduction is equal to the lesser of 20% of the QBIfrom the business as limited ($500,000) or 20% ofF’s taxable income over net capital gain ($1,880,000x 20% � $376,000). Therefore, F’s section 199Adeduction is $376,000 for 2018. F must also carryforward the $(10,000) qualified loss from a PTP tobe netted against F’s qualified REIT dividends andqualified PTP income in the succeeding taxable year.

Example 5 to paragraph (d)(4). Phase-in range.(i) B and C are married and file a joint individualincome tax return. B is a shareholder in M, an entitytaxed as an S corporation for Federal income taxpurposes that conducts a single trade or business. Mholds no qualified property. B’s share of M’s QBI is$300,000 in 2018. B’s share of the W–2 wages fromM in 2018 is $40,000. C earns wage income fromemployment by an unrelated company. After allow-able deductions unrelated to M, B and C’s taxableincome for 2018 is $375,000. B and C are within thephase-in range because their taxable income exceedsthe applicable threshold amount, $315,000, but doesnot exceed the threshold amount plus $100,000, or$415,000. Consequently, the QBI component of Band C’s section 199A deduction may be limited bythe W–2 wage and UBIA of qualified property lim-itations but the limitations will be phased in.

(ii) The UBIA of qualified property limitationamount is zero because M does not hold qualifiedproperty. B and C must apply the W–2 wage limi-tation by first determining 20% of B’s share of M’sQBI. Twenty percent of B’s share of M’s QBI of$300,000 is $60,000. Next, B and C must determine50% of B’s share of M’s W–2 wages. Fifty percentof B’s share of M’s W–2 wages of $40,000 is$20,000. Because 50% of B’s share of M’s W–2wages ($20,000) is less than 20% of B’s share of M’sQBI ($60,000), B and C must determine the QBIcomponent of their section 199A deduction by re-ducing 20% of B’s share of M’s QBI by the reduc-tion amount.

(iii) B and C are 60% through the phase-in range(that is, their taxable income exceeds the thresholdamount by $60,000 and their phase-in range is$100,000). B and C must determine the excessamount, which is the excess of 20% of B’s share ofM’s QBI, or $60,000, over 50% of B’s share of M’sW–2 wages, or $20,000. Thus, the excess amount is$40,000. The reduction amount is equal to 60% ofthe excess amount, or $24,000. Thus, the QBI com-ponent of B and C’s section 199A deduction is equalto $36,000, 20% of B’s $300,000 share M’s QBI(that is, $60,000), reduced by $24,000. B and C’ssection 199A deduction is equal to the lesser of 20%of the QBI from the business as limited ($36,000) or(ii) 20% of B and C’s taxable income ($375,000 x20% � $75,000). Therefore, B and C’s section 199Adeduction is $36,000 for 2018.

Example 6 to paragraph (d)(4). (i) Assume thesame facts as in Example 5 to paragraph (d)(4),except that M was engaged in an SSTB. Because Band C are within the phase-in range, B must reducethe QBI and W–2 wages allocable to B from M tothe applicable percentage of those items. B and C’sapplicable percentage is 100% reduced by the per-centage equal to the ratio that their taxable incomefor the taxable year ($375,000) exceeds their thresh-old amount ($315,000), or $60,000, bears to$100,000. Their applicable percentage is 40%. The

applicable percentage of B’s QBI is ($300,000 x40% �) $120,000, and the applicable percentage ofB’s share of W–2 wages is ($40,000 x 40% �)$16,000. These reduced numbers must then be usedto determine how B’s section 199A deduction islimited.

(ii) B and C must apply the W–2 wage limitationby first determining 20% of B’s share of M’s QBI aslimited by paragraph (i) of this example. Twentypercent of B’s share of M’s QBI of $120,000 is$24,000. Next, B and C must determine 50% of B’sshare of M’s W–2 wages. Fifty percent of B’s shareof M’s W–2 wages of $16,000 is $8,000. Because50% of B’s share of M’s W–2 wages ($8,000) is lessthan 20% of B’s share of M’s QBI ($24,000), B andC must determine the QBI component of their sec-tion 199A deduction by reducing 20% of B’s shareof M’s QBI by the reduction amount.

(iii) B and C are 60% through the phase–in range(that is, their taxable income exceeds the thresholdamount by $60,000 and their phase-in range is$100,000). B and C must determine the excessamount, which is the excess of 20% of B’s share ofM’s QBI, as adjusted in paragraph (i) of this exampleor $24,000, over 50% of B’s share of M’s W–2wages, as adjusted in paragraph (i) of this example,or $8,000. Thus, the excess amount is $16,000. Thereduction amount is equal to 60% of the excessamount or $9,600. Thus, the QBI component of Band C’s section 199A deduction is equal to $14,400,20% of B’s share M’s QBI of $24,000, reduced by$9,600. B and C’s section 199A deduction is equal tothe lesser of 20% of the QBI from the business aslimited ($14,400) or 20% of B and C’s taxableincome ($375,000 x 20% � $75,000). Therefore, Band C’s section 199A deduction is $14,400 for 2018.

Example 7 to paragraph (d)(4). (i) F, an unmar-ried individual, owns as a sole proprietor 100 percentof three trades or businesses, Business X, BusinessY, and Business Z. None of the businesses holdqualified property. F does not aggregate the trades orbusinesses under § 1.199A–4. For taxable year 2018,Business X generates $1 million of QBI and pays$500,000 of W–2 wages with respect to the business.Business Y also generates $1 million of QBI butpays no wages. Business Z generates $2,000 of QBIand pays $500,000 of W–2 wages with respect to thebusiness. F also has $750,000 of wage income fromemployment with an unrelated company. After al-lowable deductions unrelated to the businesses, F’staxable income is $2,722,000.

(ii) Because F’s taxable income is above thethreshold amount, the QBI component of F’s section199A deduction is subject to the W–2 wage andUBIA of qualified property limitations. These limi-tations must be applied on a business-by-businessbasis. None of the businesses hold qualified prop-erty, therefore only the 50% of W–2 wage limitationmust be calculated. Because QBI from each businessis positive, F applies the limitation by determiningthe lesser of 20% of QBI and 50% of W–2 wages foreach business. For Business X, the lesser of 20% ofQBI ($1,000,000 x 20 percent � $200,000) and 50%of Business X’s W–2 wages ($500,000 x 50% �$250,000) is $200,000. Business Y pays no W–2wages. The lesser of 20% of Business Y’s QBI($1,000,000 x 20% � $200,000) and 50% of its W–2wages (zero) is zero. For Business Z, the lesser of

20% of QBI ($2,000 x 20% � $400) and 50% ofW–2 wages ($500,000 x 50% � $250,000) is $400.

(iii) Next, F must then combine the amountsdetermined in paragraph (ii) of this example andcompare that sum to 20% of F’s taxable income. Thelesser of these two amounts equals F’s section 199Adeduction. The total of the combined amounts inparagraph (ii) is $200,400 ($200,000 � 0 � 400).Twenty percent of F’s taxable income is $544,400($2,722,000 x 20%). Thus, F’s section 199A deduc-tion for 2018 is $200,400.

Example 8 to paragraph (d)(4). (i) Assume thesame facts as in Example 7 of this paragraph (d)(4),except that F aggregates Business X, Business Y,and Business Z under the rules of § 1.199A–4.

(ii) Because F’s taxable income is above thethreshold amount, the QBI component of F’s section199A deduction is subject to the W–2 wage andUBIA of qualified property limitations. Because thebusinesses are aggregated, these limitations are ap-plied on an aggregated basis. None of the businessesholds qualified property, therefore only the W–2wage limitation must be calculated. F applies thelimitation by determining the lesser of 20% of theQBI from the aggregated businesses, which is$400,400 ($2,002,000 x 20%) and 50% of W–2wages from the aggregated businesses, which is$500,000 ($1,000,000 x 50%). F’s section 199Adeduction is equal to the lesser of $400,400 and 20%of F’s taxable income ($2,722,000 x 20% �$544,400). Thus, F’s section 199A deduction for2018 is $400,400.

Example 9 to paragraph (d)(4). (i) Assume thesame facts as in Example 7 of this paragraph (d)(4),except that for taxable year 2018, Business Z gen-erates a loss that results in ($600,000) of negativeQBI and pays $500,000 of W–2 wages. After allow-able deductions unrelated to the businesses, F’s tax-able income is $2,120,000. Because Business Z hadnegative QBI, F must offset the positive QBI fromBusiness X and Business Y with the negative QBIfrom Business Z in proportion to the relativeamounts of positive QBI from Business X and Busi-ness Y. Because Business X and Business Y pro-duced the same amount of positive QBI, the negativeQBI from Business Z is apportioned equally amongBusiness X and Business Y. Therefore, the adjustedQBI for each of Business X and Business Y is$700,000 ($1 million plus 50% of the negative QBIof $600,000). The adjusted QBI in Business Z is $0,because its negative QBI has been fully apportionedto Business X and Business Y.

(ii) Because F’s taxable income is above thethreshold amount, the QBI component of F’s section199A deduction is subject to the W–2 wage andUBIA of qualified property limitations. These limi-tations must be applied on a business-by-businessbasis. None of the businesses hold qualified prop-erty, therefore only the 50% of W–2 wage limitationmust be calculated. For Business X, the lesser of20% of QBI ($700,000 x 20% � $140,000) and 50%of W–2 wages ($500,000 x 50% � $250,000) is$140,000. Business Y pays no W–2 wages. Thelesser of 20% of Business Y’s QBI ($700,000 x 20%� $140,000) and 50% of its W–2 wages (zero) iszero.

(iii) F must combine the amounts determined inparagraph (ii) of this example and compare the sum


to 20% of taxable income. F’s section 199A deduc-tion equals the lesser of these two amounts. Thecombined amount from paragraph (ii) of this exam-ple is $140,000 ($140,000 � $0) and 20% of F’staxable income is $424,000 ($2,120,000 x 20%).Thus, F’s section 199A deduction for 2018 is$140,000. There is no carryover of any loss into thefollowing taxable year for purposes of section 199A.

Example 10 to paragraph (d)(4). (i) Assume thesame facts as in Example 9 of this paragraph (d)(4),except that F aggregates Business X, Business Y,and Business Z under the rules of § 1.199A–4.

(ii) Because F’s taxable income is above thethreshold amount, the QBI component of F’s section199A deduction is subject to the W–2 wage andUBIA of qualified property limitations. Because thebusinesses are aggregated, these limitations are ap-plied on an aggregated basis. None of the businessesholds qualified property, therefore only the W–2wage limitation must be calculated. F applies thelimitation by determining the lesser of 20% of theQBI from the aggregated businesses ($1,400,000 x20% � $280,000) and 50% of W–2 wages from theaggregated businesses ($1,000,000 x 50% �$500,000), or $280,000. F’s section 199A deductionis equal to the lesser of $280,000 and 20% of F’staxable income ($2,120,000 x 20% � $424,000).Thus, F’s section 199A deduction for 2018 is$280,000. There is no carryover of any loss into thefollowing taxable year for purposes of section 199A.

Example 11 to paragraph (d)(4). (i) Assume thesame facts as in Example 7 of this paragraph (d)(4),except that Business Z generates a loss that results in($2,150,000) of negative QBI and pays $500,000 ofW–2 wages with respect to the business in 2018.Thus, F has a negative combined QBI of ($150,000)when the QBI from all of the businesses are addedtogether ($1 million plus $1 million minus the loss of($2,150,000)). Because F has a negative combinedQBI for 2018, F has no section 199A deduction withrespect to any trade or business for 2018. Instead, thenegative combined QBI of ($150,000) carries for-ward and will be treated as negative QBI from aseparate trade or business for purposes of computingthe section 199A deduction in the next taxable year.None of the W–2 wages carry forward. However, forincome tax purposes, the $150,000 loss may offsetF’s $750,000 of wage income (assuming the loss isotherwise allowable under the Code).

(ii) In taxable year 2019, Business X generates$200,000 of net QBI and pays $100,000 of W–2wages with respect to the business. Business Y gen-erates $150,000 of net QBI but pays no wages.Business Z generates a loss that results in ($120,000)of negative QBI and pays $500 of W–2 wages withrespect to the business. F also has $750,000 of wageincome from employment with an unrelated com-pany. After allowable deductions unrelated to thebusinesses, F’s taxable income is $960,000. Pursuantto paragraph (d)(2)(iii)(B) of this section, the($150,000) of negative QBI from 2018 is treated asarising in 2019 from a separate trade or business.Thus, F has overall net QBI of $80,000 when alltrades or businesses are taken together ($200,000plus $150,000 minus $120,000 minus the carryoverloss of $150,000). Because Business Z had negativeQBI and F also has a negative QBI carryoveramount, F must offset the positive QBI from Busi-

ness X and Business Y with the negative QBI fromBusiness Z and the carryover amount in proportionto the relative amounts of positive QBI from Busi-ness X and Business Y. Because Business X pro-duced 57.14% of the total QBI from Business X andBusiness Y, 57.14% of the negative QBI from Busi-ness Z and the negative QBI carryforward must beapportioned to Business X, and the remaining42.86% allocated to Business Y. Therefore, the ad-justed QBI in Business X is $45,722 ($200,000 mi-nus 57.14% of the loss from Business Z ($68,568),minus 57.14% of the carryover loss ($85,710). Theadjusted QBI in Business Y is $34,278 ($150,000,minus 42.86% of the loss from Business Z ($51,432)minus 42.86% of the carryover loss ($64,290)). Theadjusted QBI in Business Z is $0, because its nega-tive QBI has been apportioned to Business X andBusiness Y.

(iii) Because F’s taxable income is above thethreshold amount, the QBI component of F’s section199A deduction is subject to the W–2 wage andUBIA of qualified property limitations. These limi-tations must be applied on a business-by-businessbasis. None of the businesses hold qualified prop-erty, therefore only the 50% of W–2 wage limitationmust be calculated. For Business X, 20% of QBI is$9,144 ($45,722 x 20%) and 50% of W–2 wages is$50,000 ($100,000 x 50%), so the lesser amount is$9,144. Business Y pays no W–2 wages. Twentypercent of Business Y’s QBI is $6,856 ($34,278 x20%) and 50% of its W–2 wages (zero) is zero, sothe lesser amount is zero.

(iv) F must then compare the combined amountsdetermined in paragraph (iii) of this example to 20%of F’s taxable income. The section 199A deductionequals the lesser of these amounts. F’s combinedamount from paragraph (iii) of this example is$9,144 ($9,144 plus zero) and 20% of F’s taxableincome is $192,000 ($960,000 x 20%) Thus, F’ssection 199A deduction for 2019 is $9,144. There isno carryover of any negative QBI into the followingtaxable year for purposes of section 199A.

Example 12 to paragraph (d)(4). (i) Assume thesame facts as in Example 11 of this paragraph (d)(4),except that F aggregates Business X, Business Y,and Business Z under the rules of § 1.199A–4. For2018, F’s QBI from the aggregated trade or businessis ($150,000). Because F has a combined negativeQBI for 2018, F has no section 199A deduction withrespect to any trade or business for 2018. Instead, thenegative combined QBI of ($150,000) carries for-ward and will be treated as negative QBI from aseparate trade or business for purposes of computingthe section 199A deduction in the next taxable year.However, for income tax purposes, the $150,000 lossmay offset taxpayer’s $750,000 of wage income(assuming the loss is otherwise allowable under theCode).

(ii) In taxable year 2019, F will have QBI of$230,000 and W–2 wages of $100,500 from theaggregated trade or business. F also has $750,000 ofwage income from employment with an unrelatedcompany. After allowable deductions unrelated tothe businesses, F’s taxable income is $960,000.F must treat the negative QBI carryover loss($150,000) from 2018 as a loss from a separate tradeor business for purposes of section 199A. This losswill offset the positive QBI from the aggregated

trade or business, resulting in an adjusted QBI of$80,000 ($230,000 – $150,000).

(iii) Because F’s taxable income is above thethreshold amount, the QBI component of F’s section199A deduction is subject to the W–2 wage andUBIA of qualified property limitations. These limi-tations must be applied on a business-by-businessbasis. None of the businesses hold qualified prop-erty, therefore only the 50% of W–2 wage limitationmust be calculated. For the aggregated trade or busi-ness, the lesser of 20% of QBI ($80,000 x 20% �$16,000) and 50% of W–2 wages ($100,500 x 50%� $50,250) is $16,000. F’s section 199A deductionequals the lesser of these amounts ($16,000) and20% of F’s taxable income ($960,000 x 20% �$192,000). Thus, F’s section 199A deduction for2019 is $16,000. There is no carryover of any neg-ative QBI into the following taxable year for pur-poses of section 199A.

(e) Special rules— (1) Effect of deduc-tion. In the case of a partnership or Scorporation, section 199A is applied at thepartner or shareholder level. The section199A deduction has no effect on the ad-justed basis of a partner’s interest in thepartnership, the adjusted basis of a share-holder’s stock in an S corporation, or an Scorporation’s accumulated adjustmentsaccount.

(2) Self-employment tax and net invest-ment income tax. The deduction undersection 199A does not reduce net earningsfrom self-employment under section 1402or net investment income under section1411.

(3) Commonwealth of Puerto Rico. Ifall of an individual’s QBI from sourceswithin the Commonwealth of Puerto Ricois taxable under section 1 of the Code fora taxable year, then for purposes of deter-mining the QBI of such individual forsuch taxable year, the term “UnitedStates” includes the Commonwealth ofPuerto Rico.

(4) Coordination with alternative min-imum tax. For purposes of determiningalternative minimum taxable income un-der section 55, the deduction allowed un-der section 199A(a) for a taxable year isequal in amount to the deduction allowedunder section 199A(a) in determining tax-able income for that taxable year (that is,without regard to any adjustments undersections 56 through 59).

(5) Imposition of accuracy-related pen-alty on underpayments. For rules related tothe imposition of the accuracy-related pen-alty on underpayments for taxpayers whoclaim the deduction allowed under section199A, see section 6662(d)(1)(C).


(6) Reduction for income received fromcooperatives. In the case of any trade orbusiness of a patron of a specified agricul-tural or horticultural cooperative, as de-fined in section 199A(g)(4), the amount ofsection 199A deduction determined underparagraphs (c) or (d) of this section withrespect to such trade or business must bereduced by the lesser of:

(i) Nine percent of the QBI with re-spect to such trade or business as is prop-erly allocable to qualified payments re-ceived from such cooperative, or

(ii) 50 percent of the W–2 wages withrespect to such trade or business as are soallocable as determined under § 1.199A–2.

(f) Effective/ applicability date—(1)General rule. Except as provided in para-graph (f)(2) of this section, the provisionsof this section apply to taxable years end-ing after the date the Treasury decisionadopting these regulations as final regula-tions is published in the Federal Register.However, taxpayers may rely on the rulesof this section until the date the Treasurydecision adopting these regulations as fi-nal regulations is published in the FederalRegister.

(2) Exception for non-calendar yearRPE. For purposes of determining QBI,W–2 wages, and UBIA of qualified prop-erty, if an individual receives any of theseitems from an RPE with a taxable yearthat begins before January 1, 2018 andends after December 31, 2017, such itemsare treated as having been incurred by theindividual during the individual’s taxableyear in which or with which such RPEtaxable year ends.


§ 1.199A–2 Determination of W–2wages and unadjusted basis immediatelyafter acquisition of qualified property

(a) Scope—(1) In general. This sectionprovides guidance on calculating a tradeor business’s W–2 wages properly alloca-ble to QBI (W–2 wages) and the trade orbusiness’s unadjusted basis immediatelyafter acquisition of all qualified property(UBIA of qualified property). The provi-sions of this section apply solely for pur-poses of section 199A of the Internal Rev-enue Code (Code).

(2) W–2 wages. Paragraph (b) of thissection provides guidance on the determi-nation of W–2 wages. The determinationof W–2 wages must be made for eachtrade or business by the individual or RPEthat directly conducts the trade or businessbefore applying the aggregation rules of§ 1.199A–4. In the case of W–2 wagespaid by an RPE, the RPE must determineand report W–2 wages for each trade orbusiness conducted by the RPE. W–2wages are presumed to be zero if notdetermined and reported for each trade orbusiness.

(3) UBIA of qualified property. Para-graph (c) of this section provides guidanceon the determination of the UBIA of qual-ified property. The determination of theUBIA of qualified property must be madefor each trade or business by the individ-ual or RPE that directly conducts the tradeor business before applying the aggrega-tion rules of § 1.199A–4. In the case ofqualified property held by an RPE, eachpartner’s or shareholder’s share of theUBIA of qualified property is an amountwhich bears the same proportion to thetotal UBIA of qualified property as thepartner’s or shareholder’s share of tax de-preciation bears to the RPE’s total taxdepreciation with respect to the propertyfor the year. In the case of qualified prop-erty held by a partnership which does notproduce tax depreciation during the year(for example, property that has been heldfor less than 10 years but whose recoveryperiod has ended), each partner’s share ofthe UBIA of qualified property is based onhow gain would be allocated to the part-ners pursuant to sections 704(b) and704(c) if the qualified property were soldin a hypothetical transaction for cashequal to the fair market value of the qual-ified property. In the case of qualifiedproperty held by an S corporation whichdoes not produce tax depreciation duringthe year, each shareholder’s share of theUBIA of qualified property is a share ofthe unadjusted basis proportionate to theratio of shares in the S corporation held bythe shareholder over the total shares of theS corporation. The UBIA of qualifiedproperty is presumed to be zero if notdetermined and reported for each trade orbusiness.

(b) W–2 wages—(1) In general. Sec-tion 199A(b)(2)(B) provides limitations

on the section 199A deduction based onthe W–2 wages paid with respect eachtrade or business. Section 199A(b)(4)(B)provides that W–2 wages do not includeany amount which is not properly alloca-ble to QBI for purposes of section199A(c)(1). This section provides a threestep process for determining the W–2wages paid with respect to a trade or busi-ness that are properly allocable to QBI.First, each individual or RPE must deter-mine its total W–2 wages paid for thetaxable year under the rules in paragraph(b)(2) of this section. Second, each indi-vidual or RPE must allocate its W–2wages between or among one or moretrades or businesses under the rules inparagraph (b)(3) of this section. Third,each individual or RPE must determinethe amount of such wages with respect toeach trade or business that are allocable tothe QBI of the trade or business under therules in paragraph (b)(4) of this section.

(2) Definition of W–2 wages—(i) Ingeneral. Section 199A(b)(4)(A) providesthat the term W–2 wages means with re-spect to any person for any taxable year ofsuch person, the amounts described in sec-tion 6051(a)(3) and (8) paid by such per-son with respect to employment ofemployees by such person during the cal-endar year ending during such taxableyear. Thus, the term W–2 wages includesthe total amount of wages as defined insection 3401(a) plus the total amount ofelective deferrals (within the meaning ofsection 402(g)(3)), the compensation de-ferred under section 457, and the amount ofdesignated Roth contributions (as defined insection 402A). For this purpose, except asprovided in paragraphs (b)(2)(iv)(C)(2) and(b)(2)(iv)(D) of this section, the FormsW–2, “Wage and Tax Statement,” or anysubsequent form or document used in deter-mining the amount of W–2 wages are thoseissued for the calendar year ending duringthe individual’s or RPE’s taxable year forwages paid to employees (or former em-ployees) of the individual or RPE for em-ployment by the individual or RPE. Forpurposes of this section, employees of theindividual or RPE are limited to employeesof the individual or RPE as defined in sec-tion 3121(d)(1) and (2). (For purposes ofsection 199A, this includes officers of an Scorporation and employees of an individualor RPE under common law.)


(ii) Wages paid by a person other thana common law employer. In determiningW–2 wages, an individual or RPE maytake into account any W–2 wages paid byanother person and reported by the otherperson on Forms W–2 with the other per-son as the employer listed in Box c of theForms W–2, provided that the W–2 wageswere paid to common law employees orofficers of the individual or RPE for em-ployment by the individual or RPE. Insuch cases, the person paying the W–2wages and reporting the W–2 wages onForms W–2 is precluded from taking intoaccount such wages for purposes of deter-mining W–2 wages with respect to thatperson. For purposes of this paragraph,persons that pay and report W–2 wages onbehalf of or with respect to others caninclude certified professional employerorganizations under section 7705, statu-tory employers under section 3401(d)(1),and agents under section 3504.

(iii) Requirement that wages must bereported on return filed with the Social Se-curity Administration (SSA)—(A) In gen-eral. Pursuant to section 199A(b)(4)(C), theterm W–2 wages does not include anyamount that is not properly included in areturn filed with SSA on or before the 60thday after the due date (including extensions)for such return. Under § 31.6051–2 of thischapter, each Form W–2 and the transmittalForm W-3, “Transmittal of Wage and TaxStatements,” together constitute an informa-tion return to be filed with SSA. Similarly,each Form W–2c, “Corrected Wage andTax Statement,” and the transmittal FormW–3 or W–3c, “Transmittal of CorrectedWage and Tax Statements,” together consti-tute an information return to be filed withSSA. In determining whether any amounthas been properly included in a return filedwith SSA on or before the 60th day after thedue date (including extensions) for such re-turn, each Form W–2 together with its ac-companying Form W–3 will be considereda separate information return and each FormW–2c together with its accompanying FormW–3 or Form W–3c will be considered aseparate information return. Section 6071(c)provides that Forms W–2 and W–3 must befiled on or before January 31 of the yearfollowing the calendar year to which suchreturns relate (but see the special rule in§ 31.6071(a)–1T(a)(3)(1) of this chapter formonthly returns filed under § 31.6011(a)–

5(a) of this chapter). Corrected Forms W–2are required to be filed with SSA on orbefore January 31 of the year following theyear in which the correction is made.

(B) Corrected return filed to correct areturn that was filed within 60 days of thedue date. If a corrected information return(Return B) is filed with SSA on or beforethe 60th day after the due date (includingextensions) of Return B to correct an in-formation return (Return A) that was filedwith SSA on or before the 60th day afterthe due date (including extensions) of theinformation return (Return A) and para-graph (b)(2)(iii)(C) of this section doesnot apply, then the wage information onReturn B must be included in determiningW–2 wages. If a corrected informationreturn (Return D) is filed with SSA laterthan the 60th day after the due date (in-cluding extensions) of Return D to correctan information return (Return C) that wasfiled with SSA on or before the 60th dayafter the due date (including extensions)of the information return (Return C), andif Return D reports an increase (or in-creases) in wages included in determiningW–2 wages from the wage amounts re-ported on Return C, then such increase (orincreases) on Return D will be disre-garded in determining W–2 wages (andonly the wage amounts on Return C maybe included in determining W–2 wages).If Return D reports a decrease (or de-creases) in wages included in determiningW–2 wages from the amounts reported onReturn C, then, in determining W–2wages, the wages reported on Return Cmust be reduced by the decrease (or de-creases) reflected on Return D.

(C) Corrected return filed to correct areturn that was filed later than 60 daysafter the due date. If an information return(Return F) is filed to correct an informa-tion return (Return E) that was not filedwith SSA on or before the 60th day afterthe due date (including extensions) of Re-turn E, then Return F (and any subsequentinformation returns filed with respect toReturn E) will not be considered filed onor before the 60th day after the due date(including extensions) of Return F (or thesubsequent corrected information return).Thus, if a Form W–2c (or corrected FormW–2) is filed to correct a Form W–2 thatwas not filed with SSA on or before the60th day after the due date (including ex-

tensions) of the information return includ-ing the Form W–2 (or to correct a FormW–2c relating to an information returnincluding a Form W–2 that had not beenfiled with SSA on or before the 60th dayafter the due date (including extensions)of the information return including theForm W–2), then the information returnincluding this Form W–2c (or correctedForm W–2) will not be considered to havebeen filed with SSA on or before the 60thday after the due date (including exten-sions) for this information return includ-ing the Form W–2c (or corrected FormW–2), regardless of when the informationreturn including the Form W–2c (or cor-rected Form W–2) is filed.

(iv) Methods for calculating W–2 wag-es—(A) In general. The Secretary mayprovide for methods to be used in calcu-lating W–2 wages, including W–2 wagesfor short taxable years by publication inthe Internal Revenue Bulletin (see§ 601.601(d)(2)(ii)(b) of this chapter).

(B) Acquisition or disposition of atrade or business—(1) In general. In thecase of an acquisition or disposition of atrade or business, the major portion of atrade or business, or the major portion ofa separate unit of a trade or business thatcauses more than one individual or entityto be an employer of the employees of theacquired or disposed of trade or businessduring the calendar year, the W–2 wagesof the individual or entity for the calendaryear of the acquisition or disposition areallocated between each individual or en-tity based on the period during which theemployees of the acquired or disposed oftrade or business were employed by theindividual or entity, regardless of whichpermissible method is used for reportingpredecessor and successor wages on FormW–2, “Wage and Tax Statement.” For thispurpose, the period of employment is de-termined consistently with the principlesfor determining whether an individual isan employee described in § 1.199A–2(b).

(2) Acquisition or disposition. For pur-poses of this paragraph (b)(2)(iv)(B), theterm acquisition or disposition includesan incorporation, a formation, a liquida-tion, a reorganization, or a purchase orsale of assets.

(C) Application in the case of a personwith a short taxable year—(1) In general.In the case of an individual or RPE with a


short taxable year, subject to the rules ofparagraph (b)(2) of this section, the W–2wages of the individual or RPE for theshort taxable year include only thosewages paid during the short taxable yearto employees of the individuals or RPE,only those elective deferrals (within themeaning of section 402(g)(3)) made dur-ing the short taxable year by employees ofthe individual or RPE and only compen-sation actually deferred under section 457during the short taxable year with respectto employees of the individual or RPE.

(2) Short taxable year that does notinclude December 31. If an individual orRPE has a short taxable year that does notcontain a calendar year ending duringsuch short taxable year, wages paid toemployees for employment by such indi-vidual or RPE during the short taxableyear are treated as W–2 wages for suchshort taxable year for purposes of para-graph (b) of this section (if the wageswould otherwise meet the requirements tobe W–2 wages under this section but forthe requirement that a calendar year mustend during the short taxable year).

(D) Remuneration paid for servicesperformed in the Commonwealth ofPuerto Rico. In the case of an individualor RPE that conducts a trade or businessin the Commonwealth of Puerto Rico, thedetermination of W–2 wages of such in-dividual or RPE will be made withoutregard to any exclusion under section3401(a)(8) for remuneration paid for ser-vices performed in the Commonwealth ofPuerto Rico. The individual or RPE mustmaintain sufficient documentation (for ex-ample, Forms 499R–2/W–2PR) to sub-stantiate the amount of remuneration paidfor services performed in the Common-wealth of Puerto Rico that is used in de-termining the W–2 wages of such individ-ual or RPE with respect to any trade orbusiness conducted in the Commonwealthof Puerto Rico.

(3) Allocation of wages to trades orbusinesses. After calculating total W–2wages for a taxable year, each individualor RPE that directly conducts more thanone trade or business must allocate thosewages among its various trades or busi-nesses. W–2 wages must be allocated tothe trade or business that generated thosewages. In the case of W–2 wages that areallocable to more than one trade or busi-

ness, the portion of the W–2 wages allo-cable to each trade or business is deter-mined in the same manner as the expensesassociated with those wages are allocatedamong the trades or businesses under§ 1.199A–3(b)(5).

(4) Allocation of wages to QBI. OnceW–2 wages for each trade or businesshave been determined, each individual orRPE must identify the amount of W–2wages properly allocable to QBI for eachtrade or business. W–2 wages are properlyallocable to QBI if the associated wageexpense is taken into account in comput-ing QBI under § 1.199A–3. In the case ofan RPE, the wage expense must be allo-cated and reported to the partners orshareholders of the RPE as required by theCode, including subchapters K and S. TheRPE must also identify and report theassociated W–2 wages to its partners orshareholders.

(5) Non-duplication rule. Amounts thatare treated as W–2 wages for a taxableyear under any method cannot be treatedas W–2 wages of any other taxable year.Also, an amount cannot be treated as W–2wages by more than one trade or business.

(c) UBIA of qualified property—(1)Qualified property—(i) In general. Theterm qualified property means, with re-spect to any trade or business of an indi-vidual or RPE for a taxable year, tangibleproperty of a character subject to the al-lowance for depreciation under section167(a)—

(A) Which is held by, and available foruse in, the trade or business at the close ofthe taxable year,

(B) Which is used at any point duringthe taxable year in the trade or business’sproduction of QBI, and

(C) The depreciable period for whichhas not ended before the close of the in-dividual’s or RPE’s taxable year.

(ii) Improvements to qualified prop-erty. In the case of any addition to, orimprovement of, qualified property thathas already been placed in service by theindividual or RPE, such addition or im-provement is treated as separate qualifiedproperty first placed in service on the datesuch addition or improvement is placed inservice for purposes of paragraph (c)(2) ofthis section.

(iii) Adjustments under sections 734(b)and 743(b). Basis adjustments under sec-

tions 734(b) and 743(b) are not treated asqualified property.

(iv) Property acquired at end of year.Property is not qualified property if theproperty is acquired within 60 days of theend of the taxable year and disposed ofwithin 120 days without having been usedin a trade or business for at least 45 daysprior to disposition, unless the taxpayerdemonstrates that the principal purpose ofthe acquisition and disposition was a pur-pose other than increasing the section199A deduction.

(2) Depreciable period—(i) In general.The term depreciable period means, withrespect to qualified property of a trade orbusiness, the period beginning on the datethe property was first placed in service bythe individual or RPE and ending on thelater of—

(A) The date that is 10 years after suchdate, or

(B) The last day of the last full year inthe applicable recovery period that wouldapply to the property under section 168(c),regardless of any application of section168(g).

(ii) Additional first-year depreciationunder section 168. The additional first-year depreciation deduction allowable un-der section 168 (for example, under sec-tion 168(k) or (m)) does not affect theapplicable recovery period under thisparagraph for the qualified property.

(iii) Qualified property acquired intransactions subject to section 1031 orsection 1033. For purposes of paragraph(c)(2)(i) of this section, qualified propertythat is acquired in a like-kind exchange, asdefined in § 1.168(i)–6(b)(11), or in aninvoluntary conversion, as defined in§ 1.168(i)–6(b)(12), is treated as replace-ment MACRS property as defined in§ 1.168(i)–6(b)(1). For purposes of para-graph (c)(2)(i) of this section, the date onwhich the replacement MACRS propertywas first placed in service by the individ-ual or RPE is determined as follows—

(A) Except as provided in paragraph(c)(2)(iii)(C) of this section, the date theexchanged basis, as defined in § 1.168(i)–6(b)(7), in the replacement MACRS prop-erty was first placed in service by the tradeor business is the date on which the relin-quished property was first placed in ser-vice by the individual or RPE; and


(B) Except as provided in paragraph(c)(2)(iii)(C) of this section, the date theexcess basis, as defined in § 1.168(i)–6(b)(8), in the replacement MACRS prop-erty was first placed in service by theindividual or RPE is the date on which thereplacement MACRS property was firstplaced in service by the individual orRPE; or

(C) If the individual or RPE makes anelection under § 1.168(i)–6(i)(1) (theelection not to apply § 1.168(i)–6)), thedate the exchanged basis and excess basisin the replacement MACRS property wasfirst placed in service by the trade or busi-ness is the date on which the replacementMACRS property was first placed in ser-vice by the individual or RPE.

(iv) Qualified property acquired intransactions subject to section 168(i)(7).If an individual or RPE acquires qualifiedproperty in a transaction described in sec-tion 168(i)(7)(B) (pertaining to treatmentof transferees in certain nonrecognitiontransactions), the individual or RPE mustdetermine the date on which the qualifiedproperty was first placed in service forpurposes of paragraph (c)(2)(i) of this sec-tion as follows—

(A) For the portion of the transferee’sunadjusted basis in the qualified propertythat does not exceed the transferor’s un-adjusted basis in such property, the datesuch portion was first placed in service bythe transferee is the date on which thetransferor first placed the qualified prop-erty in service; and

(B) For the portion of the transferee’sunadjusted basis in the qualified propertythat exceeds the transferor’s unadjustedbasis in such property, such portion istreated as separate qualified property thatthe transferee first placed in service on thedate of the transfer.

(3) Unadjusted basis immediately afteracquisition. The term unadjusted basisimmediately after acquisition (UBIA)means the basis on the placed in servicedate of the property as determined undersection 1012 or other applicable sectionsof Chapter 1, including subchapters O (re-lating to gain or loss on dispositions ofproperty), C (relating to corporate distri-butions and adjustments), K (relating topartners and partnerships), and P (relatingto capital gains and losses). UBIA is de-termined without regard to any adjust-

ments described in section 1016(a)(2) or(3), to any adjustments for tax creditsclaimed by the individual or RPE (forexample, under section 50(c)), or to anyadjustments for any portion of the basisfor which the individual or RPE haselected to treat as an expense (for exam-ple, under sections 179, 179B, or 179C).However, UBIA does reflect the reductionin basis for the percentage of the individ-ual’s or RPE’s use of property for thetaxable year other than in the trade orbusiness.

(4) Examples. The provisions of thisparagraph (c) are illustrated by the follow-ing examples:

Example 1 to paragraph (c)(4). (i) On January 5,2012, A purchases for $1 million and places inservice Real Property X in A’s trade or business. A’strade or business is not an SSTB. A’s basis in RealProperty X under section 1012 is $1 million. RealProperty X is qualified property within the meaningof section 199A(b)(6). As of December 31, 2018,A’s basis in Real Property X, as adjusted undersection 1016(a)(2) for depreciation deductions undersection 168(a), is $821,550.

(ii) For purposes of section 199A(b)(2)(B)(ii)and this section, A’s UBIA of Real Property X is its$1 million cost basis under section 1012, regardlessof any later depreciation deductions under section168(a) and resulting basis adjustments under section1016(a)(2).

Example 2 to paragraph (c)(4). The facts are thesame as in Example 1 of this paragraph (c)(4),except that on January 15, 2019, A enters into alike-kind exchange under section 1031 in which Aexchanges Real Property X for Real Property Y.Real Property Y has a value of $1 million. No cashor other property is involved in the exchange. As ofJanuary 15, 2019, A’s basis in Real Property X, asadjusted under section 1016(a)(2) for depreciationdeductions under section 168(a), is $820,482. A’sUBIA in Real Property Y is $820,482 as determinedunder section 1031(d) (A’s adjusted basis in RealProperty X carried over to Real Property Y). Pursu-ant to paragraph (c)(2)(iii)(A) of this section, forpurposes of determining the depreciable period ofReal Property Y is first placed in service by A onJanuary 5, 2012, which is the date on which PropertyX was first placed in service by A.

Example 3 to paragraph (c)(4). (i) C operates atrade or business that is not an SSTB as a soleproprietorship. On January 5, 2011, C purchases for$10,000 and places in service Machinery Y in C’strade or business. C’s basis in Machinery Y undersection 1012 is $10,000. Machinery Y is qualifiedproperty within the meaning of section 199A(b)(6).Assume that Machinery Y’s recovery period undersection 168(c) is 10 years, and C depreciates Ma-chinery Y under the general depreciation systemby using the straight-line depreciation method, a10-year recovery period, and the half-year conven-tion. As of December 31, 2018, C’s basis in Ma-chinery Y, as adjusted under section 1016(a)(2)for depreciation deductions under section 168(a),

is $2,500. On January 1, 2019, C incorporates thesole proprietorship and elects to treat the newlyformed entity as an S corporation for Federalincome tax purposes. C contributes Machinery Yand all other assets of the trade or business to theS corporation in a non-recognition transaction un-der section 351. The S corporation immediatelyplaces all the assets in service.

(ii) For purposes of section 199A(b)(2)(B)(ii)and this section, C’s UBIA of Machinery Y from2011 through 2018 is its $10,000 cost basis undersection 1012, regardless of any later depreciationdeductions under section 168(a) and resulting basisadjustments under section 1016(a)(2). Pursuant toparagraph (c)(3) of this section, S corporation’sUBIA of Machinery Y is determined under the ap-plicable rules of subchapter C as of date the Scorporation places it in service. Therefore, the Scorporation’s UBIA of Machinery Y is $2,500, thebasis of the property under section 362 at the timethe S corporation places the property in service.Pursuant to paragraph (c)(2)(iv)(A) of this section,for purposes of determining the depreciable periodof Machinery Y, the S corporation’s placed in ser-vice date will be the date C originally placed theproperty in service in 2011. Therefore, Machinery Ymay be qualified property of the S corporation (as-suming it continues to be used in the business) for2019 and 2020 and will not be qualified property ofthe S corporation after 2020, because its depreciableperiod will have expired.

(d) Effective/ applicability date—(1)General rule. Except as provided in para-graph (d)(2) of this section, the provisionsof this section apply to taxable years end-ing after the date the Treasury decisionadopting these regulations as final regula-tions is published in the Federal Register.However, taxpayers may rely on the rulesof this section until the date the Treasurydecision adopting these regulations as fi-nal regulations is published in the FederalRegister.

(2) Exceptions-(i) Anti-abuse rules.The provisions of paragraph (c)(1)(iv) ofthis section apply to taxable years endingafter December 22, 2017.

(ii) Non-calendar year RPE. For pur-poses of determining QBI, W–2 wages,and UBIA of qualified property, if an in-dividual receives any of these items froman RPE with a taxable year that beginsbefore January 1, 2018 and ends afterDecember 31, 2017, such items are treatedas having been incurred by the individualduring the individual’s taxable year inwhich or with which such RPE taxableyear ends.



§ 1.199A–3 Qualified business income,qualified REIT dividends, and qualifiedPTP income.

(a) In general. This section providesrules on the determination of a trade orbusiness’s QBI, as well as the determina-tion of qualified REIT dividends and qual-ified PTP income. The provisions of thissection apply solely for purposes of sec-tion 199A of the Internal Revenue Code(Code). Paragraph (b) of this section pro-vides rules for the determination of QBI.Paragraph (c) of this section providesrules for the determination of qualifiedREIT dividends and qualified PTP in-come. QBI must be determined and re-ported for each trade or business by theindividual or RPE that directly conductsthe trade or business before applying theaggregation rules of § 1.199A–4.

(b) Definition of qualified business in-come—(1) In general. For purposes ofthis section, the term qualified businessincome (QBI) means, for any taxable year,the net amount of qualified items of in-come, gain, deduction, and loss with re-spect to any trade or business of the tax-payer as described in paragraph (b)(2) ofthis section, provided the other require-ments of this section and section 199A aresatisfied (including, for example, the ex-clusion of income not effectively con-nected with a United States trade or busi-ness).

(i) Section 751 gain. With respect to apartnership, if section 751(a) or (b) ap-plies, then gain or loss attributable to as-sets of the partnership giving rise to ordi-nary income under section 751(a) or (b) isconsidered attributable to the trades orbusinesses conducted by the partnership,and is taken into account for purposes ofcomputing QBI.

(ii) Guaranteed payments for the use ofcapital. Income attributable to a guaran-teed payment for the use of capital is notconsidered to be attributable to a trade orbusiness, and thus is not taken into ac-count for purposes of computing QBI;however, the partnership’s deduction as-sociated with the guaranteed payment willbe taken into account for purposes ofcomputing QBI if such deduction is prop-erly allocable to the trade or business andis otherwise deductible for Federal in-come tax purposes.

(iii) Section 481 adjustments. Section481 adjustments (whether positive or neg-ative) are taken into account for purposesof computing QBI to the extent that therequirements of this section and section199A are otherwise satisfied, but only ifthe adjustment arises in taxable years end-ing after December 31, 2017.

(iv) Previously disallowed losses. Gen-erally, previously disallowed losses or de-ductions (including under sections 465,469, 704(d), and 1366(d)) allowed in thetaxable year are taken into account forpurposes of computing QBI. However,losses or deductions that were disallowed,suspended, limited, or carried over fromtaxable years ending before January 1,2018 (including under sections 465, 469,704(d), and 1366(d)), are not taken intoaccount in a later taxable year for pur-poses of computing QBI.

(v) Net operating losses. Generally, adeduction under section 172 for a net op-erating loss is not considered with respectto a trade or business and therefore, is nottaken into account in computing QBI.However, to the extent that the net oper-ating loss is disallowed under section461(l), the net operating loss is taken intoaccount for purposes of computing QBI.

(2) Qualified items of income, gain,deduction, and loss – (i) In general. Theterm qualified items of income, gain, de-duction, and loss means items of grossincome, gain, deduction, and loss to theextent such items are—

(A) Effectively connected with theconduct of a trade or business within theUnited States (within the meaning of sec-tion 864(c), determined by substituting“trade or business (within the meaning ofsection 199A)” for “nonresident alien in-dividual or a foreign corporation” or for“a foreign corporation” each place it ap-pears), and

(B) Included or allowed in determiningtaxable income for the taxable year.

(ii) Items not taken into account. Not-withstanding paragraph (b)(2)(i) of thissection and in accordance with section199A(c)(3)(B), the following items arenot taken into account as a qualified itemof income, gain, deduction, or loss:

(A) Any item of short-term capitalgain, short-term capital loss, long-termcapital gain, long-term capital loss, in-cluding any item treated as one of such

items, such as gains or losses under sec-tion 1231 which are treated as capitalgains or losses.

(B) Any dividend, income equivalentto a dividend, or payment in lieu of divi-dends described in section 954(c)(1)(G).Any amount described in section 1385(a)(1)is not treated as described in this clause.

(C) Any interest income other than in-terest income which is properly allocableto a trade or business. For purposes ofsection 199A and this section, interest in-come attributable to an investment ofworking capital, reserves, or similar ac-counts is not properly allocable to a tradeor business.

(D) Any item of gain or loss describedin section 954(c)(1)(C) (transactions incommodities) or section 954(c)(1)(D) (ex-cess foreign currency gains) applied ineach case by substituting “trade or busi-ness” for “controlled foreign corporation.”

(E) Any item of income, gain, deduc-tion, or loss taken into account under sec-tion 954(c)(1)(F) (income from notionalprincipal contracts) determined withoutregard to section 954(c)(1)(F)(ii) andother than items attributable to notionalprincipal contracts entered into in transac-tions qualifying under section 1221(a)(7).

(F) Any amount received from an an-nuity which is not received in connectionwith the trade or business.

(G) Any qualified REIT dividends asdefined in paragraph (c)(2) of this sectionor qualified PTP income as defined inparagraph (c)(3) of this section.

(H) Reasonable compensation receivedby a shareholder from an S corporation.However, the S corporation’s deductionfor such reasonable compensation will re-duce QBI if such deduction is properlyallocable to the trade or business and isotherwise deductible for Federal incometax purposes.

(I) Any guaranteed payment describedin section 707(c) received by a partner forservices rendered with respect to the tradeor business, regardless of whether thepartner is an individual or an RPE. How-ever, the partnership’s deduction for suchguaranteed payment will reduce QBI ifsuch deduction is properly allocable to thetrade or business and is otherwise deduct-ible for Federal income tax purposes.

(J) Any payment described in section707(a) received by a partner for services


rendered with respect to the trade or busi-ness, regardless of whether the partner isan individual or an RPE. However, thepartnership’s deduction for such paymentwill reduce QBI if such deduction is prop-erly allocable to the trade or business andis otherwise deductible for Federal in-come tax purposes.

(3) Commonwealth of Puerto Rico. Forthe purposes of determining QBI, the termUnited States includes the Common-wealth of Puerto Rico in the case of anytaxpayer with QBI for any taxable yearfrom sources within the Commonwealthof Puerto Rico, if all of such receipts aretaxable under section 1 for such taxableyear. This paragraph only applies as pro-vided in section 199A(f)(1)(C).

(4) Wages. Expenses for all wages paid(or incurred in the case of an accrualmethod taxpayer) must to be taken intoaccount in computing QBI (if the require-ments of this section and section 199A aresatisfied) regardless of the application ofthe W–2 wage limitation described in§ 1.199A–1(d)(2)(iv).

(5) Allocation of items among directly-conducted trades or businesses— If anindividual or an RPE directly conductsmultiple trades or businesses, and hasitems of QBI which are properly attribut-able to more than one trade or business,the individual or RPE must allocate thoseitems among the several trades or busi-nesses to which they are attributable usinga reasonable method based on all the factsand circumstances. The individual or RPEmay use a different reasonable method fordifferent items of income, gain, deduction,and loss. The chosen reasonable methodfor each item must be consistently appliedfrom one taxable year to another and mustclearly reflect the income and expenses ofeach trade or business. The overall com-bination of methods must also be reason-able based on all facts and circumstances.The books and records maintained for atrade or business must be consistent withany allocations under this paragraph.

(c) Qualified REIT Dividends andQualified PTP Income—(1) In general.Qualified REIT dividends and qualifiedPTP income are the sum of qualified REITdividends as defined in § 1.199A–3(c)(2)earned directly or through an RPE and thenet amount of qualified PTP income as

defined in § 1.199A–3(c)(3) earned di-rectly or through an RPE.

(2) Qualified REIT dividend—(i) Theterm qualified REIT dividend means anydividend from a REIT received during thetaxable year which—

(A) Is not a capital gain dividend, asdefined in section 857(b)(3), and

(B) Is not qualified dividend income, asdefined in section 1(h)(11).

(ii) A REIT dividend is not a qualifiedREIT dividend if the stock with respect towhich it is received is held for fewer than45 days, taking into account the principlesof section 246(c)(3) and (4).

(3) Qualified PTP income—(i) In gen-eral. The term qualified PTP incomemeans the sum of—

(A) The net amount of such taxpayer’sallocable share of income, gain, deduc-tion, and loss from a PTP as defined insection 7704(b) that is not taxed as a cor-poration under section 7704(a), plus

(B) Any gain or loss attributable toassets of the PTP giving rise to ordinaryincome under section 751(a) or (b) that isconsidered attributable to the trades orbusinesses conducted by the partnership.

(ii) Special rules. The rules applicableto the determination of QBI described inparagraph (b) of this section also apply tothe determination of a taxpayer’s alloca-ble share of income, gain, deduction, andloss from a PTP. An individual’s allocableshare of income from a PTP, and anysection 751 gain or loss is qualified PTPincome only to the extent the items meetthe qualifications of section 199A and thissection including the requirement that theitem is included or allowed in determiningtaxable income for the taxable year, andthe requirement that the item be effec-tively connected with the conduct of atrade or business within the United States.For example, if an individual owns aninterest in a PTP, and for the taxable yearis allocated a distributive share of net losswhich is disallowed under the passive ac-tivity rules of section 469, such loss is nottaken into account for purposes of section199A. Furthermore, each PTP is requiredto determine its qualified PTP income foreach trade or business and report that in-formation to its owners as described in§ 1.199A–6(b)(3).

(d) Effective/ applicability date—(1)General rule. Except as provided in para-

graph (d)(2) of this section, the provisionsof this section apply to taxable years end-ing after the date the Treasury decisionadopting these regulations as final regula-tions is published in the Federal Register.However, taxpayers may rely on the rulesof this section until the date the Treasurydecision adopting these regulations as fi-nal regulations is published in the FederalRegister.

(2) Exceptions-(i) Anti-abuse rules.The provisions of paragraph (c)(2)(ii) ofthis section apply to taxable years endingafter December 22, 2017.

(ii) Non -calendar year RPE. For pur-poses of determining QBI, W–2 wages,and UBIA of qualified property, if an in-dividual receives any of these items froman RPE with a taxable year that beginsbefore January 1, 2018 and ends afterDecember 31, 2017, such items are treatedas having been incurred by the individualduring the individual’s taxable year inwhich or with which such RPE taxableyear ends.


§ 1.199A–4 Aggregation.

(a) Scope and purpose. An individualor Relevant Passthrough Entity (RPE)may be engaged in more than one trade orbusiness. Except as provided in this sec-tion, each trade or business is a separatetrade or business for purposes of applyingthe limitations described in § 1.199A–1(d)(2)(iv). This section sets forth rules toallow individuals to aggregate trades orbusinesses, treating the aggregate as a sin-gle trade or business for purposes ofapplying the limitations described in§ 1.199A–1(d)(2)(iv). Trades or busi-nesses may be aggregated only to the ex-tent provided in this section, but aggrega-tion by taxpayers is not required.

(b) Aggregation rules—(1) Generalrule. Except as provided in paragraph(b)(3) of this section, trades or businessesmay be aggregated only if an individualcan demonstrate that—

(i) The same person or group of per-sons, directly or indirectly, owns 50 per-cent or more of each trade or business tobe aggregated, meaning in the case ofsuch trades or businesses owned by an Scorporation, 50 percent or more of the


issued and outstanding shares of the cor-poration, or, in the case of such trades orbusinesses owned by a partnership, 50percent or more of the capital or profits inthe partnership;

(ii) The ownership described in para-graph (b)(1)(i) of this section exists for amajority of the taxable year in which theitems attributable to each trade or businessto be aggregated are included in income;

(iii) All of the items attributable to eachtrade or business to be aggregated arereported on returns with the same taxableyear, not taking into account short taxableyears;

(iv) None of the trades or businesses tobe aggregated is a specified service trade orbusiness (SSTB) as defined in § 1.199A–5;and

(v) The trades or businesses to be ag-gregated satisfy at least two of the follow-ing factors (based on all of the facts andcircumstances):

(A) The trades or businesses provideproducts and services that are the same orcustomarily offered together.

(B) The trades or businesses share fa-cilities or share significant centralizedbusiness elements, such as personnel, ac-counting, legal, manufacturing, purchas-ing, human resources, or informationtechnology resources.

(C) The trades or businesses are oper-ated in coordination with, or relianceupon, one or more of the businesses in theaggregated group (for example, supplychain interdependencies).

(2) Operating rules. An individual mayaggregate trades or businesses operateddirectly and the individual’s share of QBI,W–2 wages, and UBIA of qualified prop-erty from trades or businesses operatedthrough RPEs. Multiple owners of an RPEneed not aggregate in the same manner.For those trades or businesses directly op-erated by the individual, the individualcomputes QBI, W–2 wages, and UBIA ofqualified property for each trade or busi-ness before applying these aggregationrules. If an individual aggregates multipletrades or businesses under paragraph(b)(1) of this section, the individual mustcombine the QBI, W–2 wages, and UBIAof qualified property for all aggregatedtrades or businesses for purposes of ap-plying the W–2 wage and UBIA of qual-

ified property limitations described in§ 1.199A–1(d)(2)(iv).

(3) Family attribution. For purposes ofdetermining ownership under paragraph(b)(1)(i) of this section an individual isconsidered as owning the interest in eachtrade or business owned, directly or indi-rectly, by or for—

(i) The individual’s spouse (other thana spouse who is legally separated from theindividual under a decree of divorce orseparate maintenance), and

(ii) The individual’s children, grand-children, and parents.

(c) Reporting and consistency—(1) Ingeneral. Once an individual chooses toaggregate two or more trades or busi-nesses, the individual must consistentlyreport the aggregated trades or businessesin all subsequent taxable years. However,an individual may add a newly created ornewly acquired (including through non-recognition transfers) trade or business toan existing aggregated trade or business ifthe requirements of paragraph (b)(1) ofthis section are satisfied. In a subsequentyear, if there is a change in facts andcircumstances such that an individual’sprior aggregation of trades or businessesno longer qualifies for aggregation underthe rules of this section, then the trades orbusinesses will no longer be aggregatedwithin the meaning of this section, and theindividual must reapply the rules in para-graph (b)(1) of this section to determine anew permissible aggregation (if any).

(2) Individual disclosure—(i) Requiredannual disclosure. For each taxable year,individuals must attach a statement totheir returns identifying each trade orbusiness aggregated under paragraph(b)(1) of this section. The statement mustcontain —

(A) A description of each trade or busi-ness;

(B) The name and EIN of each entity inwhich a trade or business is operated;

(C) Information identifying any tradeor business that was formed, ceased oper-ations, was acquired, or was disposed ofduring the taxable year; and

(D) Such other information as theCommissioner may require in forms, in-structions, or other published guidance.

(ii) Failure to disclose. If an individualfails to attach the statement required inparagraph (c)(2)(i) of this section, the

Commissioner may disaggregate the indi-vidual’s trades or businesses.

(d) Examples. The following examplesillustrate the principles of this section. Forpurposes of these examples, assume thetaxpayer is a United States citizen, allindividuals and RPEs use a calendar tax-able year, there are no ownership changesduring the taxable year, all trades or busi-nesses satisfy the requirements under sec-tion 162, all tax items are effectively con-nected to a trade or business within theUnited States within the meaning of sec-tion 864(c), and none of the trades orbusinesses is an SSTB within the meaningof § 1.199A–5. Except as otherwise spec-ified, a single letter denotes an individualtaxpayer.

Example 1 to paragraph (d). (i) Facts. A whollyowns and operates a catering business and a restau-rant through separate disregarded entities. The cater-ing business and the restaurant share centralizedpurchasing to obtain volume discounts and a central-ized accounting office that performs all of the book-keeping, tracks and issues statements on all of thereceivables, and prepares the payroll for each busi-ness. A maintains a website and print advertisingmaterials that reference both the catering businessand the restaurant. A uses the restaurant kitchen toprepare food for the catering business. The cateringbusiness employs its own staff and owns equipmentand trucks that are not used or associated with therestaurant.

(ii) Analysis. Because the restaurant and cateringbusiness are held in disregarded entities, A will betreated as operating each of these businesses directlyand thereby satisfies paragraph (b)(1)(i) of this section.Under paragraph (b)(1)(v) of this section, A satisfiesthe following factors: Paragraph (b)(1)(v)(A) is met asboth businesses offer prepared food to customers; andparagraph (b)(1)(v)(B) of this section is met becausethe two businesses share the same kitchen facilities inaddition to centralized purchasing, marketing, andaccounting. Having satisfied paragraph (b)(1)(i)through(v) of this section, A may treat the cateringbusiness and the restaurant as a single trade or businessfor purposes of applying § 199A–1(d).

Example 2 to paragraph (d). (i) Facts. Assumethe same facts as in Example 1 of this paragraph, butthe catering and restaurant businesses are owned inseparate partnerships and A, B, C, and D each owna 25% interest in the capital and profits of each of thetwo partnerships. A, B, C, and D are unrelated.

(ii) Analysis. Because under paragraph (b)(1)(i) ofthis section A, B, C, and D together own more than50% of the capital and profits in each of the twopartnerships, they may each treat the catering businessand the restaurant as a single trade or business forpurposes of applying § 1.199A–1(d).

Example 3 to paragraph (d). (i) Facts. W owns a75% interest in S1, an S corporation, and a 75%interest in the capital and profits of PRS, a partner-ship. S1 manufactures clothing and PRS is a retailpet food store. W manages S1 and PRS.


(ii) Analysis. W owns more than 50% of thestock of S1 and more than 50% of the capital andprofits of PRS thereby satisfying paragraph(b)(1)(i) of this section. Although W manages bothS1 and PRS, W is not able to satisfy the require-ments of paragraph (b)(1)(v) of this section as thetwo businesses do not provide goods or servicesthat are the same or customarily offered together;there are no significant centralized business ele-ments; and no facts indicate that the businesses areoperated in coordination with, or reliance upon,one another. W must treat S1 and PRS as separatetrades or businesses for purposes of applying§ 1.199A–1(d).

Example 4 to paragraph (d). (i) Facts. E owns a60% interest in the capital and profits of each of fourpartnerships (PRS1, PRS2, PRS3, and PRS4). Eachpartnership operates a hardware store. A team ofexecutives oversees the operations of all four of thebusinesses and controls the policy decisions involv-ing the business as a whole. Human resources andaccounting are centralized for the four businesses. Ereports PRS1, PRS3, and PRS4 as an aggregatedtrade or business under paragraph (b)(1) of this sec-tion and reports PRS2 as a separate trade or business.Only PRS2 generates a net taxable loss.

(ii) Analysis. E owns more than 50% of thecapital and profits of each partnership thereby satis-fying paragraph (b)(1)(i) of this section. Under para-graph (b)(1)(v) of this section, the following factorsare satisfied: Paragraph (b)(1)(v)(A) of this sectionbecause each partnership operates a hardware store;and paragraph (b)(1)(v)(B) of this section becausethe businesses share accounting and human resourcefunctions. E’s decision to aggregate only PRS1,PRS3, and PRS4 into a single trade or business forpurposes of applying § 1.199A–1(d) is permissible.The loss from PRS2 will be netted against the ag-gregate profits of PRS1, PRS3 and PRS4 pursuant to§ 1.199A–1(d)(2)(iii).

Example 5 to paragraph (d). (i) Facts. Assumethe same facts as Example 4 of this paragraph, andthat F owns a 10% interest in the capital and profitsof PRS1, PRS2, PRS3, and PRS4.

(ii) Analysis. Because under paragraph (b)(1)(i)of this section E owns more than 50% of the capitaland profits in the four partnerships, F may aggregatePRS 1, PRS2, PRS3, and PRS4 as a single trade orbusiness for purposes of applying § 1.199A–1(d),provided that F can demonstrate that the ownershiptest is met by E.

Example 6 to paragraph (d). (i) Facts. D owns75% of the stock of S1, S2, and S3, each of which isan S corporation. Each S corporation operates agrocery store in a separate state. S1 and S2 sharecentralized purchasing functions to obtain volumediscounts and a centralized accounting office thatperforms all of the bookkeeping, tracks and issuesstatements on all of the receivables, and prepares thepayroll for each business. S3 is operated indepen-dently from the other businesses.

(ii) Analysis. D owns more than 50% of the stockof each S corporation thereby satisfying paragraph(b)(1)(i) of this section. Under paragraph (b)(1)(v) ofthis section, the grocery stores satisfy paragraph(b)(1)(v)(A) of this section because they are in thesame trade or business. Only S1 and S2 satisfyparagraph (b)(1)(v)(B) of this section because of

their centralized purchasing and accounting offices.D is only able to show that the requirements ofparagraph (b)(1)(v)(B) of this section are satisfiedfor S1 and S2; therefore, D only may aggregate S1and S2 into a single trade or business for purposes of§ 1.199A–1(d). D must report S3 as a separate tradeor business for purposes of applying § 1.199A–1(d).

Example 7 to paragraph (d). (i) Facts. Assumethe same facts as Example 6 of this paragraph excepteach store is independently operated and S1 and S2do not have centralized purchasing or accountingfunctions.

(ii) Analysis. Although the stores provide thesame products and services within the meaning ofparagraph (b)(1)(v)(A) of this section, D cannotshow that another factor under paragraph (b)(1)(v) ofthis section is present. Therefore, D must report S1,S2, and S3 as separate trades or businesses for pur-poses of applying § 1.199A–1(d).

Example 8 to paragraph (d). (i) Facts. G owns80% of the stock in S1, an S corporation and 80% ofthe capital and profits in LLC1 and LLC2, each ofwhich is a partnership for Federal tax purposes.LLC1 manufactures and supplies all of the widgetssold by LLC2. LLC2 operates a retail store that sellsLLC1’s widgets. S1 owns the real property leased toLLC1 and LLC2 for use by the factory and retailstore. The entities share common advertising andmanagement.

(ii) Analysis. G owns more than 50% of the stockof S1 and more than 50% of the capital and profits inLLC1 and LLC2 thus satisfying paragraph (b)(1)(i)of this section. LLC1, LLC2, and S1 share signifi-cant centralized business elements and are operatedin coordination with, or in reliance upon, one ormore of the businesses in the aggregated group. Gcan treat the business operations of LLC1 and LLC2as a single trade or business for purposes of applying§ 1.199A–1(d). S1 is eligible to be included in theaggregated group because it leases property to atrade or business within the aggregated trade orbusiness as described in § 1.199A–1(b)(13) andmeets the requirements of paragraph (b)(1) of thissection.

Example 9 to paragraph (d). (i) Assume theFacts. Same facts as Example 8 of this paragraph,except G owns 80% of the stock in S1 and 20% ofthe capital and profits in each of LLC1 and LLC2. B,G’s son, owns a majority interest in LLC2, and M,G’s mother, owns a majority interest in LLC1. Bdoes not own an interest in S1 or LLC1, and M doesnot own an interest in S1 or LLC2.

(ii) Analysis. Under the rules in paragraph (b)(3)of this section, B and M’s interest in LLC2 andLLC1, respectively, are attributable to G and G istreated as owning a majority interest in LLC2 andLLC; G thus satisfies paragraph (b)(1)(i) of thissection. G may aggregate his interests in LLC1,LLC2, and S1 as a single trade or business forpurposes of applying § 1.199A–1(d). Under para-graph (b)(3) of this section, S1 is eligible to beincluded in the aggregated group because it leasesproperty to a trade or business within the aggregatedtrade or business as described in § 1.199A–1(b)(13)and meets the requirements of paragraph (b)(1) ofthis section.

Example 10 to paragraph (d). (i) Facts. F ownsa 75% interest and G owns a 5% interest in the

capital and profits of five partnerships (PRS1-PRS5). H owns a 10% interest in the capital andprofits of PRS1 and PRS2. Each partnership oper-ates a restaurant and each restaurant separatelyconstitutes a trade or business for purposes ofsection 162. G is the executive chef of all of therestaurants and as such he creates the menus andorders the food supplies.

(ii) Analysis. F owns more than 50% of capitaland profits in the partnerships thereby satisfyingparagraph (b)(1)(i) of this section. Under paragraph(b)(1)(v) of this section, the restaurants satisfy para-graph (b)(1)(v)(A) of this section because they are inthe same trade or business, and paragraph (b)(1)(v)(B) of this section is satisfied as G is the executivechef of all of the restaurants and the businesses sharea centralized function for ordering food and sup-plies. F can show the requirements under para-graph (b)(1) of this section are satisfied as to all ofthe restaurants. Because F owns a majority interestin each of the partnerships, G can demonstrate thatparagraph (b)(1)(i) of this section is satisfied. Gcan also aggregate all five restaurants into a singletrade or business for purposes of applying§ 1.199A–1(d). H, however, only owns an interestin PRS1 and PRS2. Like G, H satisfies paragraph(b)(1)(i) of this section because F owns a majorityinterest. H can, therefore, aggregate PRS1 andPRS2 into a single trade or business for purposesof applying § 1.199A–1(d).

Example 11 to paragraph (d). (i) Facts. H, J, K,and L own interests in PRS1 and PRS2, each apartnership, and S1 and S2, each an S corporation.H, J, K and L also own interests in C, an entitytaxable as a C corporation. H owns 30%, J owns20%, K owns 5%, L owns 45% of each of the fiveentities. All of the entities satisfy 2 of the 3 factorsunder paragraph (b)(1)(v) of this section. For pur-poses of section 199A the taxpayers report the fol-lowing aggregated trades or businesses: H aggre-gates PRS1 and S1 together and aggregates PRS2and S2 together; J aggregates PRS1, S1 and S2together and reports PRS2 separately; K aggregatesPRS1 and PRS2 together and aggregates S1 and S2together; and L aggregates S1, S2, and PRS2 to-gether and reports PRS1 separately. C cannot beaggregated.

(ii) Analysis. Under paragraph (b)(1)(i) of thissection, because H, J, and K together own a majorityinterest in PRS1, PRS2, S1, and S2, H, J, K, and Lare permitted to aggregate under paragraph (b)(1).Further, the aggregations reported by the taxpayersare permitted, but not required for each of H, J, K,and L. C’s income is not eligible for the section199A deduction and it cannot be aggregated forpurposes of applying § 1.199A–1(d).

Example 12 to paragraph (d). (i) Facts. L owns60% of the profits and capital interests in PRS1, apartnership, a business that sells non-food items togrocery stores. L also owns 55% of the profits andcapital interests in PRS2, a partnership, which ownsand operates a distribution trucking business. Thepredominant portion of PRS2’s business is transport-ing goods for PRS1.

(ii) Analysis. L is able to meet (b)(1)(i) as themajority owner of PRS1 and PRS2. Under paragraph(b)(1)(v) of this section, L is only able to show theoperations of PRS1 and PRS2 are operated in reli-


ance of one another under paragraph (b)(1)(v)(C) ofthis section. For purposes of applying § 1.199A–1(d), L must treat PRS1 and PRS2 as separate tradesor businesses.

Example 13 to paragraph (d). (i) Facts. C ownsa majority interest in a sailboat racing team and alsoowns an interest in PRS1 which operates a marina.PRS1 is a trade or business under section 162, butthe sailboat racing team is not a trade or businesswithin the meaning of section 162.

(ii) Analysis. C has only one trade or business forpurposes of section 199A and, therefore, cannot ag-gregate the interest in the racing team with PRS1under paragraph (b)(1) of this section.

Example 14 to paragraph (d). (i) Facts. Trustwholly owns LLC1, LLC2, and LLC3. LLC1 oper-ates a trucking company that delivers lumber andother supplies sold by LLC2. LLC2 operates a lum-ber yard and supplies LLC3 with building materials.LLC3 operates a construction business. LLC1,LLC2, and LLC3 have a centralized human re-sources department, payroll, and accounting depart-ment.

(ii) Analysis. Because Trust owns 100% of theinterests in LLC1, LLC2, and LLC3, Trust satisfiesparagraph (b)(1)(i) of this section. Trust can alsoshow that it satisfies paragraph (b)(1)(v)(B) of thissection as the trades or businesses have a centralizedhuman resources department, payroll, and account-ing department. Trust also can show is meets para-graph (b)(1)(v)(C) of this section as the trades orbusinesses are operated in coordination, or relianceupon, one or more in the aggregated group. Trust canaggregate LLC1, LLC2, and LLC3 for purposes ofapplying § 1.199A–1(d).

(e) Effective/ applicability date—(1)General rule. Except as provided in para-graph (e)(2) of this section, the provisionsof this section apply to taxable years end-ing after the date the Treasury decisionadopting these regulations as final regula-tions is published in the Federal Register.However, taxpayers may rely on the rulesof this section until the date the Treasurydecision adopting these regulations as fi-nal regulations is published in the FederalRegister.

(2) Exception for non-calendar yearRPE. For purposes of determining QBI,W–2 wages, and UBIA of qualified prop-erty, if an individual receives any of theseitems from an RPE with a taxable yearthat begins before January 1, 2018 andends after December 31, 2017, such itemsare treated as having been incurred by theindividual during the individual’s taxableyear in which or with which such RPEtaxable year ends.


§ 1.199A–5 Specified service trades orbusinesses and the trade or business ofperforming services as an employee.

(a) Scope and Effect—(1) Scope. Thissection provides guidance on specifiedservice trades or businesses (SSTBs) andthe trade or business of performing ser-vices as an employee. This paragraph (a)describes the effect of being an SSTB orthe trade or business of performing ser-vices as an employee. Paragraph (b) ofthis section provides definitional guidanceon SSTBs. Paragraph (c) of this sectionprovides special rules related to SSTBs.Paragraph (d) of this section providesguidance on the trade or business of per-forming services as an employee. The pro-visions of this section apply solely forpurposes of section 199A of the InternalRevenue Code (Code).

(2) Effect of being an SSTB. If a tradeor business is an SSTB, no QBI, W–2wages, or UBIA of qualified propertyfrom the SSTB may be taken into accountby any individual whose taxable incomeexceeds the phase-in range as defined in§ 1.199A–1(b)(3), even if the item is de-rived from an activity that is not itself aspecified service activity. If a trade orbusiness conducted by a relevant pass-through entity (RPE) is an SSTB, thislimitation applies to any direct or indirectindividual owners of the business, regard-less of whether the owner is passive orparticipated in any specified service activ-ity. However, the SSTB limitation doesnot apply to individuals with taxable in-come below the threshold amount as de-fined in § 1.199A–1(b)(11). A phase-inrule, provided in § 1.199A–1(d)(2), ap-plies to individuals with taxable incomewithin the phase-in range, allowing themto take into account a certain “applicablepercentage” of QBI, W–2 wages, andUBIA of qualified property from anSSTB. A direct or indirect owner of atrade or business engaged in the perfor-mance of a specified service is engaged inthe performance of the specified servicefor purposes of section 199A and this sec-tion, regardless of whether the owner ispassive or participated in the specified ser-vice activity.

(3) Trade or business of performingservices as an employee. The trade orbusiness of performing services as an em-

ployee is not a trade or business for pur-poses of section 199A and the regulationsthereunder. Therefore, no items of in-come, gain, loss, or deduction from thetrade or business of performing servicesas an employee constitute QBI within themeaning of section 199A and § 1.199A–3.No taxpayer may claim a section 199Adeduction for wage income, regardless ofthe amount of taxable income.

(b) Definition of specified service tradeor business. Except as provided in para-graph (c)(1) of this section, the term spec-ified service trade or business (SSTB)means any of the following:

(1) Listed SSTBs. Any trade or businessinvolving the performance of services inone or more of the following fields:

(i) Health as described in paragraph(b)(2)(ii) of this section;

(ii) Law as described in paragraph(b)(2)(iii) of this section;

(iii) Accounting as described in para-graph (b)(2)(iv) of this section;

(iv) Actuarial science as described inparagraph (b)(2)(v) of this section;

(v) Performing arts as described inparagraph (b)(2)(vi) of this section;

(vi) Consulting as described in para-graph (b)(2)(vii) of this section;

(vii) Athletics as described in para-graph (b)(2)(viii) of this section;

(viii) Financial services as described inparagraph (b)(2)(ix) of this section;

(ix) Brokerage services as described inparagraph (b)(2)(x) of this section;

(x) Investing and investment manage-ment as described in paragraph (b)(2)(xi)of this section;

(xi) Trading as described in paragraph(b)(2)(xii) of this section;

(xii) Dealing in securities (as defined insection 475(c)(2)), partnership interests,or commodities (as defined in section475(e)(2)) as described in paragraph(b)(2)(xiii) of this section; or

(xiii) Any trade or business where theprincipal asset of such trade or business isthe reputation or skill of one or more of itsemployees or owners as defined in para-graph (b)(2)(xiv) of this section.

(2) Additional rules for applying sec-tion 199A(d)(2) and paragraph (b) of thissection—(i) In general. This paragraph(b)(2) provides additional rules for deter-mining whether a business is an SSTBwithin the meaning of section 199A(d)(2)


and paragraph (b) of this section only. Therules of this paragraph (b)(2) may not betaken into account for purposes of apply-ing any provision of law or regulationother than section 199A and the regula-tions thereunder except to the extent suchprovision expressly refers to section199A(d) or this section.

(ii) Meaning of services performed inthe field of health. For purposes of section199A(d)(2) and paragraph (b)(1)(i) of thissection only, the performance of servicesin the field of health means the provisionof medical services by individuals such asphysicians, pharmacists, nurses, dentists,veterinarians, physical therapists, psy-chologists and other similar healthcareprofessionals performing services in theircapacity as such who provide medical ser-vices directly to a patient (service recipi-ent). The performance of services in thefield of health does not include the provi-sion of services not directly related to amedical services field, even though theservices provided may purportedly relateto the health of the service recipient. Forexample, the performance of services inthe field of health does not include theoperation of health clubs or health spasthat provide physical exercise or condi-tioning to their customers, payment pro-cessing, or the research, testing, and man-ufacture and/or sales of pharmaceuticalsor medical devices.

(iii) Meaning of services performed inthe field of law. For purposes of section199A(d)(2) and paragraph (b)(1)(ii) ofthis section only, the performance of ser-vices in the field of law means the perfor-mance of services by individuals such aslawyers, paralegals, legal arbitrators, me-diators, and similar professionals perform-ing services in their capacity as such. Theperformance of services in the field of lawdoes not include the provision of servicesthat do not require skills unique to thefield of law, for example, the provision ofservices in the field of law does not in-clude the provision of services by printers,delivery services, or stenography services.

(iv) Meaning of services performed inthe field of accounting. For purposes of sec-tion 199A(d)(2) and paragraph (b)(1)(iii) ofthis section only, the performance of ser-vices in the field of accounting means theprovision of services by individuals such asaccountants, enrolled agents, return prepar-

ers, financial auditors, and similar profes-sionals performing services in their capacityas such.

(v) Meaning of services performed inthe field of actuarial science. For purposesof section 199A(d)(2) and paragraph(b)(1)(iv) of this section only, the perfor-mance of services in the field of actuarialscience means the provision of services byindividuals such as actuaries and similarprofessionals performing services in theircapacity as such.

(vi) Meaning of services performed inthe field of performing arts. For purposesof section 199A(d)(2) and paragraph(b)(1)(v) of this section only, the perfor-mance of services in the field of the per-forming arts means the performance ofservices by individuals who participate inthe creation of performing arts, such asactors, singers, musicians, entertainers, di-rectors, and similar professionals perform-ing services in their capacity as such. Theperformance of services in the field ofperforming arts does not include the pro-vision of services that do not require skillsunique to the creation of performing arts,such as the maintenance and operation ofequipment or facilities for use in the per-forming arts. Similarly, the performanceof services in the field of the performingarts does not include the provision of ser-vices by persons who broadcast or other-wise disseminate video or audio of per-forming arts to the public.

(vii) Meaning of services performed inthe field of consulting. For purposes of sec-tion 199A(d)(2) and paragraph (b)(1)(vi) ofthis section only, the performance of ser-vices in the field of consulting means theprovision of professional advice and counselto clients to assist the client in achievinggoals and solving problems. Consulting in-cludes providing advice and counsel regard-ing advocacy with the intention of influenc-ing decisions made by a government orgovernmental agency and all attempts toinfluence legislators and other governmentofficials on behalf of a client by lobbyistsand other similar professionals performingservices in their capacity as such. The per-formance of services in the field of consult-ing does not include the performance ofservices other than advice and counsel, suchas sales or economically similar services orthe provision of training and educationalcourses. For purposes of the preceding sen-

tence, the determination of whether a per-son’s services are sales or economicallysimilar services will be based on all the factsand circumstances of that person’s business.Such facts and circumstances include, forexample, the manner in which the taxpayeris compensated for the services provided.Performance of services in the field of con-sulting does not include the performance ofconsulting services embedded in, or ancil-lary to, the sale of goods or performance ofservices on behalf of a trade or business thatis otherwise not an SSTB (such as typicalservices provided by a building contractor)if there is no separate payment for the con-sulting services.

(viii) Meaning of services performed inthe field of athletics. For purposes of sec-tion 199A(d)(2) and paragraph (b)(1)(vii)of this section only, the performance ofservices in the field of athletics means theperformance of services by individualswho participate in athletic competitionsuch as athletes, coaches, and team man-agers in sports such as baseball, basket-ball, football, soccer, hockey, martial arts,boxing, bowling, tennis, golf, skiing,snowboarding, track and field, billiards,and racing. The performance of servicesin the field of athletics does not includethe provision of services that do not re-quire skills unique to athletic competition,such as the maintenance and operation ofequipment or facilities for use in athleticevents. Similarly, the performance of ser-vices in the field of athletics does notinclude the provision of services by per-sons who broadcast or otherwise dissem-inate video or audio of athletic events tothe public.

(ix) Meaning of services performed inthe field of financial services. For pur-poses of section 199A(d)(2) and para-graph (b)(1)(viii) of this section only, theperformance of services in the field offinancial services means the provision offinancial services to clients includingmanaging wealth, advising clients with re-spect to finances, developing retirementplans, developing wealth transition plans,the provision of advisory and other similarservices regarding valuations, mergers,acquisitions, dispositions, restructurings(including in title 11 or similar cases), andraising financial capital by underwriting,or acting as a client’s agent in the issuanceof securities and similar services. This


includes services provided by financialadvisors, investment bankers, wealthplanners, and retirement advisors andother similar professionals performingservices in their capacity as such.

(x) Meaning of services performed inthe field of brokerage services. For pur-poses of section 199A(d)(2) and para-graph (b)(1)(ix) of this section only, theperformance of services in the field ofbrokerage services includes services inwhich a person arranges transactions be-tween a buyer and a seller with respect tosecurities (as defined in section 475(c)(2))for a commission or fee. This includesservices provided by stock brokers andother similar professionals, but does notinclude services provided by real estateagents and brokers, or insurance agentsand brokers.

(xi) Meaning of the provision of ser-vices in investing and investment manage-ment. For purposes of section 199A(d)(2)and paragraph (b)(1)(x) of this sectiononly, the performance of services thatconsist of investing and investment man-agement refers to a trade or business in-volving the receipt of fees for providinginvesting, asset management, or invest-ment management services, includingproviding advice with respect to buyingand selling investments. The performanceof services of investing and investmentmanagement does not include directlymanaging real property.

(xii) Meaning of the provision of ser-vices in trading. For purposes of section199A(d)(2) and paragraph (b)(1)(xi) ofthis section only, the performance of ser-vices that consist of trading means a tradeor business of trading in securities (asdefined in section 475(c)(2)), commodi-ties (as defined in section 475(e)(2)), orpartnership interests. Whether a person isa trader in securities, commodities, orpartnership interests is determined by tak-ing into account all relevant facts and cir-cumstances, including the source and typeof profit that is associated with engagingin the activity regardless of whether thatperson trades for the person’s own ac-count, for the account of others, or anycombination thereof. A taxpayer, such asa manufacturer or a farmer, who engagesin hedging transactions as part of theirtrade or business of manufacturing orfarming is not considered to be engaged in

the trade or business of trading commod-ities.

(xiii) Meaning of the provision of ser-vices in dealing—(A) Dealing in securi-ties. For purposes of section 199A(d)(2)and paragraph (b)(1)(xii) of this sectiononly, the performance of services thatconsist of dealing in securities (as definedin section 475(c)(2)) means regularly pur-chasing securities from and selling secu-rities to customers in the ordinary courseof a trade or business or regularly offeringto enter into, assume, offset, assign, orotherwise terminate positions in securitieswith customers in the ordinary course of atrade or business. For purposes of the pre-ceding sentence, however, a taxpayer thatregularly originates loans in the ordinarycourse of a trade or business of makingloans but engages in no more than negligi-ble sales of the loans is not dealing in secu-rities for purposes of section 199A(d)(2) andthis section. See § 1.475(c)–1(c)(2) and (4)for the definition of negligible sales.

(B) Dealing in commodities. For pur-poses of section 199A(d)(2) and para-graph (b)(1)(xii) of this section only, theperformance of services that consist ofdealing in commodities (as defined in sec-tion 475(e)(2)) means regularly purchas-ing commodities from and selling com-modities to customers in the ordinarycourse of a trade or business or regularlyoffering to enter into, assume, offset, as-sign, or otherwise terminate positions incommodities with customers in the ordi-nary course of a trade or business.

(C) Dealing in partnership interests.For purposes of section 199A(d)(2) andparagraph (b)(1)(xii) of this section only,the performance of services that consist ofdealing in partnership interests means reg-ularly purchasing partnership interestsfrom and selling partnership interests tocustomers in the ordinary course of a tradeor business or regularly offering to enterinto, assume, offset, assign, or otherwiseterminate positions in partnership interestswith customers in the ordinary course of atrade or business.

(xiv) Meaning of trade or businesswhere the principal asset of such trade orbusiness is the reputation or skill of one ormore employees or owners. For purposesof section 199A(d)(2) and paragraph(b)(1)(xiii) of this section only, the termany trade or business where the principal

asset of such trade or business is the rep-utation or skill of one or more of its em-ployees or owners means any trade orbusiness that consists of any of the fol-lowing (or any combination thereof):

(A) A trade or business in which aperson receives fees, compensation, orother income for endorsing products orservices,

(B) A trade or business in which aperson licenses or receives fees, compen-sation or other income for the use of anindividual’s image, likeness, name, signa-ture, voice, trademark, or any other sym-bols associated with the individual’s iden-tity,

(C) Receiving fees, compensation, orother income for appearing at an event oron radio, television, or another media for-mat.

(D) For purposes of paragraph (b)(2)(xiv)(A) through (C) of this section, theterm fees, compensation, or other incomeincludes the receipt of a partnership inter-est and the corresponding distributiveshare of income, deduction, gain or lossfrom the partnership, or the receipt ofstock of an S corporation and the corre-sponding income, deduction, gain or lossfrom the S corporation stock.

(3) Examples. The following examplesillustrate the rules in paragraphs (a) and(b) of this section. The examples do notaddress all types of services that may ormay not qualify as specified services. Un-less otherwise provided, the individual ineach example has taxable income in ex-cess of the threshold amount.

Example 1 to paragraph (b)(3). A, a singer,records a song. A is paid a mechanical royalty whenthe song is licensed or streamed. A is also paid aperformance royalty when the recorded song isplayed publicly. A is engaged in the performance ofservices in an SSTB in the field of performing artswithin the meaning of paragraphs (b)(1)(v) and(b)(2)(vi) of this section. The royalties that A re-ceives for the song are not eligible for a deductionunder section 199A.

Example 2 to paragraph (b)(3). B is a partner inPartnership, which solely owns and operates a pro-fessional sports team. Partnership employs athletesand sells tickets to the public to attend games inwhich the sports team competes. Therefore, Partner-ship is engaged in the performance of services in anSSTB in the field of athletics within the meaning ofparagraphs (b)(1)(vii) and (b)(2)(viii) of this section.B is a passive owner in Partnership and B does notprovide any services with respect to Partnership orthe sports team. However, because Partnership isengaged in an SSTB in the field of athletics, B’sdistributive share of the income, gain, loss, and de-


duction with respect to Partnership is not eligible fora deduction under section 199A.

Example 3 to paragraph (b)(3). C is in the busi-ness of providing services that assist unrelated enti-ties in making their personnel structures more effi-cient. C studies its client’s organization and structureand compares it to peers in its industry. C then makesrecommendations and provides advice to its clientregarding possible changes in the client’s personnelstructure, including the use of temporary workers. Cis engaged in the performance of services in anSSTB in the field of consulting within the meaningof paragraphs (b)(1)(vi) and (b)(2)(vii) of this sec-tion.

Example 4 to paragraph (b)(3). D is in the busi-ness of licensing software to customers. D discussesand evaluates the customer’s software needs with thecustomer. The taxpayer advises the customer on theparticular software products it licenses. D is paid aflat price for the software license. After the customerlicenses the software, D helps to implement thesoftware. D is engaged in the trade or business oflicensing software and not engaged in an SSTB inthe field of consulting within the meaning of para-graphs (b)(1)(vi) and (b)(2)(vii) of this section.

Example 5 to paragraph (b)(3). E is in the busi-ness of providing services to assist clients with theirfinances. E will study a particular client’s financialsituation, including, the client’s present income, sav-ings and investments, and anticipated future eco-nomic and financial needs. Based on this study, Ewill then assist the client in making decisions andplans regarding the client’s financial activities. Suchfinancial planning includes the design of a personalbudget to assist the client in monitoring the client’sfinancial situation, the adoption of investment strat-egies tailored to the client’s needs, and other similarservices. E is engaged in the performance of servicesin an SSTB in the field of financial services withinthe meaning of paragraphs (b)(1)(viii) and (b)(2)(ix)of this section.

Example 6 to paragraph (b)(3). F is in the busi-ness of executing transactions for customers involv-ing various types of securities or commodities gen-erally traded through organized exchanges or othersimilar networks. Customers place orders with F totrade securities or commodities based on the taxpay-er’s recommendations. F’s compensation for its ser-vices typically is based on completion of the tradeorders. F is engaged in an SSTB in the field ofbrokerage services within the meaning of paragraphs(b)(1)(ix) and (b)(2)(x) of this section.

Example 7 to paragraph (b)(3). G owns 100% ofCorp, an S corporation, which operates a bicyclesales and repair business. Corp has 8 employees,including G. Half of Corp’s net income is generatedfrom sales of new and used bicycles and relatedgoods, such as helmets, and bicycle–related equip-ment. The other half of Corp’s net income is gener-ated from bicycle repair services performed by Gand Corp’s other employees. Corp’s assets consist ofinventory, fixtures, bicycle repair equipment, and aleasehold on its retail location. Several of the em-ployees and G have worked in the bicycle businessfor many years, and have acquired substantial skilland reputation in the field. Customers often consultwith the employees on the best bicycle for purchase. Gis in the business of sales and repairs of bicycles and is

not engaged in an SSTB within the meaning of para-graphs (b)(1)(xiii) and (b)(2)(xiv) of this section.

Example 8 to paragraph (b)(3). H is a well-known chef and the sole owner of multiple restau-rants each of which is owned in a disregarded entity.Due to H’s skill and reputation as a chef, H receivesan endorsement fee of $500,000 for the use of H’sname on a line of cooking utensils and cookware. His in the trade or business of being a chef and owningrestaurants and such trade or business is not anSSTB. However, H is also in the trade or business ofreceiving endorsement income. H’s trade or businessconsisting of the receipt of the endorsement fee forH’s skill and/or reputation is an SSTB within themeaning of paragraphs (b)(1)(xiii) and (b)(2)(xiv) ofthis section.

Example 9 to paragraph (b)(3). J is a well-known actor. J entered into a partnership with ShoeCompany, in which J contributed her likeness andthe use of her name to the partnership in exchangefor a 50% interest in the capital and profits of thepartnership and a guaranteed payment. J’s trade orbusiness consisting of the receipt of the partnershipinterest and the corresponding distributive share withrespect to the partnership interest for J’s likeness andthe use of her name is an SSTB within the meaningof paragraphs (b)(1)(xiii) and (b)(2)(xiv) of this sec-tion.

(c) Special rules. (1) De minimisrule.—(i) Gross receipts of $25 million orless. For a trade or business with grossreceipts of $25 million dollars or less forthe taxable year, a trade or business is notan SSTB if less than 10 percent of thegross receipts of the trade or business areattributable to the performance of servicesin a field described in paragraph (b) of thissection. For purposes of determiningwhether this 10 percent test is satisfied,the performance of any activity incident tothe actual performance of services in thefield is considered the performance of ser-vices in that field.

(ii) Gross receipts of greater than $25million. For a trade or business with grossreceipts of greater than $25 million for thetaxable year, the rules of paragraph(c)(1)(i) of this section are applied by sub-stituting “5 percent” for “10 percent” eachplace it appears.

(2) Services or property provided to anSSTB—(i) In general. An SSTB includesany trade or business that provides 80percent or more of its property or servicesto an SSTB if there is 50 percent or morecommon ownership of the trades or busi-nesses.

(ii) Less than substantially all of prop-erty or services provided. If a trade orbusiness provides less than 80 percent ofits property or services to an SSTB withinthe meaning of this section and there is 50

percent or more common ownership ofthe trades or businesses, that portion ofthe trade or business of providing prop-erty or services to the 50 percent ormore commonly-owned SSTB is treatedas a part of the SSTB.

(iii) 50 percent or more common own-ership. For purposes of paragraphs (c)(2)(i) and (ii) of this section, 50 percent ormore common ownership includes director indirect ownership by related partieswithin the meaning of sections 267(b) or707(b).

(iv) Example. Law Firm is a partnership thatprovides legal services to clients, owns its own officebuilding and employs its own administrative staff.Law Firm divides into three partnerships. Partner-ship 1 performs legal services to clients. Partnership2 owns the office building and rents the entire build-ing to Partnership 1. Partnership 3 employs the ad-ministrative staff and through a contract with Part-nership 1 provides administrative services toPartnership 1 in exchange for fees. All three of thepartnerships are owned by the same people (theoriginal owners of Law Firm). Because there is 50%or more common ownership of each of the threepartnerships, Partnership 2 provides substantially allof its property to Partnership 1, and Partnership 3provides substantially all of its services to Partner-ship 1, Partnerships 1, 2, and 3 will be treated as oneSSTB under paragraph (a)(6) of this section.

(3) Incidental to specified service tradeor business—(i) In general. If a trade orbusiness (that would not otherwise betreated as an SSTB) has 50 percent ormore common ownership with an SSTB,including related parties (within the mean-ing of sections 267(b) or 707(b)), and hasshared expenses with the SSTB, includingshared wage or overhead expenses, thensuch trade or business is treated as inci-dental to and, therefore, part of the SSTBwithin the meaning of this section if thegross receipts of the trade or business rep-resent no more than 5 percent of the totalcombined gross receipts of the trade orbusiness and the SSTB in a taxable year.

(ii) Example. A, a dermatologist, provides med-ical services to patients on a regular basis throughDermatology LLC, a disregarded entity owned by A.In addition to providing medical services, Dermatol-ogy LLC also sells skin care products to A’s patients.The same employees and office space are usedfor the medical services and sale of skin care prod-ucts. The gross receipts with respect to the skin careproduct sales do not exceed 5% of the gross receiptsof Dermatology LLC. Accordingly, the sale of theskin care products is treated as incidental to A’sSSTB of performing services in the field of health(within the meaning of paragraph (b)(1)(i) and(b)(2)(ii) of this section) and is treated under para-graph (c)(3) of this section as part of such SSTB.


(d) Trade or business of performingservices as an employee—(1) In general.The trade or business of performing ser-vices as an employee is not a trade orbusiness for purposes of section 199A andthe regulations thereunder. Therefore, noitems of income, gain, loss, and deductionfrom the trade or business of performingservices as an employee constitute QBIwithin the meaning of section 199A and§ 1.199A–3. Except as provided in para-graph (d)(3) of this section, income fromthe trade or business of performing ser-vices as an employee refers to all wages(within the meaning of section 3401(a))and other income earned in a capacity asan employee, including payments de-scribed in § 1.6041–2(a)(1) (other thanpayments to individuals described in sec-tion 3121(d)(3)) and § 1.6041–2(b)(1).

(2) Employer’s Federal employmenttax classification of employee immaterial.For purposes of determining whetherwages are earned in a capacity as an em-ployee as provided in paragraph (d)(1) ofthis section, the treatment of an employeeby an employer as anything other than anemployee for Federal employment taxpurposes is immaterial. Thus, if a workershould be properly classified as an em-ployee, it is of no consequence that theemployee is treated as a non-employee bythe employer for Federal employment taxpurposes.

(3) Presumption that former employ-ees are still employees—(i) Presump-tion. Solely for purposes of section199A(d)(1)(B) and paragraph (d)(1) ofthis section, an individual that was prop-erly treated as an employee for Federalemployment tax purposes by the personto which he or she provided services andwho is subsequently treated as otherthan an employee by such person withregard to the provision of substantiallythe same services directly or indirectlyto the person (or a related person), ispresumed to be in the trade or businessof performing services as an employeewith regard to such services. This pre-sumption may be rebutted upon a show-ing by the individual that, under Federaltax law, regulations, and principles (in-cluding common-law employee classifi-cation rules), the individual is perform-ing services in a capacity other than asan employee. This presumption applies

regardless of whether the individualprovides services directly or indirectlythrough an entity or entities.

(ii) Examples. The following examplesillustrate the provision of paragraph(b)(3)(i) of this section. Unless otherwiseprovided, the individual in each examplehas taxable income in excess of thethreshold amount.

Example 1 to paragraph (d)(3). A is employedby PRS, a partnership, as a fulltime employee and istreated as such for Federal employment tax purposes.A quits his job for PRS and enters into a contractwith PRS under which A provides substantially thesame services that A previously provided to PRS inA’s capacity as an employee. Because A was treatedas an employee for services he provided to PRS, andnow is no longer treated as an employee with regardto such services, A is presumed (solely for purposesof section 199A(d)(1)(B) and paragraphs (a)(3) and(d) of this section) to be in the trade or business ofperforming services as an employee with regard tohis services performed for PRS. Unless the presump-tion is rebutted with a showing that, under Federaltax law, regulations, and principles (including thecommon-law employee classification rules), A is notan employee, any amounts paid by PRS to A withrespect to such services will not be QBI for purposesof section 199A. The presumption would apply evenif, instead of contracting directly with PRS, Aformed a disregarded entity, or an S corporation, andthe disregarded entity or the S corporation enteredinto the contract with PRS.

Example 2 to paragraph (d)(3). C is an attorneyemployed as an associate in a law firm (Law Firm 1)and was treated as such for Federal employment taxpurposes. C and the other associates in Law Firm 1have taxable income below the threshold amount.Law Firm 1 terminates its employment relationshipwith C and its other associates. C and the otherformer associates form a new partnership, Law Firm2, which contracts to perform legal services for LawFirm 1. Therefore, in form, C is now a partner inLaw Firm 2 which earns income from providinglegal services to Law Firm 1. C continues to providesubstantially the same legal services to Law Firm 1and its clients. Because C was previously treated asan employee for services she provided to Law Firm1, and now is no longer treated as an employee withregard to such services, C is presumed (solely forpurposes of section 199A(d)(1)(B) and paragraphs(a)(3) and (d) of this section) to be in the trade orbusiness of performing services as an employee withrespect to the services C provides to Law Firm 1indirectly through Law Firm 2. Unless the presump-tion is rebutted with a showing that, under Federaltax law, regulations, and principles (includingcommon-law employee classification rules), C is notan employee, C’s distributive share of Law Firm 2income (including any guaranteed payments) willnot be QBI for purposes of section 199A. The resultsin this example would not change if, instead ofcontracting with Law Firm 1, Law Firm 2 was in-stead admitted as a partner in Law Firm 1.

Example 3 to paragraph (d)(3). E is an engineeremployed as a senior project engineer in an engi-neering firm, Engineering Firm. Engineering Firm is

a partnership and structured such that after 10 years,senior project engineers are considered for partner ifcertain career milestones are met. After 10 years, Emeets those career milestones and is admitted as apartner in Engineering Firm. As a partner in Engi-neering Firm, E shares in the net profits of Engineer-ing Firm, and also otherwise satisfies the require-ments under Federal tax law, regulations, andprinciples (including common-law employee classi-fication rules) to be respected as a partner. Eis presumed (solely for purposes of section199A(d)(1)(B) and paragraphs (a)(3) and (d) of thissection) to be in the trade or business of performingservices as an employee with respect to the servicesE provides to Engineering Firm. However, E is ableto rebut the presumption by showing that E becamea partner in Engineering Firm as a career milestone,shares in the overall net profits in Engineering Firm,and otherwise satisfies the requirements under Fed-eral tax law, regulations, and principles (includingcommon-law employee classification rules) to berespected as a partner.


(2) Exceptions-(i) Anti-abuse rules.The provisions of paragraphs (c)(2),(c)(3), and (d)(3) of this section apply totaxable years ending after December 22,2017.



§ 1.199A–6 Relevant passthroughentities (RPEs), publicly tradedpartnerships (PTPs), trusts, and estates.

(a) Overview. This section providesspecial rules for RPEs, PTPs, trusts, andestates necessary for the computation ofthe section 199A deduction of their own-


ers or beneficiaries. Paragraph (b) of thissection provides computational and re-porting rules for RPEs necessary for indi-viduals who own interests in RPEs to cal-culate their section 199A deduction.Paragraph (c) of this section providescomputational and reporting rules forPTPs necessary for individuals who owninterests in PTPs to calculate their section199A deduction. Paragraph (d) of this sec-tion provides computational and reportingrules for trusts (other than grantor trusts)and estates necessary for their beneficia-ries to calculate their section 199A deduc-tion.

(b) Computational and reporting rulesfor RPEs—(1) In general. An RPE mustdetermine and report information attribut-able to any trades or businesses it is en-gaged in necessary for its owners to de-termine their section 199A deduction.

(2) Computational rules. Using the fol-lowing four rules, an RPE must determinethe items necessary for individuals whoown interests in the RPE to calculate theirsection 199A deduction under § 1.199A–1(c) or (d):

(i) First, the RPE must determine if it isengaged in one or more trades or busi-nesses. The RPE must also determinewhether any of its trades or businesses isan SSTB under the rules of § 1.199A–5.

(ii) Second, the RPE must apply therules in § 1.199A–3 to determine the QBIfor each trade or business engaged in di-rectly.

(iii) Third, the RPE must apply therules in § 1.199A–2 to determine the W–2wages and UBIA of qualified property foreach trade or business engaged in directly.

(iv) Fourth, the RPE must determinewhether it has any qualified REIT divi-dends as defined in 1.199A–3(c)(1) earneddirectly or through another RPE. The RPEmust also determine the net amount ofqualified PTP income as defined in§ 1.199A–3(c)(2) earned directly or indi-rectly through investments in PTPs.

(3) Reporting rules for RPEs—(i)Trade or business directly engaged in. AnRPE must separately identify and reporton the Schedule K-1 issued to its ownersfor any trade or business engaged in di-rectly by the RPE—

(A) Each owner’s allocable share ofQBI, W–2 wages, and UBIA of qualified

property attributable to each such trade orbusiness, and

(B) Whether any of the trades or busi-nesses described in paragraph (b)(3)(i)(A)of this section is an SSTB.

(ii) Other items. An RPE must alsoreport on an attachment to the ScheduleK-1, any QBI, W–2 wages, UBIA of qual-ified property, or SSTB determinations,reported to it by any RPE in which theRPE owns a direct or indirect interest. TheRPE must also report each owner’s allo-cated share of any qualified REIT divi-dends or qualified PTP income or lossreceived by the RPE (including throughanother RPE).

(iii) Failure to report information. If anRPE fails to separately identify or reporton the Schedule K-1 (or any attachmentsthereto) issued to an owner any items de-scribed in paragraph (b)(3)(i) of this sec-tion, the owner’s share (and the share ofany upper-tier indirect owner) of positiveQBI, W–2 wages, and UBIA of qualifiedproperty attributable to trades or busi-nesses engaged in by that RPE will bepresumed to be zero.

(c) Computational and reporting rulesfor PTPs—(1) Computational rules. EachPTP must determine its QBI under therules of § 1.199A–3 for each trade orbusiness in which the PTP is engaged indirectly. The PTP must also determinewhether any of the trades or businesses itis engaged in directly is an SSTB.

(2) Reporting rules. Each PTP is re-quired to separately identify and report theinformation described in paragraph (c)(1)of this section on Schedules K-1 issued toits partners. Each PTP must also deter-mine and report any qualified REIT divi-dends or qualified PTP income or lossreceived by the PTP including through anRPE, a REIT, or another PTP. A PTP isnot required to determine or report W–2wages or the UBIA of qualified propertyattributable to trades or businesses it isengaged in directly.

(d) Application to trusts, estates, andbeneficiaries—(1) In general. A trust orestate computes its section 199A deduc-tion based on the QBI, W–2 wages, UBIAof qualified property, qualified REIT div-idends, and qualified PTP income that areallocated to the trust or estate. An individ-ual beneficiary of a trust or estate takesinto account any QBI, W–2 wages, UBIA

of qualified property, qualified REIT div-idends, and qualified PTP income allo-cated from a trust or estate in calculatingthe beneficiary’s section 199A deduction,in the same manner as though the itemshad been allocated from an RPE. For pur-poses of this section and §§ 1.199A–1through 1.199A–5, a trust or estate istreated as an RPE to the extent it allocatesQBI and other items to its beneficiaries,and is treated as an individual to the extentit retains the QBI and other items.

(2) Grantor trusts. To the extent thatthe grantor or another person is treated asowning all or part of a trust under sections671 through 679, such person computesits section 199A deduction as if that per-son directly conducted the activities of thetrust with respect to the portion of the trusttreated as owned by the grantor or anotherperson.

(3) Non-grantor trusts and estates—(i)Calculation at entity level. A trust or es-tate must calculate its QBI, W–2 wages,UBIA of qualified property, qualifiedREIT dividends, and qualified PTP in-come. The QBI of a trust or estate must becomputed by allocating qualified items ofdeduction described in section 199A(c)(3)in accordance with the classification ofthose deductions under § 1.652(b)–3(a),and deductions not directly attributablewithin the meaning of § 1.652(b)–3(b)(other deductions) are allocated in amanner consistent with the rules in§ 1.652(b)–––––3(b). Any depletion anddepreciation deductions described insection 642(e) and any amortization de-ductions described in section 642(f) thatotherwise are properly included in thecomputation of QBI are included in thecomputation of QBI of the trust or es-tate, regardless of how those deductionsmay otherwise be allocated between thetrust or estate and its beneficiaries forother purposes of the Code.

(ii) Allocation among trust or estateand beneficiaries. The QBI (including anyamounts that may be less than zero ascalculated at the trust or estate level), W–2wages, UBIA of qualified property, qual-ified REIT dividends, and qualified PTPincome of a trust or estate are allocated toeach beneficiary and to the trust or estatebased on the relative proportion of thetrust’s or estate’s distributable net income(DNI), as defined by section 643(a), for


the taxable year that is distributed or re-quired to be distributed to the beneficiaryor is retained by the trust or estate. For thispurpose, the trust’s or estate’s DNI is de-termined with regard to the separate sharerule of section 663(c), but without regardto section 199A. If the trust or estate hasno DNI for the taxable year, any QBI,W–2 wages, UBIA of qualified property,qualified REIT dividends, and qualifiedPTP income are allocated entirely to thetrust or estate.

(iii) Threshold amount. The thresholdamount applicable to a trust or estate is$157,500 for any taxable year beginningbefore 2019. For taxable years beginningafter 2018, the threshold amount shall be$157,500 increased by the cost-of-livingadjustment as outlined in § 1.199A–1(b)(11). For purposes of determiningwhether a trust or estate has taxable in-come that exceeds the threshold amount,the taxable income of a trust or estate isdetermined before taking into account anydistribution deduction under sections 651or 661.

(iv) Electing small business trusts. Anelecting small business trust (ESBT) isentitled to the deduction under section199A. The S portion of the ESBT musttake into account the QBI and other itemsfrom any S corporation owned by theESBT, the grantor portion of the ESBTmust take into account the QBI and otheritems from any assets treated as owned bya grantor or another person (owned por-tion) of a trust under sections 671 through679, and the non-S portion of the ESBTmust take into account any QBI and otheritems from any other entities or assetsowned by the ESBT. See § 1.641(c)–1.

(v) Anti-abuse rule for creation of mul-tiple trusts to avoid exceeding the thresh-old amount. Trusts formed or funded witha significant purpose of receiving a deduc-tion under section 199A will not be re-spected for purposes of section 199A. Seealso § 1.643(f)–1 of the regulations.

(vi) The following example illustratesthe application of paragraph (d) of thissection.

Example 1 to (d)(3)(vi). (i) Computation of DNIand inclusion and deduction amounts. (A) Trust’sdistributive share of partnership items. Trust, an

irrevocable testamentary complex trust, is a 25%partner in PRS, a family partnership that operates arestaurant that generates QBI and W–2 wages. In2018, PRS properly allocates gross income from therestaurant of $55,000, and expenses directly alloca-ble to the restaurant of $50,000 (including W–2wages of $25,000, miscellaneous expenses of$20,000, and depreciation deductions of $5,000) toTrust. These items are properly included in Trust’sDNI. Trust’s share of PRS’ UBIA of qualified propertyis $125,000. PRS distributes $5,000 of cash to Trust in2018.

(B) Trust’s activities. In addition to its interest inPRS, Trust also operates a family bakery conductedthrough an LLC wholly-owned by the Trust that istreated as a disregarded entity. In 2018, the bakeryproduced $100,000 of gross income and $150,000 ofexpenses directly allocable to operation of the bak-ery (including W–2 wages of $50,000, rental ex-pense of $75,000, and miscellaneous expenses of$25,000). (The net loss from the bakery operations isnot subject to any loss disallowance provisions out-side of section 199A.) Trust also has zero UBIA ofqualified property in the bakery. For purposes ofcomputing its section 199A deduction, Trust hasproperly chosen to aggregate the family restaurantconducted through PRS with the bakery conducteddirectly by Trust under § 1.199A–4. Trust also ownsvarious investment assets that produce portfolio-typeincome consisting of dividends ($25,000), interest($15,000), and tax-exempt interest ($15,000). Ac-cordingly, Trust has the following items which areproperly included in Trust’s DNI:

Interest Income.......................................................................................................................................................................... 15,000

Dividends................................................................................................................................................................................... 25,000

Tax-exempt interest................................................................................................................................................................... 15,000

Net business loss from PRS and bakery...................................................................................................................................(45,000)

Trustee commissions.................................................................................................................................................................. 3,000

State and local taxes.................................................................................................................................................................. 5,000

(C) Allocation of deductions under § 1.652(b)–3.(1) Directly attributable expenses. In computingTrust’s DNI for the taxable year, the distributiveshare of expenses of PRS are directly attributableunder § 1.652(b)–3(a) to the distributive share ofincome of PRS. Accordingly, Trust has gross busi-ness income of $155,000 (55,000 from PRS and100,000 from the bakery) and direct business ex-penses of $200,000 ($50,000 from PRS and$150,000 from the bakery). In addition, $1,000 ofthe trustee commissions and $1,000 of state and localtaxes are directly attributable under § 1.652(b)–3(a)to Trust’s business income. Accordingly, Trust hasexcess business deductions of $47,000. Pursuant toits authority recognized under § 1.652(b)–3(d), Trustallocates the $47,000 excess business deductions asfollows: $15,000 to the interest income, resulting in$0 interest income, $25,000 to the dividends, result-ing in $0 dividend income, and $7,000 to the taxexempt interest.

(2) Non-directly attributable expenses. Thetrustee must allocate the sum of the balance of thetrustee commissions ($2,000) and state and localtaxes ($4,000) to Trust’s remaining tax-exempt in-

terest income, resulting in $2,000 of tax exemptinterest.

(D) Amounts included in taxable income. For2018, Trust has DNI of $2,000. Pursuant to Trust’sgoverning instrument, Trustee distributes 50%, or$1,000, of that DNI to A, an individual who is adiscretionary beneficiary of Trust. In addition,Trustee is required to distribute 25%, or $500, of thatDNI to B, a current income beneficiary of Trust.Trust retains the remaining 25% of DNI. Conse-quently, with respect to the $1,000 distribution Areceives from Trust, A properly excludes $1,000 oftax-exempt interest income under section 662(b).With respect to the $500 distribution B receives fromTrust, B properly excludes $500 of tax exempt in-terest income under section 662(b). Because the DNIconsists entirely of tax-exempt income, Trust de-ducts $0 under section 661 with respect to the dis-tributions to A and B.

(ii) Section 199A deduction. (A) Trust’s W–2wages and QBI. For the 2018 taxable year, Trust has$75,000 ($25,000 from PRS � $50,000 of Trust) ofW–2 wages. Trust also has $125,000 of UBIA ofqualified property. Trust has negative QBI of

($47,000) ($155,000 gross income from aggregatedbusinesses less the sum of $200,000 direct expensesfrom aggregated businesses and $2,000 directly at-tributable business expenses from Trust under therules of § 1.652(b)–3(a)).

(B) Section 199A deduction computation. (1) A’scomputation. Because the $1,000 Trust distributionto A equals one-half of Trust’s DNI, A has W–2wages from Trust of $37,500. A also has W–2 wagesof $2,500 from a trade or business outside of Trust(computed without regard to A’s interest in Trust),which A has properly aggregated under § 1.199A–4with the Trust’s trade or businesses (the family’srestaurant and bakery), for a total of $40,000 of W–2wages from the aggregate trade or businesses. A has$100,000 of QBI from non-Trust trade or businessesin which A owns an interest. Because the $1,000Trust distribution to A equals one-half of Trust’sDNI, A has (negative) QBI from Trust of ($23,500).A’s total QBI is determined by combining the$100,000 QBI from non-Trust sources with the($23,500) QBI from Trust for a total of $76,500 ofQBI. Assume that A’s taxable income exceeds thethreshold amount for 2018 by $200,000. A’s tenta-


tive deduction is $15,300 (.20 x $76,500), limitedunder the W–2 wage limitation to $20,000 (50% x$40,000 W–2 wages). Accordingly, A’s section199A deduction for 2018 is $15,300.

(2) B’s computation. For 2018, B’s taxable in-come is below the threshold amount so B is notsubject to the W–2 wage limitation. Because the$500 Trust distribution to B equals one-quarter ofTrust’s DNI, B has a total of ($11,750) of QBI. Balso has no QBI from non-Trust trades or businesses,so B has a total of ($11,750) of QBI. Accordingly,B’s section 199A deduction for 2018 is zero. The($11,750) of QBI is carried over to 2019 as a lossfrom a qualified business in the hands of B pursuantto section 199A(c)(2).

(3) Trust’s computation. For 2018, Trust’s tax-able income is below the threshold amount so it isnot subject to the W–2 wage limitation. BecauseTrust retained 25% of Trust’s DNI, Trust is allocated25% of its QBI, which is ($11,750). Trust’s section199A deduction for 2018 is zero. The ($11,750) ofQBI is carried over to 2019 as a loss from a qualifiedbusiness in the hands of Trust pursuant to section199A(c)(2).


(2) Exceptions-(i) Anti-abuse rules.The provisions of paragraph (d)(3)(v) ofthis section apply to taxable years endingafter December 22, 2017.


Par. 9. Section 1.643(f)–1 is added toread as follows:

§ 1.643(f)–1 Treatment of MultipleTrusts.

(a) General rule. For purposes of sub-chapter J of chapter 1 of Title 26 of theUnited States Code, two or more trustswill be aggregated and treated as a singletrust if such trusts have substantially thesame grantor or grantors and substantiallythe same primary beneficiary or beneficia-ries, and if a principal purpose for estab-lishing such trusts or for contributing ad-ditional cash or other property to suchtrusts is the avoidance of Federal incometax. For purposes of applying this rule,spouses will be treated as one person.

(b) A principal purpose. A principalpurpose for establishing or funding a trustwill be presumed if it results in a signifi-cant income tax benefit unless there is asignificant non-tax (or non-income tax)purpose that could not have been achievedwithout the creation of these separatetrusts.

(c) Examples. The following examplesillustrate the application of this section:

Example 1 to paragraph (c). (i) A owns andoperates a pizzeria and several gas stations. A’sannual income from these businesses and othersources exceeds the threshold amount in section199A(e)(2), and the W–2 wages properly allocableto these businesses are not sufficient for A to max-imize the deduction allowable under section 199A. Areads an article in a magazine that suggests thattaxpayers can avoid the W–2 wage limitation ofsection 199A by contributing portions of their familybusinesses to multiple identical trusts established forfamily members. Based on this advice, in 2018, Aestablishes three irrevocable, non-grantor trusts:Trust 1 for the benefit of A’s sister, B, and A’sbrothers, C and D; Trust 2 for the benefit of A’ssecond sister, E, and for C and D; and Trust 3 for thebenefit of E. Under each trust instrument, the trusteeis given discretion to pay any current or accumulatedincome to any one or more of the beneficiaries. Thetrust agreements otherwise have nearly identicalterms. But for the enactment of section 199A andA’s desire to avoid the W–2 wage limitation of thatprovision, A would not have created or funded suchtrusts. A names A’s oldest son, F, as the trustee for

each trust. A forms a family limited partnership, andcontributes the ownership interests in the pizzeriaand gas stations to the partnership in exchange for a50-percent general partner interest and a 50-percentlimited partner interest. A later contributes to eachtrust a 15% limited partner interest. Under the part-nership agreement, the trustee does not have anypower or discretion to manage the partnership or anyof its businesses on behalf of the trusts, or to disposeof the limited partnership interests without the ap-proval of the general partner. Each of the trustsclaims the section 199A deduction on its Form 1041in full based on the amount of qualified businessincome (QBI) allocable to that trust from the limitedpartnership, as if such trust was not subject to thewage limitation in section 199A(b)(2)(B).

(ii) Under these facts, for Federal income taxpurposes under this section, Trust 1, Trust 2, andTrust 3 would be aggregated and treated as a singletrust.

Example 2 to paragraph (c). (i) X establishestwo irrevocable trusts: one for the benefit of X’s son,G, and the other for X’s daughter, H. G is the incomebeneficiary of the first trust and the trustee is re-quired to apply all income currently to G for G’s life.H is the remainder beneficiary of the first trust. H isan income beneficiary of the second trust and thetrust instrument permits the trustee to accumulate orto pay income, in its discretion, to H for H’s educa-tion, support, and maintenance. The trustee also maypay income or corpus for G’s medical expenses. H isthe remainder beneficiary of the second trust and willreceive the trust corpus upon G’s death.

(ii) Under these facts, there are significant non-tax differences between the substantive terms of thetwo trusts, so tax avoidance will not be presumed tobe a principal purpose for the establishment or fund-ing of the separate trusts. Accordingly, in the ab-sence of other facts or circumstances that wouldindicate that a principal purpose for creating the twoseparate trusts was income tax avoidance, the twotrusts will not be aggregated and treated as a singletrust for Federal income tax purposes under thissection.

(d) Effective/ applicability date. Theprovisions of this section apply to taxableyears ending after August 16, 2018.

Kirsten Wielobob,Deputy Commissioner for Services and

Enforcement.

(Filed by the Office of the Federal Register on August 10,2018, 4:15 p.m., and published in the issue of the FederalRegister for August 16, 2018, 83 F.R. 40884)


Definition of TermsRevenue rulings and revenue procedures(hereinafter referred to as “rulings”) thathave an effect on previous rulings use thefollowing defined terms to describe theeffect:

Amplified describes a situation whereno change is being made in a prior pub-lished position, but the prior position isbeing extended to apply to a variation ofthe fact situation set forth therein. Thus, ifan earlier ruling held that a principle ap-plied to A, and the new ruling holds thatthe same principle also applies to B, theearlier ruling is amplified. (Compare withmodified, below).

Clarified is used in those instanceswhere the language in a prior ruling isbeing made clear because the languagehas caused, or may cause, some confu-sion. It is not used where a position in aprior ruling is being changed.

Distinguished describes a situationwhere a ruling mentions a previously pub-lished ruling and points out an essentialdifference between them.

Modified is used where the substanceof a previously published position is beingchanged. Thus, if a prior ruling held that aprinciple applied to A but not to B, and thenew ruling holds that it applies to both A

and B, the prior ruling is modified becauseit corrects a published position. (Comparewith amplified and clarified, above).

Obsoleted describes a previously pub-lished ruling that is not considered deter-minative with respect to future transac-tions. This term is most commonly used ina ruling that lists previously published rul-ings that are obsoleted because of changesin laws or regulations. A ruling may alsobe obsoleted because the substance hasbeen included in regulations subsequentlyadopted.

Revoked describes situations where theposition in the previously published rulingis not correct and the correct position isbeing stated in a new ruling.

Superseded describes a situation wherethe new ruling does nothing more thanrestate the substance and situation of apreviously published ruling (or rulings).Thus, the term is used to republish underthe 1986 Code and regulations the sameposition published under the 1939 Codeand regulations. The term is also usedwhen it is desired to republish in a singleruling a series of situations, names, etc.,that were previously published over a pe-riod of time in separate rulings. If the newruling does more than restate the sub-

stance of a prior ruling, a combination ofterms is used. For example, modified andsuperseded describes a situation where thesubstance of a previously published rulingis being changed in part and is continuedwithout change in part and it is desired torestate the valid portion of the previouslypublished ruling in a new ruling that isself contained. In this case, the previouslypublished ruling is first modified and then,as modified, is superseded.

Supplemented is used in situations inwhich a list, such as a list of the names ofcountries, is published in a ruling and thatlist is expanded by adding further namesin subsequent rulings. After the originalruling has been supplemented severaltimes, a new ruling may be published thatincludes the list in the original ruling andthe additions, and supersedes all prior rul-ings in the series.

Suspended is used in rare situations toshow that the previous published rulingswill not be applied pending some futureaction such as the issuance of new oramended regulations, the outcome ofcases in litigation, or the outcome of aService study.

AbbreviationsThe following abbreviations in currentuse and formerly used will appear in ma-terial published in the Bulletin.

A—Individual.Acq.—Acquiescence.B—Individual.BE—Beneficiary.BK—Bank.B.T.A.—Board of Tax Appeals.C—Individual.C.B.—Cumulative Bulletin.CFR—Code of Federal Regulations.CI—City.COOP—Cooperative.Ct.D.—Court Decision.CY—County.D—Decedent.DC—Dummy Corporation.DE—Donee.Del. Order—Delegation Order.DISC—Domestic International Sales Corporation.DR—Donor.E—Estate.EE—Employee.E.O.—Executive Order.ER—Employer.

ERISA—Employee Retirement Income Security Act.EX—Executor.F—Fiduciary.FC—Foreign Country.FICA—Federal Insurance Contributions Act.FISC—Foreign International Sales Company.FPH—Foreign Personal Holding Company.F.R.—Federal Register.FUTA—Federal Unemployment Tax Act.FX—Foreign corporation.G.C.M.—Chief Counsel’s Memorandum.GE—Grantee.GP—General Partner.GR—Grantor.IC—Insurance Company.I.R.B.—Internal Revenue Bulletin.LE—Lessee.LP—Limited Partner.LR—Lessor.M—Minor.Nonacq.—Nonacquiescence.O—Organization.P—Parent Corporation.PHC—Personal Holding Company.PO—Possession of the U.S.PR—Partner.PRS—Partnership.

PTE—Prohibited Transaction Exemption.Pub. L.—Public Law.REIT—Real Estate Investment Trust.Rev. Proc.—Revenue Procedure.Rev. Rul.—Revenue Ruling.S—Subsidiary.S.P.R.—Statement of Procedural Rules.Stat.—Statutes at Large.T—Target Corporation.T.C.—Tax Court.T.D.—Treasury Decision.TFE—Transferee.TFR—Transferor.T.I.R.—Technical Information Release.TP—Taxpayer.TR—Trust.TT—Trustee.U.S.C.—United States Code.X—Corporation.Y—Corporation.Z—Corporation.

Bulletin No. 2018–35 August 27, 2018i

Numerical Finding List1

Bulletin 2018–27 through 2018–35

Announcements:

2018-09, 2018-28 I.R.B. 2062018-12, 2018-30 I.R.B. 232

Notices:

2018-48, 2018-28 I.R.B. 92018-56, 2018-27 I.R.B. 32018-58, 2018-33 I.R.B. 3052018-59, 2018-28 I.R.B. 1962018-60, 2018-31 I.R.B. 2752018-61, 2018-31 I.R.B. 2782018-62, 2018-34 I.R.B. 3162018-63, 2018-34 I.R.B. 3182018-64, 2018-35 I.R.B. 3472018-65, 2018-35 I.R.B. 350

Proposed Regulations:

REG-103474-18, 2018-32 I.R.B. 284REG-106977-18, 2018-27 I.R.B. 6REG-107892-18, 2018-35 I.R.B. 353

Revenue Procedures:

2018-35, 2018-28 I.R.B. 2042018-37, 2018-29 I.R.B. 2102018-38, 2018-31 I.R.B. 2802018-39, 2018-34 I.R.B. 3192018-40, 2018-34 I.R.B. 320

Revenue Rulings:

2018-19, 2018-27 I.R.B. 12018-20, 2018-28 I.R.B. 82018-21, 2018-32 I.R.B. 2822018-22, 2018-34 I.R.B. 308

Treasury Decisions:

9834, 2018-31 I.R.B. 2339835, 2018-33 I.R.B. 2889836, 2018-33 I.R.B. 2919838, 2018-34 I.R.B. 3099839, 2018-35 I.R.B. 325

1A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2018–01 through 2018–26 is in Internal Revenue Bulletin2018–26, dated June 27, 2018.

August 27, 2018 Bulletin No. 2018–35ii

Finding List of Current Actions onPreviously Published Items1

Bulletin 2018–27 through 2018–35

Revenue Procedures:

2015-27Amplified byRev. Proc. 2018-39, 2018-34 I.R.B. 319

2017-24Amplified byRev. Proc. 2018-39, 2018-34 I.R.B. 319

1A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2018–01 through 2018–26 is in Internal Revenue Bulletin2018–26, dated June 27, 2018.

Bulletin No. 2018–35 August 27, 2018iii

INTERNAL REVENUE BULLETINThe Introduction at the beginning of this issue describes the purpose and content of this publication. The weekly Internal Revenue

Bulletins are available at www.irs.gov/irb/.

We Welcome Comments About the Internal Revenue BulletinIf you have comments concerning the format or production of the Internal Revenue Bulletin or suggestions for improving it, we

would be pleased to hear from you. You can email us your suggestions or comments through the IRS Internet Home Page(www.irs.gov) or write to the Internal Revenue Service, Publishing Division, IRB Publishing Program Desk, 1111 Constitution Ave.NW, IR-6230 Washington, DC 20224.

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