The IRS issued final regulations (T.D. 9847, available at tinyurl.com/y4ww7p9k) on the qualified business income (QBI) deduction under Sec. 199A and an anti-avoidance rule under Sec. 643 that will require multiple trusts to be treated as a single trust in certain cases.
Sec. 199A allows taxpayers to deduct up to 20% of QBI from a domestic business operated as a sole proprietorship or through a partnership, S corporation, trust, or estate. The Sec. 199A deduction can be taken by individuals and by some estates and trusts. The deduction is not available for wage income or for business income earned through a C corporation.
The deduction is generally available to taxpayers whose 2018 taxable incomes fall below $315,000 for joint returns and $157,500 for other taxpayers. The deduction is generally equal to the lesser of 20% of the taxpayers QBI plus 20% of the taxpayer's qualified real estate investment trust (REIT) dividends and qualified publicly traded partnership (PTP) income, or 20% of taxable income minus net capital gains. Deductions for taxpayers above the $157,500/1315,000 thresholds may be limited; the application of those limits is described in the regulations. These amounts are inflation-adjusted. (For more on the deduction, see Nitti, "Understanding the New Sec. 199A Business Income Deduction," 49 The Tax Adviser 224 (April 2018), available at tinyurl.com/ycqdtfue).
The IRS noted that the final regulations had been modified somewhat from the proposed regulations issued last August (REG-107892-18) as a result of comments it received and testimony at a public hearing it held. The final regulations apply to tax years ending after Feb. 8, the date they were published in the Federal Register, however, taxpayers may rely on the proposed regulations for tax years ending in 2018.
The IRS says it received approximately 335 comments on the proposed regulations. The final regulations contain modifications based on some of those comments, and the IRS says it is continuing to study some comments it received that were beyond the scope of the proposed regulations.
Net capital gain: The IRS had not defined "net capital gain" in the proposed regulations, and a number of commenters had requested a definition. The final regulations define net capital gain for purposes of Sec. 199A as net capital gain under Sec. 1222(11) (the excess of net long-term capital gain for the tax year over the net short-term capital loss for that year) plus...