New Developments: Guidance on Qualified Business Income & More.

• Author: Josephs, Stuart R.
• Position: Fed Tax

For tax years beginning after 2017 and before 2026, under new IRC See. 199A, an individual generally may deduct 20 percent of qualified business income from a partnership, S corp or sole proprietorship.

On Aug. 9, proposed regulations, REG-107892-18, and a proposed revenue procedure were published in the Federal Register. Taxpayers can rely on these proposals until they are issued in final form.

Trade or Business

Qualified business income must be from a qualified trade or business under Sec. 199A(b) (1) and (2). Prop. Regs 1.199A-1(b)(13) states a trade or business means a Sec. 162 trade or business other than the trade or business of performing services as an employee.

A taxpayer may have more than one trade or business, but a single trade or business generally cannot be operated through more than one entity.

Taxpayers cannot use the Sec. 469 passive activity rules to group multiple activities into a single business. A taxpayer mar aggregate trades or businesses if:

* Each trade or business constitutes a trade or business;

* The same person or group owns 50 percent or more of each trade or business to be aggregated;

* None of the aggregated trades or businesses can be a specified service trade or business (see below); and

* The trades or businesses meet at least two of the three factors (discussed next) demonstrating that they are part of a larger, integrated trade or business.

Three Factors

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

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

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

Specified Service Businesses These businesses were described in the March/April 2018 California CPA, Page 23, and generally cannot generate qualified business income--although this exclusion is phased in for lower-income taxpayers.

New De Minimis Exception

This exception allows a business to avoid classification as a specified service business if:

* Its gross receipts are $25 million or less for the tax year and less than 10 percent of those receipts are attributable to performing specified services; or

* Its gross receipts exceed $25 million for the tax year and less than 5...