New Developments Information on Sec. 199A, Tax Benefit Rule & More.

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

The IRS recently released the following draft forms to be used to compute the IRC See. 199A deduction:

* form 8995. Qualified Business Income Deduction Simplified Computation; and

* form 8995-A, Qualified Business Income Deduction.

In addition, the IRS issued a Fact Sheet (FS-2018-8, Apr. 11, 2019), which discusses various aspects of this deduction and also states "The Form 1040 Instructions and Publication 535 provide worksheets to compute the deduction." Publication 535 is called Business Expenses.

Tax Benefit Rule

Rev. Rul. 2019-11 (IRB 2019-17. April 22, 2019) answers the following question: If a taxpayer received a tax benefit from deducting state and local taxes in 2018 and recovers all or a portion of those taxes in 2019, what portion of the refund must the taxpayer include in 2019 gross income?

This ruling discusses four situations under these facts for 2018:

* The taxpayers were unmarried individuals whose filing status was "single" and who itemized deductions on their federal income tax returns in lieu of using their 812,000 standard deduction.

* They did not pay state and local taxes in carrying on a trade or business or for an activity described in Sec. 212.

* These taxpayers used the cash method of accounting, were not subject to the alternative minimum tax and were not entitled to any tax credits.

Rationale

If the taxpayers in situations 1 through 4 (below) had paid only the proper amount of state and local taxes in 2018, then their itemized deductions may have been lower or they may have used the standard deduction. Therefore, in each situation, the taxpayer must determine the amount of itemized deductions that the taxpayer would have deducted in 2018 if the taxpayer paid only the proper amount of state and local taxes.

The taxpayer must then compare this amount to the total itemized deductions claimed for 2018 or to the standard deduction that could have been taken for 2018. Thc difference must be included in 2019 gross income if the taxpayer received a tax benefit from the itemized deductions claimed for 2018.

This rationale is illustrated in the following four situations.

Situation 1: State Income Tax Refund Fully Includable in 2019 Gross Income Mr. A paid the following taxes in 2018:

Local real property taxes $ 1.000

State income taxes $5.000

Total state and local taxes $9,000

This deduction was not limited by Sec.

164(b)(6) because it was below $10,000. Mr. A claimed the following itemized deductions on his 2018 federal...