[Federal Register Volume 84, Number 27 (Friday, February 8, 2019)]
[Rules and Regulations]
[Pages 2952-3014]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-01025]



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Vol. 84

Friday,

No. 27

February 8, 2019

Part II





Department of The Treasury





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Internal Revenue Service





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26 CFR Part 1





Qualified Business Income Deduction; Final Rule and Proposed Rule

  Federal Register / Vol. 84 , No. 27 / Friday, February 8, 2019 / 
Rules and Regulations  

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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9847]
RIN 1545-BO71


Qualified Business Income Deduction

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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SUMMARY: This document contains final regulations concerning the 
deduction for qualified business income under section 199A of the 
Internal Revenue Code (Code). The regulations will affect individuals, 
partnerships, S corporations, trusts, and estates engaged in domestic 
trades or businesses. The regulations also contain an anti-avoidance 
rule under section 643 of the Code to treat multiple trusts as a single 
trust in certain cases, which will affect trusts, their grantors, and 
beneficiaries. This document also requests additional comments on 
certain aspects of the deduction.

DATES: 
    Effective date: These regulations are effective on February 8, 
2019. Sections 1.199A-1 through 1.199A-6 are generally applicable to 
taxable years ending after February 8, 2019. However, taxpayers may 
rely on the rules set forth in Sec. Sec.  1.199A-1 through 1.199A-6, in 
their entirety, or on the proposed regulations under Sec. Sec.  1.199A-
1 through 1.199A-6 issued on August 16, 2018, in their entirety, for 
taxable years ending in calendar year 2018.
    Applicability date: For dates of applicability, see Sec. Sec.  
1.199A-1(f), 1.199A-2(d), 1.199A-3(d), 1.199A-4(e), 1.199A-5(e), 
1.199A-6(e), and 1.643(f)-1(b).

FOR FURTHER INFORMATION CONTACT: Vishal R. Amin or Frank J. Fisher at 
(202) 317-6850 or Robert D. Alinsky, Margaret Burow, or Wendy L. 
Kribell at (202) 317-5279.

ADDRESSES: Submit electronic submissions to the Federal eRulemaking 
Portal at www.regulations.gov (indicate IRS and REG-107892-18) by 
following the online instructions for submitting comments. Once 
submitted to the Federal eRulemaking Portal, comments cannot be edited 
or withdrawn. The Department of the Treasury (Treasury Department) and 
the IRS will publish for public availability any comment received to 
its public docket, whether submitted electronically or in hard copy. 
Send hard copy submissions to CC:PA:LPD:PR (REG-107892-18), Room 5203, 
Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, 
Washington, DC 20044. Submissions may be hand-delivered Monday through 
Friday between 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 NW, Washington, DC 20224.

SUPPLEMENTARY INFORMATION: 

Paperwork Reduction Act

    The collection of information contained in these regulations has 
been revised and approved by the Office of Management and Budget for 
review in accordance with the Paperwork Reduction Act of 1995 (44 
U.S.C. 3507) under control numbers 1545-0123, 1545-0074, and 1545-0092.
    Regulations in Sec. Sec.  1.199A-4 and 1.199A-6 require the 
collection of information. Section 1.199A-4 requires taxpayers and 
passthrough entities that choose to aggregate two or more trades or 
businesses to collect information. Section 1.199A-6 requires 
passthrough entities to report section 199A information to their owners 
or beneficiaries. Taxpayers need to report the information to the IRS 
by attaching the applicable statement to Form 1040 or to the Schedules 
K-1 for the Form 1041, Form 1065, or Form 1120S, as appropriate, to 
ensure the correct amount of deduction is reported under section 199A. 
The collection of information is necessary to ensure tax compliance.
    The likely respondents are individuals with qualified business 
income from more than one trade or business as well as most 
partnerships, S corporations, trusts, and estates that have qualified 
business income. More of the paperwork burden analysis details are 
explained in the Special Analysis Section J, Anticipated impacts on 
administrative and compliance costs.
    Estimated total annual reporting burden: 25 million hours. This 
estimate primarily reflects two effects of the regulations: A 0.7 
million hour increase in reporting burden from compliance with Sec.  
1.199A-4 and a 24.2 million hour increase in reporting burden from 
compliance with Sec.  1.199A-6.
    Estimated average annual burden hours per respondent will vary from 
30 minutes to 20 hours, depending on individual circumstances, with an 
estimated average of 2.5 hours.
    Estimated number of respondents: 10 million.
    Estimated annual frequency of responses: Annually.
    Estimated monetized burden: Using the IRS's taxpayer compliance 
cost estimates, taxpayers who are self-employed with multiple 
businesses are estimated to have a monetization rate of $39 per hour. 
Passthroughs that issue K-1s have a monetization rate of $53 per hour. 
(See ``Taxpayer Compliance Costs for Corporations and Partnerships: A 
New Look,'' Contos, et al. IRS Research Bulletin (2012) p. 5 for a 
description of the model.)
    An agency may not conduct or sponsor, and a person is not required 
to respond to, a collection of information unless it displays a valid 
control number assigned by the Office of Management and Budget.
    Books or records relating to a collection of information must be 
retained as long as their contents may become material in the 
administration of any internal revenue law. Generally, tax returns and 
tax return information are confidential, as required by section 6103.

Background

    This document contains amendments to the Income Tax Regulations (26 
CFR part 1) under sections 199A and 643(f) of the Code. On August 16, 
2018, the Department of the Treasury (Treasury Department) and the IRS 
published a notice of proposed rulemaking (REG-107892-18) in the 
Federal Register (83 FR 40884) containing proposed regulations under 
sections 199A and 643(f) of the Code (proposed regulations). The 
Summary of Comments and Explanation of Revisions summarizes the 
provisions of sections 199A and 643(f) and the provisions of the 
proposed regulations, which are explained in greater detail in the 
preamble to the proposed regulations.
    The Treasury Department and the IRS received written and electronic 
comments responding to the proposed regulations and held a public 
hearing on the proposed regulations on October 16, 2018. After full 
consideration of the comments received on the proposed regulations and 
the testimony heard at the public hearing, this Treasury decision 
adopts the proposed regulations with modifications in response to such 
comments and testimony as described in the Summary of Comments and 
Explanation of Revisions. Concurrently with the publication of these 
final regulations, the Treasury Department and the IRS are publishing 
in the Proposed Rule section of this edition of the Federal Register 
(RIN 1545-BP12) a notice of proposed rulemaking providing additional 
proposed regulations under section 199A (REG-134652-18).

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Summary of Comments and Explanation of Revisions

    The Treasury Department and the IRS received approximately 335 
comments in response to the notice of proposed rulemaking. All comments 
were considered and are available at www.regulations.gov or upon 
request. Most of the comments addressing the proposed regulations are 
summarized in this Summary of Comments and Explanation of Revisions. 
However, comments merely summarizing or interpreting the proposed 
regulations, recommending statutory revisions, or addressing provisions 
outside the scope of these final regulations are not discussed in this 
preamble. The Treasury Department and the IRS continue to study 
comments on issues related to section 199A that are beyond the scope of 
these final regulations (or the notice of proposed rulemaking on this 
subject in the Proposed Rules section of this issue of the Federal 
Register) and may discuss those comments that are beyond the scope of 
the regulations if future guidance on those issues is published.
    As discussed in the preamble to the proposed regulations, the 
purpose and scope of the proposed regulations and these final 
regulations are primarily limited to determining the amount of the 
deduction of up to 20 percent of income from a domestic business 
operated as a sole proprietorship or through a partnership, S 
corporation (as defined in section 1361(a)(1)), trust, or estate 
(section 199A deduction). The purpose and scope of the proposed 
regulations and these final regulations are also to determine when to 
treat two or more trusts as a single trust for purposes of subchapter J 
of chapter 1 of subtitle A of the Code (subchapter J). These final 
regulations are not intended to address section 643 in general.
    Commenters and others requested that the proposed regulations be 
finalized as quickly as possible to provide guidance to practitioners 
and taxpayers as they prepare returns and determine the section 199A 
deduction for the first taxable year in which the deduction is allowed. 
Commenters also requested that the rules for section 199A be simplified 
and clarified. Accordingly, these final regulations adopt many of the 
rules described in the proposed regulations, with revisions in response 
to the comments received and testimony provided at the public hearing, 
as described in the remainder of this Summary of Comments and 
Explanation of Revisions. Additionally, clarifying language and 
additional examples have been added throughout the final regulations.
    Part I of this section provides an overview of the sections of the 
Code addressed by these final regulations. Part II of this section 
addresses the operational rules, including definitions, computational 
rules, special rules, and reporting requirements. Part III of this 
section addresses the determination of W-2 wages and unadjusted basis 
immediately after acquisition (UBIA) of qualified property. Part IV of 
this section addresses the determination of qualified business income 
(QBI), qualified real estate investment trust (REIT) dividends, and 
qualified publicly traded partnership (PTP) income. Part V of this 
section addresses the optional aggregation of trades or businesses. 
Part VI of this section addresses specified services trades or 
businesses (SSTBs) and the trade or business of being an employee. Part 
VII of this section addresses the rules for relevant passthrough 
entities (RPEs), PTPs, beneficiaries, trusts, and estates. Part VIII of 
this section addresses the treatment of multiple trusts.

I. Overview

A. Section 199A

    As noted in the preamble to the proposed regulations, section 199A 
was enacted on December 22, 2017, by section 11011 of ``An Act to 
provide for reconciliation pursuant to titles II and V of the 
concurrent resolution on the budget for fiscal year 2018,'' Public Law 
115-97 (TCJA), and was amended on March 23, 2018, retroactively to 
January 1, 2018, by section 101 of Division T of the Consolidated 
Appropriations Act, 2018, Public Law 115-141, (2018 Act). Section 199A 
applies to taxable years beginning after 2017 and before 2026.
    Section 199A provides a deduction of up to 20 percent of income 
from a domestic business operated as a sole proprietorship or through a 
partnership, S corporation, trust, or estate. The section 199A 
deduction may be taken by individuals and by some estates and trusts. A 
section 199A deduction is not available for wage income or for business 
income earned through a C corporation (as defined in section 
1361(a)(2)). For taxpayers whose taxable income exceeds a statutorily-
defined amount (threshold amount), section 199A may limit the 
taxpayer's section 199A deduction based on (i) the type of trade or 
business engaged in by the taxpayer, (ii) the amount of W-2 wages paid 
with respect to the trade or business (W-2 wages), and/or (iii) the 
UBIA of qualified property held for use in the trade or business (UBIA 
of qualified property). These statutory limitations are subject to 
phase-in rules based upon taxable income above the threshold amount.
    Section 199A also allows individuals and some trusts and estates 
(but not corporations) a deduction of up to 20 percent of their 
combined qualified REIT dividends and qualified PTP income, including 
qualified REIT dividends and qualified PTP income earned through 
passthrough entities. This component of the section 199A deduction is 
not limited by W-2 wages or UBIA of qualified property.
    The section 199A deduction is the lesser of (1) the sum of the 
combined amounts described in the prior two paragraphs or (2) an amount 
equal to 20 percent of the excess (if any) of taxable income of the 
taxpayer for the taxable year over the net capital gain of the taxpayer 
for the taxable year.
    Additionally, section 199A(g), as amended by the 2018 Act effective 
as of January 1, 2018, provides that specified agricultural or 
horticultural cooperatives may claim a special entity-level deduction 
that is substantially similar to the domestic production activities 
deduction under former section 199. The Treasury Department and the IRS 
intend to issue a future notice of proposed rulemaking describing 
proposed rules for applying section 199A to specified agricultural and 
horticultural cooperatives and their patrons.
    Finally, the statute expressly grants the Secretary authority to 
prescribe such regulations as are necessary to carry out the purposes 
of section 199A (section 199A(f)(4)), and provides specific grants of 
authority with respect to: The treatment of acquisitions, dispositions, 
and short taxable years (section 199A(b)(5)); certain payments to 
partners for services rendered in a non-partner capacity (section 
199A(c)(4)(C)); the allocation of W-2 wages and UBIA of qualified 
property (section 199A(f)(1)(A)(iii)); restricting the allocation of 
items and wages under section 199A and such reporting requirements as 
the Secretary determines appropriate (section 199A(f)(4)(A)); the 
application of section 199A in the case of tiered entities (section 
199A(f)(4)(B); preventing the manipulation of the depreciable period of 
qualified property using transactions between related parties (section 
199A(h)(1)); and determining the UBIA of qualified property acquired in 
like-kind exchanges or involuntary conversions (section 199A(h)(2)).

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B. Section 643(f)

    Part I of subchapter J provides rules related to the taxation of 
estates, trusts, and beneficiaries. For various subparts of part I of 
subchapter J, sections 643(a), 643(b), and 643(c) define the terms 
distributable net income (DNI), income, and beneficiary, respectively. 
Sections 643(d) through 643(i) (other than section 643(f)) provide 
additional rules. Section 643(f) grants the Secretary authority to 
treat two or more trusts as a single trust for purposes of subchapter J 
if (1) the trusts have substantially the same grantors and 
substantially the same primary beneficiaries and (2) a principal 
purpose of such trusts is the avoidance of the tax imposed by chapter 1 
of the Code. Section 643(f) further provides that, for these purposes, 
spouses are treated as a single person.

II. Operational Rules

A. Definitions

1. Net Capital Gain
    Section 199A(a) provides, in relevant part, that the section 199A 
deduction is limited to the lesser of the taxpayer's combined QBI or 20 
percent of the excess of a taxpayer's taxable income over the 
taxpayer's net capital gain (as defined in section 1(h)) for the 
taxable year. The proposed regulations do not contain a specific 
definition of net capital gain. The Treasury Department and the IRS are 
aware that taxpayers and practitioners have questioned how net capital 
gain is determined for purposes of section 199A. One commenter 
suggested that net capital gain, as used to calculate the section 199A 
deduction, should be defined as excluding qualified dividend income, 
which is taxed as capital gain.
    The final regulations provide a definition of net capital gain for 
purposes of section 199A. Section 1(h) establishes the maximum capital 
gains rates imposed on individuals, trusts, and estates that have a net 
capital gain for the taxable year. Section 1222(11) defines net capital 
gain as the excess of net long-term capital gain for the taxable year 
over the net short-term capital loss for such year. Section 1(h)(11) 
provides that for purposes of section 1(h), net capital gain means net 
capital gain (determined without regard to section 1(h)(11)) increased 
by qualified dividend income. Accordingly, Sec.  1.199A-1(b)(3) defines 
net capital gain for purposes of section 199A as net capital gain 
within the meaning of section 1222(11) plus any qualified dividend 
income (as defined in section 1(h)(11)(B)) for the taxable year.
    The Treasury Department and the IRS note that under section 
1(h)(2), net capital gain is reduced by the amount that the taxpayer 
takes into account as investment income under section 
163(d)(4)(B)(iii). This reduction does not change the definition of net 
capital gain for purposes of section 1(h). Instead, it reduces the 
amount of gains that can be taxed at the maximum capital gains rates as 
a tradeoff for allowing a taxpayer to elect to deduct more investment 
interest under section 163(d). Consequently, capital gains and 
qualified dividends treated as investment income are net capital gain 
for purposes of determining the section 199A deduction.
2. Relevant Passthrough Entity
    The proposed regulations define an RPE as a partnership (other than 
a PTP) or an S corporation that is owned, directly or indirectly, by at 
least one individual, estate, or trust. A trust or estate is treated as 
an RPE to the extent it passes through QBI, W-2 wages, UBIA of 
qualified property, qualified REIT dividends, or qualified PTP income. 
In response to a comment, the final regulations provide that other 
passthrough entities, including common trust funds as described in 
Sec.  1.6032-T and religious or apostolic organizations described in 
section 501(d), are also treated as RPEs if the entity files a Form 
1065, U.S. Return of Partnership Income, and is owned, directly or 
indirectly, by at least one individual, estate, or trust. The Treasury 
Department and the IRS decline to adopt the recommendation of another 
commenter to treat regulated investment companies (RICs) as RPEs 
because RICs are C corporations, not passthrough entities.
3. Trade or Business
a. In General
    The calculation of QBI and therefore, the benefits of section 199A, 
are limited to taxpayers with income from a trade or business. Section 
199A and its legislative history, however, do not define the phrase 
``trade or business.'' The proposed regulations define trade or 
business by reference to section 162. Section 162(a) permits a 
deduction for all the ordinary and necessary expenses paid or incurred 
in carrying on a trade or business. Multiple commenters agreed that 
section 162 is the most appropriate standard for what constitutes a 
trade or business for purposes of section 199A, but noted that there 
are significant uncertainties in the meaning of trade or business under 
section 162. However, because many taxpayers who will now benefit from 
the section 199A deduction are already familiar with the trade or 
business standard under section 162, using the section 162 standard 
appears to be the most practical for taxpayers and the IRS. Therefore, 
after considering all relevant comments, the final regulations retain 
and slightly reword the proposed regulation's definition of trade or 
business. Specifically, for purposes of section 199A and the 
regulations thereunder, Sec.  1.199A-1(b)(14) defines trade or business 
as a trade or business under section 162 (section 162 trade or 
business) other than the trade or business of performing services as an 
employee.
    The Treasury Department and the IRS received a number of comments 
requesting additional guidance with respect to determining whether an 
activity rises to the level of a section 162 trade or business, and 
therefore, will be considered to be a trade or business for purposes of 
determining the section 199A deduction. Commenters suggested guidance 
in the form of a regulatory definition, a bright-line test, a factor-
based test, or a safe harbor. Whether an activity rises to the level of 
a section 162 trade or business, however, is inherently a factual 
question and specific guidance under section 162 is beyond the scope of 
these regulations. Accordingly, the Treasury Department and the IRS 
have concluded that the factual setting of various trades or businesses 
varies so widely that a single rule or list of factors would be 
difficult to provide in a timely and manageable manner and would be 
difficult for taxpayers to apply.
    In Higgins v. Commissioner, 312 U.S. 212 (1941), the Supreme Court 
noted that determining whether a trade or business exists is a factual 
determination. Specifically, the Court stated that the determination of 
``whether the activities of a taxpayer are `carrying on a business' 
requires an examination of the facts in each case.'' 312 U.S. at 217. 
Because there is no statutory or regulatory definition of a section 162 
trade or business, courts have established elements to determine the 
existence of a trade or business. The courts have developed two 
definitional requirements. One, in relation to profit motive, is said 
to require the taxpayer to enter into and carry on the activity with a 
good faith intention to make a profit or with the belief that a profit 
can be made from the activity. The second is in relation to the scope 
of the activities and is said to require considerable, regular, and 
continuous activity. See generally Commissioner v. Groetzinger, 480 
U.S. 23 (1987). In the seminal case of Groetzinger, the Supreme Court 
stated,

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``[w]e do not overrule or cut back on the Court's holding in Higgins 
when we conclude that if one's gambling activity is pursued full time, 
in good faith, and with regularity, to the production of income for a 
livelihood, and is not a mere hobby, it is a trade or business within 
the statutes with which we are here concerned.'' Id. at 35.
    A few commenters suggested adopting the definitions or rules 
regarding a trade or business found in other provisions of the Code, 
including sections 469 and 1411. Section 469(c)(6) and Sec.  1.469-
4(b)(1) broadly define trade or business activities other than rental 
activities to include any activity performed: (i) In connection with a 
trade or business within the meaning of section 162, (ii) with respect 
to which expenses are allowable as a deduction under section 212, (iii) 
conducted in anticipation of the commencement of a trade or business, 
or (iv) that involves research and experimentation expenditures (within 
the meaning of section 174). Section 1.469-4(b)(2) defines a rental 
activity as an activity that constitutes a rental activity within the 
meaning of Sec.  1.469-1T(e)(3). Passive activities for purposes of 
section 469 are defined as any activity that involves the conduct of a 
trade or business in which the taxpayer does not materially participate 
and includes all rental activity. The definition of trade or business 
for section 469 purposes is significantly broader than the definition 
for purposes of section 162 as it is intended to capture a larger 
universe of activities, including passive activities. Section 469 was 
enacted to limit the deduction of certain passive losses and therefore, 
serves a very different purpose than the allowance of a deduction under 
section 199A. Further, section 199A does not require that a taxpayer 
materially participate in a trade or business in order to qualify for 
the section 199A deduction. Consequently, the Treasury Department and 
the IRS decline to adopt the recommendation to define trade or business 
for purposes of section 199A by reference to section 469. The Treasury 
Department and the IRS also decline to define trade or business by 
reference to section 1411 as Sec.  1.1411-1(d)(12) defines trade or 
business by reference to section 162 in a manner similar to Sec.  
1.199A-1(b)(14).
    Commenters also suggested that the section 199A regulations 
incorporate the real estate professional provisions in section 
469(c)(7) in a manner similar to the cross references in section 163(j) 
and Sec.  1.1411-4(g)(7). Under section 469, a real estate professional 
may treat rental real estate activities described in section 
469(c)(7)(C) as nonpassive if the taxpayer materially participates in 
such activities. Section 1.469-5T(a) provides seven tests to establish 
material participation, but as noted above, these tests only determine 
whether an individual materially participates in a rental real estate 
activity. They cannot be used to determine whether the activity itself 
is a trade or business. Unlike section 469, whether a taxpayer is 
entitled to a section 199A deduction is not determined based on the 
taxpayer's level of participation in a trade or business, nor does it 
require that an individual materially participate in the trade or 
business. Instead, section 199A is dependent on whether the individual 
has QBI from a trade or business. Consequently, the Treasury Department 
and the IRS decline to adopt these comments because the Sec.  1.469-5T 
material participation tests are not a proxy to establish regular, 
continuous, and considerable activity that rises to the level of a 
trade or business for purposes of section 199A.
b. Rental Real Estate Activities as a Trade or Business
    A majority of the comments received on the meaning of a trade or 
business focus on the treatment of rental real estate activities. 
Commenters noted inconsistency in the case law in determining whether a 
taxpayer renting real estate is engaged in a trade or business. Some 
commenters suggested including safe harbors, tests, or a variety of 
factors, which if satisfied, would qualify a rental real estate 
activity as a trade or business. A number of commenters suggested that 
all rental real estate activity should qualify as a trade or business. 
Further, one commenter suggested that rental income from real property 
held for the production of rents within the meaning of section 62(a)(4) 
should be considered a trade or business for purposes of section 199A. 
Another commenter suggested that final regulations provide that an 
individual whose taxable income does not exceed the threshold amount 
will be considered to be conducting a trade or business with respect to 
any real estate rental of which the individual owns at least ten 
percent and in which the individual actively participates within the 
meaning of section 469(i).
    In determining whether a rental real estate activity is a section 
162 trade or business, relevant factors might include, but are not 
limited to (i) the type of rented property (commercial real property 
versus residential property), (ii) the number of properties rented, 
(iii) the owner's or the owner's agents day-to-day involvement, (iv) 
the types and significance of any ancillary services provided under the 
lease, and (v) the terms of the lease (for example, a net lease versus 
a traditional lease and a short-term lease versus a long-term lease).
    Providing bright line rules on whether a rental real estate 
activity is a section 162 trade or business for purposes of section 
199A is beyond the scope of these regulations. Additionally, the 
Treasury Department and the IRS decline to adopt a position deeming all 
rental real estate activity to be a trade or business for purposes of 
section 199A. However, the Treasury Department and IRS recognize the 
difficulties taxpayers and practitioners may have in determining 
whether a taxpayer's rental real estate activity is sufficiently 
regular, continuous, and considerable for the activity to constitute a 
section 162 trade or business. Accordingly, Notice 2019-07, 2019-9 IRB, 
released concurrently with these final regulations, provides notice of 
a proposed revenue procedure detailing a proposed safe harbor under 
which a rental real estate enterprise may be treated as a trade or 
business solely for purposes of section 199A.
    Under the proposed safe harbor, a rental real estate enterprise may 
be treated as a trade or business for purposes of section 199A if at 
least 250 hours of services are performed each taxable year with 
respect to the enterprise. This includes services performed by owners, 
employees, and independent contractors and time spent on maintenance, 
repairs, collection of rent, payment of expenses, provision of services 
to tenants, and efforts to rent the property. Hours spent by any person 
with respect to the owner's capacity as an investor, such as arranging 
financing, procuring property, reviewing financial statements or 
reports on operations, planning, managing, or constructing long-term 
capital improvements, and traveling to and from the real estate are not 
considered to be hours of service with respect to the enterprise. The 
proposed safe harbor also would require that separate books and records 
and separate bank accounts be maintained for the rental real estate 
enterprise. Property leased under a triple net lease or used by the 
taxpayer (including an owner or beneficiary of an RPE) as a residence 
for any part of the year under section 280A would not be eligible under 
the proposed safe harbor. A rental real estate enterprise that 
satisfies the proposed safe harbor may be treated as a trade or 
business solely for purposes of section 199A and such satisfaction does 
not necessarily determine whether the rental real estate activity is a 
section 162 trade or business. Likewise, failure

[[Page 2956]]

to meet the proposed safe harbor would not necessarily preclude rental 
real estate activities from being a section 162 trade or business.
    Examples 1 and 2 of proposed Sec.  1.199A-1(d)(4) describe a 
taxpayer who owns several parcels of land that the taxpayer manages and 
leases to airports for parking lots. The Treasury Department and the 
IRS are aware that some practitioners and taxpayers questioned whether 
the use of the lease of unimproved land in these examples was intended 
to imply that the lease of unimproved land is a trade or business for 
purposes of section 199A. Proposed Sec.  1.199A-1(d)(4) provides that 
for purposes of the examples all businesses described in the examples 
are trades or business for purposes of section 199A. Example 1 was 
intended to provide a simple illustration of how the calculation would 
work if a taxpayer lacked sufficient W-2 wages or UBIA of qualified 
property to claim the deduction. Example 2 built on the fact pattern by 
adding UBIA of qualified property to the facts. The examples in the 
proposed regulations were not intended to imply that the lease of the 
land is, or is not, a trade or business for purposes of section 199A 
beyond the assumption in the examples. In order to avoid any confusion, 
the final regulations remove the references to land in both examples.
c. Special Rule for Renting Property to a Related Person
    In one instance, the proposed regulations and the final regulations 
extend the definition of trade or business for purposes of section 199A 
beyond section 162. Solely for purposes of section 199A, the rental or 
licensing of tangible or intangible property to a related trade or 
business is treated as a trade or business if the rental or licensing 
activity and the other trade or business are commonly controlled under 
proposed Sec.  1.199A-4(b)(1)(i). This rule also allows taxpayers to 
aggregate their trades or businesses with the leasing or licensing of 
the associated rental or intangible property if all of the requirements 
of proposed Sec.  1.199A-4 are met.
    One commenter asked for clarification regarding whether this rule 
applies to situations in which the rental or licensing is to a commonly 
controlled C corporation. Another commenter suggested that the rule in 
the proposed regulations could allow passive leasing and licensing-type 
activities to benefit from section 199A even if the counterparty is not 
an individual or an RPE. The commenter recommended that the exception 
be limited to scenarios in which the related party is an individual or 
an RPE and that the term related party be defined with reference to 
existing attribution rules under sections 267, 707, or 414. The final 
regulations clarify these rules by adopting these recommendations and 
limiting this special rule to situations in which the related party is 
an individual or an RPE. Further, as discussed in part V.B. of this 
Summary of Comments and Explanation of Revisions, the final regulations 
provide that the related party rules under sections 267(b) or 707(b) 
will be used to determine relatedness for purposes of Sec.  1.199A-4 
and this special rule.
d. Multiple Trades or Businesses Within an Entity
    Several commenters suggested that there should be safe harbors or 
factors to determine how to delineate separate section 162 trades or 
businesses within an entity and when an entity's combined activities 
should be considered a single section 162 trade or business. Some of 
the factors suggested include whether the activities: Have separate 
books and records, facilities, locations, employees, and bank accounts; 
operate separate types of businesses or activities; are held out as 
separate to the public; and are housed in separate legal entities. One 
commenter suggested adopting the separate trade or business rules 
provided in regulations under sections 446 and 469.
    The Treasury Department and the IRS decline to adopt these 
recommendations because specific guidance under section 162 is beyond 
the scope of these final regulations and, as described in part 
II.A.3.a. of this Summary of Comments and Explanation of Revisions, 
guidance under section 469 is inapplicable. Further, Sec.  1.446-1(d) 
does not provide guidance on when trades or businesses will be 
considered separate and distinct. Instead, it provides that a taxpayer 
can use different methods of accounting for separate and distinct 
trades or businesses and specifies two circumstances in which trades or 
businesses will not be considered separate and distinct. Section 1.446-
1(d)(2) provides that no trade or business will be considered separate 
and distinct unless a complete and separable set of books and records 
is kept for such trade or business.
    The Treasury Department and the IRS acknowledge that an entity can 
conduct more than one section 162 trade or business. This position is 
inherent in the reporting requirements detailed in Sec.  1.199A-6, 
which require an entity to separately report QBI, W-2 wages, UBIA of 
qualified property, and SSTB information for each trade or business 
engaged in by the entity. Whether a single entity has multiple trades 
or businesses is a factual determination. However, court decisions that 
help define the meaning of ``trade or business'' provide taxpayers 
guidance in determining whether more than one trades or businesses 
exist. As discussed in part II.A.3.a. of this Summary of Comments and 
Explanation of Revisions, generally under section 162, to be engaged in 
a trade or business, the taxpayer must be involved in the activity with 
continuity and regularity and the taxpayer's primary purpose for 
engaging in the activity must be for income or profit. Groetzinger, at 
35.
    The Treasury Department and the IRS also believe that multiple 
trades or businesses will generally not exist within an entity unless 
different methods of accounting could be used for each trade or 
business under Sec.  1.446-1(d). Section 1.446-1(d) explains that no 
trade or business is considered separate and distinct unless a complete 
and separable set of books and records is kept for that trade or 
business. Further, trades or businesses will not be considered separate 
and distinct if, by reason of maintaining different methods of 
accounting, there is a creation or shifting of profits and losses 
between the businesses of the taxpayer so that income of the taxpayer 
is not clearly reflected.
e. Taxpayer Consistency
    In cases in which other Code provisions use a trade or business 
standard that is the same or substantially similar to the section 162 
standard adopted in these final regulations, taxpayers should report 
such items consistently. For example, if taxpayers who own tenancy in 
common interests in rental property treat such joint interests as a 
trade or business for purposes of section 199A but do not treat the 
joint interests as a separate entity for purposes of Sec.  301.7701-
1(a)(2), the IRS will consider the facts and circumstances surrounding 
the differing treatment. Similarly, taxpayers should consider the 
appropriateness of treating a rental activity as a trade or business 
for purposes of section 199A where the taxpayer does not comply with 
the information return filing requirements under section 6041.

B. Computational Rules

    Section 1.199A-1(d)(2)(iii)(A) of the proposed regulations provides 
that if an individual's QBI from at least one trade or business is less 
than zero, the individual must offset the QBI

[[Page 2957]]

attributable to each trade or business that produced net positive QBI 
with the QBI from each trade or business that produced net negative QBI 
in proportion to the relative amounts of net QBI in the trades or 
businesses with positive QBI. This rule is applied prior to the 
application of the W-2 wage and UBIA of qualified property limitations. 
One commenter supported this rule, noting that it leads to fair and 
administrable results for both the government and taxpayers. Another 
commenter argued that the rule requiring losses to be allocated to a 
trade or business with positive QBI should be eliminated. The commenter 
noted that aggregation is optional and netting provisions force a 
mathematical aggregation where one is not desired or necessary. The 
commenter also stated that taxpayers are prevented from claiming an 
excessive deduction by the taxable income, W-2 wage, and UBIA of 
qualified property limitations. A third commenter suggested that if the 
netting rule is retained, a taxpayer should be able to elect to include 
an unprofitable business with any group of businesses when determining 
the amount of their W-2 wages and UBIA of qualified property regardless 
of whether the aggregation factors are met.
    The Treasury Department and the IRS decline to adopt these 
recommendations. The aggregation rules provided in Sec.  1.199A-4 are 
optional and are intended to assist taxpayers in applying the W-2 wage 
and UBIA of qualified property limitations in situations in which a 
unified business is conducted across multiple entities. In contrast, 
the netting rule is derived from section 199A(b) of the Code, which 
provides in relevant part that the term ``combined qualified business 
income amount'' includes the sum of 20 percent of the taxpayer's QBI 
with respect to each qualified trade or business of the taxpayer. 
Further, the conference report accompanying the TCJA describes the 
Senate amendment as providing that ``[i]f the net amount of qualified 
business income from all qualified trades or businesses during the 
taxable year is a loss, it is carried forward as a loss from a 
qualified trade or business in the next taxable year.'' H.R. Rep. No. 
115-466, at 214 (2017) (Conference Report). The Conference Report also 
includes an example, ``For example, an individual has two business 
activities that give rise to a net business loss of 3 and 4, 
respectively, in year one, giving rise to a carryover business loss of 
7 in year two. If in year two the two business activities each give 
rise to net business income of 2, a carryover business loss of 3 is 
carried to year three (that is, <7>-(2 + 2) = <3>).'' Id. at 211. This 
example indicates that QBI is netted in determining combined QBI.
    Another commenter asked, in the case of a taxpayer with taxable 
income within the phase-in range, whether QBI from an SSTB is reduced 
by the applicable percentage before or after QBI from all of the 
taxpayer's trades or businesses is netted. The commenter recommended 
that negative QBI be netted with positive QBI before the reduction 
amount is applied to the QBI from the SSTB.
    The Treasury Department and the IRS agree that clarification is 
needed regarding the reduction of QBI from an SSTB when a taxpayer has 
multiple trades or businesses. Section 199A(d)(3)(A)(ii) provides that 
only the applicable percentage of qualified items of income, gain, 
deduction, or loss, and the W-2 wages and the unadjusted basis 
immediately after acquisition of qualified property, of the taxpayer 
allocable to such specified service trade or business shall be taken 
into account in computing the qualified business income, W-2 wages, and 
the unadjusted basis immediately after acquisition of qualified 
property of the taxpayer for the taxable year for purposes of applying 
this section. The Treasury Department and the IRS believe this language 
applies for all purposes in computing the section 199A deduction. 
Accordingly, the final regulations provide that for taxpayers with 
taxable income within the phase-in range, QBI from an SSTB must be 
reduced by the applicable percentage before the application of the 
netting and carryover rules described in Sec.  1.199A-1(d)(2)(iii)(A). 
The final regulations clarify that the SSTB limitations also apply to 
qualified income received by an individual from a PTP.

C. Other Comments

1. Disregarded Entities
    The proposed regulations do not address the treatment of 
disregarded entities for purposes of section 199A. A few commenters 
questioned whether trades or businesses conducted by disregarded 
entities would be treated as if conducted directly by the owner of the 
entity. Section 1.199A-1(e)(2) of the final regulations provides that 
an entity with a single owner that is treated as disregarded as an 
entity separate from its owner under any provision of the Code is 
disregarded for purposes of section 199A and 1.199A-1 through 1.199A-6. 
Accordingly, trades or businesses conducted by a disregarded entity 
will be treated as conducted directly by the owner of the entity for 
purposes of section 199A.
2. Deductions Limited by Taxable Income
    One commenter requested clarification that other deductions limited 
by taxable income, such as the 65-percent-of-taxable-income limit 
imposed on the deduction for oil and gas percentage depletion under 
section 613A, are to be computed without regard to any section 199A 
deduction. The Treasury Department and the IRS decline to adopt this 
comment as the specific question is answered by section 613A(d)(1)(B), 
as amended by the TCJA, which provides that taxable income for purposes 
of the limitation under section 613A(d)(1) is computed without regard 
to any deduction allowable under 199A. The Treasury Department and the 
IRS believe that limitations on other deductions provided for under the 
Code are more properly addressed by guidance under those Code sections.
3. Treatment of Section 199A Deduction for Purposes of Section 162(a)
    Another commenter suggested that the final regulations provide that 
the section 199A deduction is treated as a deduction for purposes of 
section 199A only and not as a deduction that is paid or incurred for 
purposes of section 162(a) or for any other purposes of the Code. The 
Treasury Department and the IRS decline to adopt this recommendation. 
In making this suggestion, the Treasury Department and the IRS assume 
the commenter is concerned with how section 199A interacts with the 
many Code sections that reference a ``trade or business.'' How section 
199A interacts with other Code sections must be determined with respect 
to the particular Code section at issue. Accordingly, the Treasury 
Department and the IRS decline to adopt this general suggestion.
4. Section 6662(a) Penalty for Underpayment of Tax
    Section 6662(a) provides a penalty for an underpayment of tax 
required to be shown on a return. Under section 6662(b), the penalty 
applies to the portion of any underpayment that is attributable to a 
substantial underpayment of income tax. Section 6662(d)(1) defines 
substantial understatement of tax, which is generally an understatement 
that exceeds the greater of 10 percent of the tax required to be shown 
on the return or $5,000. Section 6662(d)(1)(C) provides a special rule 
in the case of any taxpayer who claims the section 199A deduction for 
the taxable year, which

[[Page 2958]]

requires that section 6662(d)(1)(A) is applied by substituting ``5 
percent'' for ``10 percent.'' Section 1.199A-1(e)(6) cross-references 
this rule. One commenter asked for guidance on how the section 6662 
accuracy penalty would be applied if an activity was determined by the 
IRS not to be a trade or business for purposes of section 199A. The 
Treasury Department and the IRS decline to adopt this suggestion as 
guidance regarding the application of section 6662 is beyond the scope 
of these regulations.

III. Determination of W-2 Wages and Unadjusted Basis Immediately After 
Acquisition of Qualified Property

A. W-2 Wages

    One commenter asked for clarification regarding whether W-2 wages 
include elective deferrals to self-employed Simplified Employee 
Pensions (SEP), simple retirement accounts (SIMPLE), and other 
qualified plans. Revenue Procedure 2019-11, 2019-9 IRB, issued 
concurrently with these final regulations, provides additional guidance 
on the definition of W-2 wages, including amounts treated as elective 
deferrals. A few commenters asked for confirmation that W-2 wages 
include S corporation owner/employee W-2 wages for purposes of the W-2 
wage limitation (assuming the wages are included on the Form W-2 filed 
within 60 days of the due date). The definition of W-2 wages includes 
amounts paid to officers of an S corporation and common-law employees 
of an individual or RPE. Amounts paid as W-2 wages to an S corporation 
shareholder cannot be included in the recipient's QBI. However, these 
amounts are included as W-2 wages for purposes of the W-2 wage 
limitation to the extent that the requirements of Sec.  1.199A-2 are 
otherwise satisfied.
    Another commenter suggested that, for purposes of the W-2 wage 
limitation, taxpayers should be able to include wages paid during the 
12 months prior to the sale, disposition, or other transactions 
involving a business segment that generates LIFO and depreciation 
recapture. The Treasury Department and the IRS decline to adopt this 
comment. Section 199A(b)(4) provides that the term W-2 wages means, 
with respect to any person for any taxable year of such person, the 
amounts described in paragraphs (3) and (8) of section 6051(a) paid by 
such person with respect to employment of employees by such person 
during the calendar year ending during such taxable year. Therefore, 
regardless of recapture, wages paid prior to a calendar year cannot be 
included in determining W-2 wages for such calendar year under the 
language of the statute.

B. UBIA

1. Qualified Property Held by an RPE
    The proposed regulations provide that in the case of qualified 
property held by an RPE, each partner's or shareholder's share of the 
UBIA of qualified property is an amount that bears the same proportion 
to the total UBIA of qualified property as the partner's or 
shareholder's share of tax depreciation bears to the RPE's total tax 
depreciation with respect to the property for the year. In the case of 
a partnership with qualified property that does not produce tax 
depreciation during the year, each partner's share of the UBIA of 
qualified property would be based on how gain would be allocated to the 
partners pursuant to sections 704(b) and 704(c) if the qualified 
property were sold in a hypothetical transaction for cash equal to the 
fair market value of the qualified property. Several commenters 
suggested that only section 704(b) should be used for this purpose, 
arguing that the use of section 704(c) allocation methods would be 
unduly burdensome and could lead to unintended results. One commenter 
recommended that partners should share UBIA of qualified property in 
the same manner that they share the economic depreciation of the 
property. Another commenter suggested allocating UBIA based on a ratio 
of each partner's allocation of depreciation and the partnership's 
total depreciation of qualified property for the year. One commenter 
requested clarification regarding how UBIA is allocated when a partner 
or shareholder has depreciation expense as an ordinary deduction and as 
a rental real estate deduction and they are allocated differently.
    The Treasury Department and the IRS agree with the commenters that 
relying on section 704(c) to allocate UBIA could lead to unintended 
shifts in the allocation of UBIA. Therefore, the final regulations 
provide that each partner's share of the UBIA of qualified property is 
determined in accordance with how depreciation would be allocated for 
section 704(b) book purposes under Sec.  1.704-1(b)(2)(iv)(g) on the 
last day of the taxable year. To the extent a partner has depreciation 
expense as an ordinary deduction and as a rental real estate deduction, 
the allocation of the UBIA should match the allocation of the expenses. 
The Treasury Department and the IRS request comments on whether a new 
regime is necessary in the case of a partnership with qualified 
property that does not produce tax depreciation during the taxable 
year. In the case of qualified property held by an S corporation, each 
shareholder's share of UBIA of qualified property is a share of the 
unadjusted basis proportionate to the ratio of shares in the S 
corporation held by the shareholder on the last day of the taxable year 
over the total issued and outstanding shares of the S corporation.
2. Property Contributed to a Partnership or S Corporation in a 
Nonrecognition Transfer
    The proposed regulations provide that the UBIA of qualified 
property means the basis on the placed in service date of the property. 
Therefore, the UBIA of qualified property contributed to a partnership 
in a section 721 transaction generally equals the partnership's tax 
basis under section 723 rather than the contributing partner's original 
UBIA of the property. Similarly, the UBIA of qualified property 
contributed to an S corporation in a section 351 transaction is 
determined by reference to section 362. Multiple commenters expressed 
concern that this treatment could result in a step-down in the UBIA of 
qualified property used in a trade or business at the time of the 
contribution due only to the change in entity structure. These 
commenters suggested that the UBIA of qualified property contributed to 
a partnership under section 721 or to an S corporation under section 
351 should be determined as of the date it was first placed in service 
by the contributing partner or shareholder. Another commenter suggested 
that final regulations should generally provide for carryover of UBIA 
of qualified property in non-recognition transactions, but provide an 
anti-abuse rule for cases in which a transaction was engaged in with a 
principal purpose of increasing the section 199A deduction.
    The Treasury Department and the IRS agree that qualified property 
contributed to a partnership or S corporation in a nonrecognition 
transaction should generally retain its UBIA on the date it was first 
placed in service by the contributing partner or shareholder. 
Accordingly, Sec.  1.199A-2(c)(3)(iv) provides that, solely for the 
purposes of section 199A, if qualified property is acquired in a 
transaction described in section 168(i)(7)(B), the transferee's UBIA in 
the qualified property is the same as the transferor's UBIA in the 
property, decreased by the amount of money received by the transferor 
in the transaction or increased by the amount of money paid by the 
transferee to acquire the property in the transaction.

[[Page 2959]]

    The rules set forth in these regulations are limited solely to the 
determination of UBIA of qualified property for purposes of section 
199A and are not applicable to the determination of gain, loss, basis, 
or depreciation with respect to transactions described in section 
168(i)(7).
3. Property Received in a Section 1031 Like-Kind Exchange or Section 
1033 Involuntary Conversion
    Section 1.199A-2(c)(3) of the proposed regulations explains that 
UBIA of qualified property means the basis of qualified property on the 
placed in service date of the property as determined under applicable 
sections of chapter 1 of subtitle A of the Code, which includes 
sections 1012 (Basis of property--cost), 1031 (Exchange of real 
property held for productive use or investment), and 1033 (Involuntary 
conversions). Section 1.199A-2(c)(3) of the proposed regulations also 
explains that UBIA of qualified property is determined without regard 
to any adjustments for depreciation described in section 1016(a)(2) or 
(3). Example 2 to proposed Sec.  1.199A-2(c)(4) illustrates that the 
UBIA of qualified property received in a section 1031 like-kind 
exchange is the adjusted basis of the relinquished property transferred 
in the exchange as determined under section 1031(d), which reflects the 
adjustment in basis for depreciation deductions previously taken under 
section 168.
    Several commenters argued that the proposed regulations discourage 
like-kind exchanges by providing an incentive to retain property in 
order to maintain greater UBIA of qualified property. These commenters 
argue that the UBIA of replacement qualified property should be the 
taxpayer's UBIA of the relinquished property on the placed in service 
date by the taxpayer, increased by any additional capital invested by 
the taxpayer to acquire the replacement property, rather than the 
adjusted basis of the replacement property at the time of the exchange 
as determined under section 1031(d). This would be consistent with the 
step-in-the-shoes rule for determining the depreciable period. Another 
commenter suggested that if the rule is retained, the provision should 
be revised to treat the placed in service date as the date of the 
exchange.
    Section 1.1002-1(c) of the Income Tax Regulations generally 
describes nonrecognition sections, including section 1031, as 
``exchanges of property in which at the time of the exchange particular 
differences exist between the property parted with and the property 
acquired, but such differences are more formal that substantial,'' so 
that recognition and income inclusion at that time of the exchange are 
not appropriate. The underlying assumption of these exceptions to the 
recognition requirement is that the new property is substantially a 
continuation of the old investment still unliquidated; and in the case 
of reorganization, that the new enterprise, the new corporate 
structure, and the new property are substantially a continuation of the 
old still unliquidated investment. Id.
    Application of section 1031(d) in determining UBIA for the 
replacement property would require, among other possible adjustments, a 
downward adjustment for depreciation deductions. This approach is 
contrary to the rule in Sec.  1.199A-2(c)(3) of the proposed 
regulations that UBIA of qualified property is determined without 
regard to any adjustments for depreciation described in section 
1016(a)(2) or (3).
    Accordingly, the final regulations provide that the UBIA of 
qualified like-kind property that a taxpayer receives in a section 1031 
like-kind exchange is the UBIA of the relinquished property. However, 
if a taxpayer either receives money or property not of a like kind to 
the relinquished property (other property) or provides money or other 
property as part of the exchange, the taxpayer's UBIA in the 
replacement property is adjusted. The taxpayer's UBIA in the 
replacement property is adjusted downward by the excess of any money or 
the fair market value of other property received by the taxpayer in the 
exchange over the taxpayer's appreciation in the relinquished property 
(excess boot). Appreciation for this purpose is the excess of the 
relinquished property's fair market value on the date of the exchange 
over the fair market value of the relinquished property on the date of 
acquisition by the taxpayer. This reduction for excess boot in the 
taxpayer's UBIA in the replacement property reflects a partial 
liquidation of the taxpayer's investment in qualified property.
    If the taxpayer adds money or other property to acquire replacement 
property, the taxpayer's UBIA in the replacement property is adjusted 
upward by the amount of money paid or the fair market value of the 
other property transferred to reflect additional taxpayer investment.
    If the taxpayer receives other property in the exchange that is 
qualified property, the taxpayer's UBIA in the qualified other property 
will equal the fair market value of the other property. Consequently, a 
taxpayer who receives qualified other property in the exchange is 
treated, for UBIA purposes, as if the taxpayer receives cash in the 
exchange and uses that cash to purchase the qualified property.
    The rules are similar for qualified property acquired pursuant to 
an involuntary conversion under section 1033, except that appreciation 
for this purpose is the difference between the fair market value of the 
converted property on the date of the conversion over the fair market 
value of the converted property on the date of acquisition by the 
taxpayer. In addition, other property is property not similar or 
related in service or use to the converted property.
    The rules set forth in these final regulations are limited solely 
to the determination of UBIA of qualified property for purposes of 
section 199A and are not applicable to the determination of gain, loss, 
basis, or depreciation with respect to transactions governed by 
sections 1031 or 1033.
    In determining the depreciable period of replacement property 
acquired in a like-kind exchange or in an involuntary conversion, the 
proposed regulations apply Sec.  1.168(i)-6 which, in turn, follows the 
rules in section 1031(d) or 1033(b), as applicable. Because the final 
regulations do not determine the UBIA of replacement property under 
section 1031(d) or 1033(b), the final regulations correspondingly 
remove the indirect references to those rules for determining the 
depreciable period of replacement property. To be consistent with the 
rules regarding the UBIA of replacement property that is of like kind 
to the relinquished property or that is similar or related in service 
or use to the involuntarily converted property, the final regulations 
provide that (i) for the portion of the individual's or RPE's UBIA in 
the replacement property that does not exceed the individual's or RPE's 
UBIA in the relinquished property or involuntarily converted property, 
the date such portion in the replacement property was first placed in 
service by the individual or RPE is the date on which the relinquished 
property or involuntarily converted property was first placed in 
service by the individual or RPE, and (ii) for the portion of the 
individual's or RPE's UBIA in the replacement property that exceeds the 
individual's or RPE's UBIA in the relinquished property or 
involuntarily converted property, such portion in the replacement 
property is treated as separate qualified property that the individual 
or RPE first placed in service on the date on which the replacement 
property was first placed in service by the individual or RPE. This 
rule is not a change from the proposed regulations,

[[Page 2960]]

but is consistent with the step-in-the-shoes rationale for determining 
the depreciable period for certain non-recognition transactions 
described in section 168(i)(7)(B).
    In addition, the final regulations provide that when qualified 
property that is not of like kind to the relinquished property or 
qualified property that is not similar or related in service or use to 
involuntarily converted property is received in a section 1031 or 1033 
transaction, such qualified property is treated as separate qualified 
property that the individual or RPE first placed in service on the date 
on which such qualified property was first placed in service by the 
individual or RPE. This rule is consistent with the rules regarding the 
UBIA of such qualified property.
    The rules set forth in these final regulations are limited solely 
to the determination of the depreciable period for purposes of section 
199A and are not applicable to the determination of the placed in 
service date for depreciation or tax credit purposes.
4. Sections 734(b) and 743(b) Special Basis Adjustments
    The proposed regulations provide that basis adjustments under 
sections 734(b) and 743(b) are not treated as qualified property. The 
preamble to the proposed regulations describes concerns about 
inappropriate duplication of the UBIA of qualified property in 
circumstances such as when the fair market value of property has not 
increased and its depreciable period has not ended. Several commenters 
agreed that special basis adjustments could result in the duplication 
of UBIA of qualified property to the extent that the fair market value 
of the qualified property does not exceed UBIA. However, many of these 
commenters suggested that basis adjustments under section 734(b) and 
743(b) should be treated as qualified property to the extent that the 
fair market value of the qualified property to which the adjustments 
relate exceeds the UBIA of such property immediately before the special 
basis adjustment. Other commenters recommended that both section 734(b) 
and section 743(b) adjustments should generate new UBIA. Commenters 
suggested a variety of methods for adjusting UBIA to account for the 
special basis adjustments. These included incorporating existing 
principles of sections 734(b), 743(b), 754, and 755 by determining the 
UBIA of separate qualified property by reference to the difference 
between the transferee partner's outside basis and its share of UBIA; 
treating the entire amount of the section 743(b) adjustment as separate 
qualified property with a new depreciation period, with adjustments to 
the partner's share of the partnership's UBIA to avoid duplicating 
UBIA; and creating an entirely new regime mirroring the principles of 
sections 734(b), 743(b), 754, and 755.
    The Treasury Department and the IRS agree that section 743(b) basis 
adjustments should be treated as qualified property to extent the 
section 743(b) basis adjustment reflects an increase in the fair market 
value of the underlying qualified property. Accordingly, the final 
regulations define an ``excess section 743(b) basis adjustment'' as an 
amount that is determined with respect to each item of qualified 
property and is equal to an amount that would represent the partner's 
section 743(b) basis adjustment with respect to the property, as 
determined under Sec.  1.743-1(b) and Sec.  1.755-1, but calculated as 
if the adjusted basis of all of the partnership's property was equal to 
the UBIA of such property. The absolute value of the excess section 
743(b) basis adjustment cannot exceed the absolute value of the total 
section 743(b) basis adjustment with respect to qualified property. The 
excess section 743(b) basis adjustment is treated as a separate item of 
qualified property placed in service when the transfer of the 
partnership interest occurs. This rule is limited solely to the 
determination of the depreciable period for purposes of section 199A 
and is not applicable to the determination of the placed in service 
date for depreciation or tax credit purposes. The recovery period for 
such property is determined under Sec.  1.743-1(j)(4)(i)(B) with 
respect to positive basis adjustments and Sec.  1.743-1(j)(4)(ii)(B) 
with respect to negative basis adjustments.
    The Treasury Department and the IRS do not believe that a section 
734(b) adjustment is an acquisition of qualified property for purposes 
of determining UBIA. Section 734(b)(1) provides that, in the case of a 
distribution of property to a partner with respect to which a section 
754 election is in effect (or when there is a substantial basis 
reduction under section 734(d)), the partnership will increase the 
adjusted basis of partnership property by the sum of (A) the amount of 
any gain recognized to the distributee partner under section 731(a)(1), 
and (B) in the case of distributed property to which section 732(a)(2) 
or (b) applies, the excess of the adjusted basis of the distributed 
property to the partnership immediately before the distribution (as 
adjusted by section 732(d)) over the basis of the distributed property 
to the distributee, as determined under section 732. The Treasury 
Department and the IRS do not believe that the adjustment to basis is 
an acquisition for purposes of section 199A.
    Commenters also noted that the failure to adjust UBIA for reduction 
of basis under section 734 could result in a duplication of UBIA if 
property is distributed in liquidation of a partner's interest in a 
partnership and the partner takes that property with the partner's 
outside basis under section 732(b) without the partnership adjusting 
the UBIA in the partnership's remaining assets. The Treasury Department 
and the IRS agree that such a duplication is inappropriate, but do not 
agree with commenters that such a distribution results in an increase 
in UBIA. These regulations provide that the partnership's UBIA in the 
qualified property carries over to a partner that receives a 
distribution of the qualified property.
    The Treasury Department and the IRS continue to study this issue 
and request additional comments on the interaction of the special basis 
adjustments under sections 734(b) and 743(b) with section 199A and 
whether a new regime for calculating adjustments with respect to UBIA 
is necessary.
5. Qualified Property Held by a Trade or Business at the Close of the 
Taxable Year
    Section 199A(b)(6)(A)(i) and proposed Sec.  1.199A-2(c) provide 
that qualified property must be held by, and available for use in, the 
qualified trade or business at the close of the taxable year. One 
commenter suggested the final regulations contain a rule for 
determining the UBIA of qualified property in a short year on 
acquisition or disposition of a trade or business, similar to the 
guidance provided in Sec.  1.199A-2(b)(2)(v) for purposes of 
calculating W-2 wages. The commenter suggested that one approach for 
UBIA could be a pro rata calculation based on the number of days the 
qualified property is held during the year. The Treasury Department and 
the IRS decline to adopt this suggestion because the statute looks to 
qualified property held at the close of the taxable year.
    Another commenter asked for additional guidance on this rule with 
respect to qualified property held by an RPE. The commenter questioned 
whether the applicable taxable year is that of the taxpayer or the RPE. 
The commenter also asked how the rule would be applied if a taxpayer 
transferred his or her interest in an RPE. The Treasury Department and 
the IRS believe that the UBIA of qualified

[[Page 2961]]

property is measured at the trade or business level. Accordingly, in 
the case of qualified property held by an RPE, the applicable taxable 
year is that of the RPE. A taxpayer who transfers an interest in an RPE 
prior to the close of the RPE's taxable year is not entitled to a share 
of UBIA from the RPE.
    In the context of S corporations, one commenter noted that section 
1377(a) provides that income for the taxable year is allocated among 
shareholders on a pro rata basis by assigning a pro rata share of each 
corporate item to each day of the taxable year. The commenter suggested 
that all shareholders who were owners during the taxable year should be 
given access to the UBIA of qualified property held by an S corporation 
at the close of the S corporation's taxable year. The Treasury 
Department and the IRS decline to adopt this comment because section 
199A does not have a rule comparable to the rule in section 1377(a).
    The proposed regulations provide that property is not qualified 
property if the property is acquired within 60 days of the end of the 
taxable year and disposed of within 120 days without having been used 
in a trade or business for at least 45 days prior to disposition, 
unless the taxpayer demonstrates that the principal purpose of the 
acquisition and disposition was a purpose other than increasing the 
section 199A deduction. The Treasury Department and the IRS received no 
comments with respect to this rule. The final regulations retain the 
rule but clarify that the 120 day period begins with the acquisition of 
the property.
6. Qualified Property Acquired From a Decedent
    The preamble to the proposed regulations provides that for property 
acquired from a decedent and immediately placed in service, the UBIA 
generally will be its fair market value at the time of the decedent's 
death under section 1014. One commenter recommended that the 
regulations should clearly state this rule in the regulatory text. The 
commenter recommended that the regulations should further clarify that 
the date of the decedent's death should commence a new depreciable 
period for the property. The Treasury Department and the IRS adopt 
these comments. The final regulations provide that for qualified 
property acquired from a decedent and immediately placed in service, 
the UBIA of the property will generally be the fair market value at the 
date of the decedent's death under section 1014. Further, the 
regulations provide that a new depreciable period for the property 
commences as of the date of the decedent's death.

IV. Qualified Business Income, Qualified REIT Dividends, and Qualified 
PTP Income

A. Qualified Business Income

1. Items Spanning Multiple Tax Years
    Section 1.199A-3(b)(1)(iii) provides that section 481 adjustments 
(whether positive or negative) are taken into account for purposes of 
computing QBI to the extent that the requirements of this section and 
section 199A are otherwise satisfied, but only if the adjustment arises 
in taxable years ending after December 31, 2017. One commenter 
suggested that income from installment sales and deferred cancellation 
of indebtedness income under section 108(i) arising in taxable years 
ending before January 1, 2018, should not be taken into account for 
purposes of computing QBI. The commenter also recommended that items 
deferred under Revenue Procedure 2004-34, 2004-1 C.B. 911 (advanced 
payments not included in revenue) prior to January 1, 2018, should be 
included in QBI. The Treasury Department and the IRS continue to study 
this issue and request additional comments on when items arising in 
taxable years prior to January 1, 2018, should be taken into account 
for purposes of computing QBI.
2. Previously Disallowed Losses
    The proposed regulations provide that previously disallowed losses 
or deductions (including under sections 465, 469, 704(d), and 1366(d)) 
allowed in the taxable year are taken into account for purposes of 
computing QBI so long as the losses were incurred in a taxable year 
beginning after January 1, 2018. Because previously disallowed losses 
incurred for taxable years beginning before January 1, 2018, cannot be 
taken into account for purposes of computing QBI, several commenters 
recommended that final regulations provide an ordering rule for the use 
of such losses. Commenters recommended both ``last-in, first-out'' 
(LIFO) and ``first-in, first-out'' (FIFO) approaches, with a slight 
preference for the FIFO approach as consistent with former section 199. 
The Treasury Department and the IRS agree that taxpayers with 
previously disallowed losses for taxable years beginning both before 
and after January 1, 2018, require an ordering rule to determine which 
portion of a previously disallowed loss can be taken into account for 
purposes of section 199A. Consistent with regulations under former 
section 199, these regulations provide that any losses disallowed, 
suspended, or limited under the provisions of sections 465, 469, 
704(d), and 1366(d), or any other similar provisions, shall be used, 
for purposes of section 199A and these regulations, in order from the 
oldest to the most recent on a FIFO basis.
    One commenter suggested that a special rule should be provided to 
identify the section 469 trade or business losses that are used to 
offset income if the taxpayer's section 469 groupings differ from the 
taxpayer's section 199A aggregations. The commenter recommended that 
any section 469 loss carryforward that is later used should be 
allocated across the taxpayer's section 199A aggregations based on 
income with respect to such aggregations in the year the loss was 
generated. The Treasury Department and the IRS decline to adopt this 
comment. Concurrently with the publication of these proposed 
regulations, the Treasury Department and the IRS are publishing 
proposed regulations under section 199A (REG-134652-18) that treat 
previously suspended losses as losses from a separate trade or business 
for purposes of section 199A.
3. Net Operating Losses and the Interaction of Section 199A With 
Section 461(l)
    The preamble to the proposed regulations requested comments on the 
interaction of sections 199A and 461(l). Commenters requested guidance 
in many areas including: Ordering rules for the use of suspended active 
business losses; methods for tracing losses to a taxpayer's various 
trades or businesses; whether a loss retains its character; whether a 
deduction under section 199A is a loss for calculating the loss 
limitation; and how the section 199A loss carryover rules interact with 
a loss limited under section 461(l). The Treasury Department and the 
IRS understand that taxpayers will need guidance as to the interaction 
of section 199A and section 461(l). However, these issues are beyond 
the scope of these regulations and will be considered in future 
guidance under section 461(l). Section 1.199A-3(b)(1)(v) retains and 
clarifies the rule that while a deduction under section 172 for a net 
operating loss is generally not considered to be with respect to a 
trade or business (and thus not taken into account in determining QBI), 
an excess business loss under section 461(l) is treated as a net 
operating loss carryover to the following taxable year and is taken 
into account for purposes of computing QBI

[[Page 2962]]

in the subsequent taxable year in which it is deducted.
4. Recapture of Overall Foreign Losses
    One commentator requested that Treasury and the IRS provide that 
U.S.-source taxable income arising upon recapture of an overall foreign 
loss described in section 904(f) be treated as QBI in the recapture 
year to the extent the overall foreign loss limited the section 199A 
deduction in a prior tax year. This comment was not adopted. Section 
199A(c)(3)(A)(i) limits QBI to items that are effectively connected to 
a U.S. trade or business in the tax year concerned and the recapture 
rules in section 904(f) apply only for purposes of subchapter N, Part 
III, Subpart A of the Code. In addition, it would not be appropriate to 
expand the scope of QBI for recaptured foreign losses when no similar 
relief is available if non-qualifying domestic losses are subsequently 
offset by non-qualifying domestic income.
5. Treatment of Other Deductions
    Section 199A(c)(1) provides that QBI includes the net amount of 
qualified items of income, gain, deduction, and loss with respect to 
any qualified trade or business of the taxpayer. Commenters requested 
additional guidance on whether certain items constitute qualified items 
under this provision. Several commenters suggested that deductions for 
self-employment tax, self-employed health insurance, and certain other 
retirement plan contribution deductions should not reduce QBI. One 
commenter reasoned that qualified retirement plan contributions should 
not reduce QBI because they should not be treated as being associated 
with a trade or business, consistent with the treatment when 
calculating net operating losses under section 172(d)(4)(D). The 
commenter also suggested that while self-employed health insurance is 
treated as associated with a trade or business, such expense should 
likewise not reduce QBI for purposes of simplification in administering 
the rule. Another commenter suggested that QBI should not be reduced by 
these expenses because they are personal adjustments. One commenter 
also requested guidance on whether unreimbursed partnership expenses, 
the interest expense to acquire partnership and S corporation 
interests, and state and local taxes reduce QBI.
    The Treasury Department and the IRS have not adopted these 
recommendations because they are inconsistent with the statutory 
language of section 199A(c). Whether a deduction is attributable to a 
trade or business must be determined under the section of the Code 
governing the deduction. All deductions attributable to a trade or 
business should be taken into account for purposes of computing QBI 
except to the extent provided by section 199A and these regulations. 
Accordingly, Sec.  1.199A-3(b)(1)(vi) provides that, in general, 
deductions attributable to a trade or business are taken into account 
for purposes of computing QBI to the extent that the requirements of 
section 199A and Sec.  1.199A-3 are otherwise satisfied. Thus, for 
purposes of section 199A, deductions such as the deductible portion of 
the tax on self-employment income under section 164(f), the self-
employed health insurance deduction under section 162(l), and the 
deduction for contributions to qualified retirement plans under section 
404 are considered attributable to a trade or business to the extent 
that the individual's gross income from the trade or business is taken 
into account in calculating the allowable deduction, on a proportionate 
basis. The Treasury Department and the IRS decline to address whether 
deductions for unreimbursed partnership expenses, the interest expense 
to acquire partnership and S corporation interests, and state and local 
taxes are attributable to a trade or business as such guidance is 
beyond the scope of these regulations.
6. Guaranteed Payments for the Use of Capital
    A few commenters suggested that the rule in the proposed 
regulations which excludes guaranteed payments for the use of capital 
under section 707(c) should be removed. Commenters argued that while 
section 199A(c)(4) excludes guaranteed payments paid to a partner for 
services rendered with respect to a trade or business under section 
707(a), the statutory language does not likewise exclude guaranteed 
payments for the use of capital under section 707(c). The commenters 
argued that Congress drew a line between payments for services and 
payments for the use of capital when it drafted section 199A(c) and 
that even though payments for the use of capital are determined without 
regard to the partnership's income, that does not mean that they are 
not attributable to a trade or business. Several commenters stated that 
contrary to the reasoning in the preamble to the proposed regulations, 
there is risk involved when making guaranteed payments for the use of 
capital because the payments do rely to some degree on the 
partnership's success. Commenters noted that guaranteed payments for 
the use of capital are generally accepted as part of the partner's 
distributive share from the partnership and taxed as such, and should 
be included in calculating QBI. Similarly, another commenter generally 
requested additional guidance for how to determine when a payment to a 
partner is considered for the use of capital and excluded from the 
calculation of QBI. Another commenter suggested that if guaranteed 
payments for the use of capital under section 707(c) are excluded from 
the calculation of QBI, a partnership's expense related to guaranteed 
payments for the use of capital also should be excluded from the 
calculation of QBI. One commenter suggested that to the extent a 
guaranteed payment for the use of capital is considered akin to 
interest income on indebtedness, it is generally appropriate to exclude 
the payment from QBI but noted the significant uncertainty in 
determining whether an arrangement is a guaranteed payment for the use 
of capital, a gross income allocation, or something else. The commenter 
also noted that guaranteed payments for the use of capital are not 
necessarily akin to interest income.
    The Treasury Department and the IRS decline to adopt the comments 
suggesting that guaranteed payments for the use of capital are 
generally attributable to a trade or business. Although section 199A is 
silent with respect to guaranteed payments for the use of capital, 
section 199A does limit the deduction under section 199A to income from 
qualified trades or businesses. The Treasury Department and the IRS 
believe that guaranteed payments for the use of capital are not 
attributable to the trade or business of the partnership because they 
are determined without regard to the partnership's income. 
Consequently, such payments should not generally be considered part of 
the recipient's QBI. Rather, for purposes of section 199A, guaranteed 
payments for the use of capital should be treated in a manner similar 
to interest income. Interest income other than interest income which is 
properly allocated to trade or business is specifically excluded from 
qualified items of income, gain, deduction or loss under section 
199A(c)(3)(B)(iii). One commenter noted that if guaranteed payments are 
treated like interest income for purposes of section 199A, and if such 
payments are properly allocated to a qualified trade or business of the 
recipient, they should constitute QBI to that recipient in respect of 
such qualified trade or business. Although, this is an unlikely fact 
pattern to occur, the Treasury Department and the IRS agree with this

[[Page 2963]]

comment and the final regulations adopt this comment. Further, guidance 
under sections 707(a) and 707(c) is beyond the scope of these 
regulations.
7. Section 707(a) Payments for Services
    The proposed regulations provide that any payment described in 
section 707(a) received by a partner for services rendered with respect 
to a trade or business, regardless of whether the partner is an 
individual or an RPE, is excluded from QBI. A number of commenters 
suggested that payments to partners in exchange for services provided 
to the partnership under section 707(a) should not be excluded from QBI 
and others suggested a narrowing of the rule for certain circumstances. 
Some commenters suggested that the payments should be QBI when the 
arrangement is structured as it would be with a third-party. Many 
commenters argued that section 707(a) payments should be QBI when the 
partner who is providing services has its own business separate from 
that of the partnership. On a related note, one commenter suggested 
payments for services should be QBI when the services provided are a 
different business from that of the partnership. Other commenters 
further suggested that payments should be QBI when the partner is not 
primarily providing services solely to one partnership. One commenter 
suggested that the rule excluding section 707(a) payments from QBI 
should be narrowed to apply only in the context of SSTBs or if the 
payments would be considered wages by the partner, but that generally 
payments from the partner's qualified trade or business should be QBI. 
One commenter suggested that the regulations excluding section 707(a) 
payments from QBI be applied only to individuals and RPEs that are 
either (i) not otherwise engaged in a trade or business of providing 
similar services to other consumers or (ii) whose ownership interests 
in the partnership exceed a de minimis amount. Another commenter 
suggested that the exclusion of section 707(a) payments be replaced 
with a narrowly tailored anti-abuse rule that would exclude from QBI 
section 707(a) payments (i) paid to a partner owning more than 50 
percent of the capital or profits interests in the partnership and (ii) 
designed with a primary purpose of causing income that would not 
otherwise have qualified as QBI to be treated as QBI.
    The Treasury Department and the IRS decline to adopt these 
recommendations. As stated in the preamble to the proposed regulations, 
payments under section 707(a) for services are similar to guaranteed 
payments, reasonable compensation, and wages, none of which are 
includable in QBI. Thus, treating section 707(a) payments received by a 
partner for services rendered to a partnership as QBI would be 
inconsistent with the statute. Further, as noted by one commenter, it 
is difficult to distinguish between payments under section 707(c) and 
payments under section 707(a). Therefore, creating such a distinction 
would be difficult for both taxpayers and the IRS to administer.
    Section 1.199A-3(b)(2) of the proposed regulations addresses items 
that are not taken into account as qualified items of income, gain, 
deduction, or loss, and includes all of the items listed in both 
section 199A(c)(3) (exceptions from qualified items of income, gain, 
deduction, and loss) and section 199A(c)(4) (treatment of reasonable 
compensation and guaranteed payments). As suggested by one commenter, 
the final regulations clarify that amounts received by an S corporation 
shareholder as reasonable compensation or by a partner as a payment for 
services under sections 707(a) or 707(c) are not taken into account as 
qualified items of income, gain, deduction, or loss, and thus are 
excluded from QBI.
8. Interaction of Sections 875(l) and 199A
    Section 199A(c)(3)(A)(i) provides that for purposes of determining 
QBI, the term qualified items of income, gain, deduction, and loss 
means items of income, gain, deduction and loss to the extent such 
items are effectively connected with the conduct of a trade or business 
within the United States (within the meaning of section 864(c), 
determined by substituting ``qualified trade or business (within the 
meaning of section 199A'' for ``nonresident alien individual or a 
foreign corporation'' or for ``a foreign corporation'' each place it 
appears). The preamble to the proposed regulations provides that 
certain items of income, gain, deduction, and loss are treated as 
effectively connected income but are not with respect to a domestic 
trade or business (such as items attributable to the election to treat 
certain U.S. real property sales as effectively connected pursuant to 
section 871(d)), and are thus not QBI because they are not items 
attributable to a qualified trade or business for purposes of section 
199A. One commenter agreed with this interpretation but requested 
additional guidance on the interaction between sections 875(l) and 
199A, specifically whether the determination of whether an activity is 
a trade or business is made at the entity level for purposes of section 
199A. The commenter also recommended that regulations distinguish 
between (1) items of income, gain, loss, or deduction that are incurred 
in a trade or business applying the principles of section 162 and (2) 
items of income, gain, deduction, or loss that are not incurred in such 
a trade or business.
    For purposes of section 199A, the determination of whether an 
activity is a trade or business is made at the entity level. If an RPE 
is engaged in a trade or business, items of income, gain, loss, or 
deduction from such trade or business retain their character as they 
pass from the entity to the taxpayer--even if the taxpayer is not 
personally engaged in the trade or business of the entity. Conversely, 
if an RPE is not engaged in a trade or business, income, gain, loss, or 
deduction allocated to a taxpayer from such entity will not qualify for 
the section 199A deduction even if the taxpayer or an intervening 
entity is otherwise engaged in a trade or business. As described in 
part II.A.3 of this Summary of Comments and Explanation of Revisions, a 
trade or business for purposes of section 199A is generally defined by 
reference to the standards for a section 162 trade or business. A 
rental real estate enterprise that meets the safe harbor described in 
Notice 2017-07, released concurrently with these final regulations, may 
also treated as trades or businesses for purposes of section 199A. 
Additionally, the rental or licensing of property if the property is 
rented or licensed to a trade or business conducted by the individual 
or an RPE which is commonly controlled under Sec.  1.199A-4(b)(1)(i) is 
also treated as a trade or business for purposes of section 199A. In 
addition to these requirements, the items must be effectively connected 
to a trade or business within the United States as described in section 
864(c).
    One commenter requested guidance coordinating section 199A with 
section 751(a) and the rules for dispositions of certain interests by 
foreign persons in section 864(c)(8). The proposed regulations provide 
that, with respect to a partnership, if section 751(a) or (b) applies, 
then gain or loss attributable to assets of the partnership giving rise 
to ordinary income under section 751(a) or (b) is considered 
attributable to the trades or businesses conducted by the partnership, 
and is taken into account for purposes of computing QBI. The commenter 
questioned whether income treated as ordinary income under section 751 
for purposes of section 864(c)(8) should be QBI. The treatment

[[Page 2964]]

of ordinary income under section 751 under subchapter N of chapter 1 of 
subtitle A of the Code is generally a function of section 864(c)(8). On 
December 27, 2018, the Federal Register published a notice of proposed 
rulemaking (REG-113604-18) at 83 FR 66647 under section 864(c)(8) 
(proposed section 864(c)(8) regulations). The proposed section 
864(c)(8) regulations provide rules for determining the amount of gain 
or loss treated as effectively connected with the conduct of a trade or 
business within the United States (``effectively connected gain'' or 
``effectively connected loss'') described in section 864(c)(8), 
including rules coordinating section 864(c)(8) with sections 741 and 
751 (relating to the character of gain or loss realized in connection 
with the sale or exchange of an interest in a partnership). Because the 
proposed section 864(c)(8) regulations apply the deemed sale construct 
of section 751(a) to determine whether gain or loss on the sale of a 
partnership interest is subject to tax under section 864(c)(8), the 
issue raised in this comment does not arise, and thus this comment is 
not adopted. The Treasury Department and the IRS request further 
comments on the interaction of section 199A and the proposed 
regulations under section 864(c)(8) after the publication of those 
proposed regulations.
9. Reasonable Compensation
    Several commenters were concerned that an overlap of the QBI, W-2 
wage limitation, and reasonable compensation rules for S corporations 
would cause disparities between taxpayers operating businesses in 
different entity structures. These commenters stated that the rules 
might have the unintended consequence of encouraging taxpayers to 
select or avoid certain business entities. For example, one commenter 
noted that the reasonable compensation requirement for S corporations 
favors S corporations for purposes of the W-2 wage limitation when 
calculating the section 199A deduction, compared to sole 
proprietorships and partnerships which may not pay any wages. That 
commenter suggested the final regulations include an election for 
partners or sole proprietors to treat an amount of reasonable 
compensation paid as wages for purposes of the W-2 wage limitation. 
Other commenters similarly noted the entity choice issue, but from the 
perspective that S corporations can be less advantageous. The 
commenters argued that QBI is reduced for S corporation shareholders 
because reasonable compensation is not included in QBI and noted there 
could be further impacts depending on whether the taxpayer is above or 
below the income thresholds. These commenters suggested that the final 
regulations should strive for equity between taxpayers operating 
businesses in different entity structures. Finally, one commenter 
suggested the need for additional guidance regarding whether and how 
reasonable compensation paid to an S corporation shareholder is 
considered wages for purposes of the W-2 wage limitation.
    One commenter maintained that to avoid incentivizing minimization 
of compensation and Federal Insurance Contributions Act tax, the final 
regulations should provide that deductions with respect to reasonable 
compensation should not reduce QBI. The commenter stated that 
reasonable compensation must be added back in calculating QBI.
    The Treasury Department and the IRS decline to adopt these 
suggestions. Section 199A(c)(4) clearly excludes reasonable 
compensation paid to a taxpayer by any qualified trade or business of 
the taxpayer for services rendered with respect to the trade or 
business from QBI. These amounts are attributable to a trade or 
business and are thus qualified items of deduction as described in 
section 199A(c)(3) to the extent they are effectively connected with 
the conduct of a trade or business within the United States and 
included or allowed in determining taxable income for the taxable year. 
In addition, reasonable compensation paid to a shareholder-employee is 
included as W-2 wages for purposes of the W-2 wage limitation to the 
extent that the requirements of Sec.  1.199A-2 are otherwise satisfied. 
Further, guaranteed payments and payments to independent contractors 
are not W-2 wages and therefore, cannot be counted for purposes of the 
W-2 wage limitation.
    A few commenters were concerned about whether tax return preparers 
would have the responsibility to closely examine whether compensation 
paid to a shareholder of an S corporation is reasonable before 
calculating the section 199A deduction, and whether tax return 
preparers could be subject to penalties. One commenter suggested a 
small business safe harbor approach where certain cash method S 
corporations that treat at least 70 percent of dividend distributions 
to shareholder-employees as wages are deemed to satisfy the reasonable 
compensation requirement of Rev. Rul. 74-44, 1974-1 C.B. 287. Providing 
additional guidance with respect to what constitutes reasonable 
compensation for a shareholder-employee of an S corporation or the 
application or non-application of assessable penalties applicable to 
tax return preparers is beyond the scope of these final regulations.
10. Items Treated as Capital Gain or Loss
    The proposed regulations provide that any item of short-term 
capital gain, short-term capital loss, long-term capital gain, or long-
term capital loss, including any item treated as one of such items, 
such as gains or losses under section 1231, that are treated as capital 
gains or losses, are not taken into account as a qualified item of 
income, gain, deduction, or loss in computing QBI.
    Several commenters suggested that many technical complications 
arise from the exclusion of section 1231 gain from QBI. Specifically, 
commenters noted that whether a taxpayer has long-term capital gain or 
loss under section 1231 is determined at the taxpayer level and not at 
the level of the various trades or businesses for which QBI is being 
determined. For example, if a taxpayer has two businesses, the taxpayer 
may have section 1231 gains in one trade or business and section 1231 
losses in the other trade or business. One commenter suggested that 
both section 1231 gains and losses be included in the calculation of 
QBI regardless of whether they result in a capital or ordinary amount 
when combined at the taxpayer level. The commenter asserts that this 
approach would not affect the overall limitation that restricts a 
taxpayer's deduction to 20 percent of the excess of taxable income over 
net capital gain.
    The Treasury Department and the IRS acknowledge the added 
challenges in applying section 1231 in the context of calculating QBI 
under section 199A. Generally, under section 1231, a taxpayer nets all 
of its section 1231 gains and losses from multiple trades or businesses 
before determining their ultimate character. In other words, the 
section 1231 determination is not made until the taxpayer combines its 
section 1231 gain or loss from all sources. This does not change in the 
context of section 199A. Thus, the section 1231 rules remain the same 
in the context of section 199A. For purposes of calculating QBI, 
taxpayers should continue to net their section 1231 gains and losses 
from their multiple trades or businesses to determine whether they have 
excess gain (which characterizes all of the gain or loss as capital and 
so all are excluded from QBI) or excess loss (which characterizes all 
of the gain or loss as ordinary and so all are included in QBI). As 
would be the case outside the section 199A context, the character

[[Page 2965]]

tracks back to the trade or business that disposed of the asset.
    Another potential complication noted by commenters is the section 
1231(c) recapture rule. Under the rule, a taxpayer that has a section 
1231 capital gain in the current year must look back to any section 
1231 ordinary loss taken in the previous five years and convert a 
portion of the current year section 1231 capital gain to ordinary gain, 
based on the previous losses taken. One commenter asked for further 
guidance on how to allocate ordinary gains and losses that may result 
from the section 1231 calculation to multiple trades or businesses. 
While the Treasury Department and the IRS recognize the complexity in 
applying the section 1231(c) recapture rules and allocating gain to 
multiple trades or businesses, providing additional guidance with 
respect to section 1231(c) is beyond the scope of these regulations. 
For purposes of determining whether ordinary income is included in QBI, 
taxpayers should apply the section 1231(c) recapture rules in the same 
manner as they would otherwise. Notice 97-59, 1997-2 C.B. 309, provides 
guidance on netting capital gains and losses and how that netting 
incorporates the section 1231(c) recapture rule.
    Given the specific reference to section 1231 gain in the proposed 
regulations, other commenters requested guidance with respect to 
whether gain or loss under other provisions of the Code would be 
included in QBI. One commenter asked for clarification about whether 
real estate gain, which is taxed at a preferential rate, is included in 
QBI. Additionally, other commenters requested clarification regarding 
whether items treated as ordinary income, such as gain under sections 
475, 1245, and 1250, are included in QBI.
    To avoid any unintended inferences, the final regulations remove 
the specific reference to section 1231 and provide that any item of 
short-term capital gain, short-term capital loss, long-term capital 
gain, or long-term capital loss, including any item treated as one of 
such items under any other provision of the Code, is not taken into 
account as a qualified item of income, gain, deduction, or loss. To the 
extent an item is not treated as an item of capital gain or capital 
loss under any other provision of the Code, it is taken into account as 
a qualified item of income, gain, deduction, or loss unless otherwise 
excluded by section 199A or these regulations.
    Similarly, another commenter requested clarification regarding 
whether income from foreign currencies and notional principal contracts 
are excluded from QBI if they are ordinary income. Section 
199A(c)(3)(B)(iv) and Sec.  1.199A-3(b)(2)(ii)(D) provide that any item 
of gain or loss described in section 954(c)(1)(C) (transactions in 
commodities) or section 954(c)(1)(D) (excess foreign currency gains) is 
not included as a qualified item of income, gain, deduction, or loss. 
Section 199A(c)(3)(B)(v) and Sec.  1.199A-3(b)(2)(ii)(E) provide any 
item of income, gain, deduction, or loss described in section 
954(c)(1)(F) (income from notional principal contracts) determined 
without regard to section 954(c)(1)(F)(ii) and other than items 
attributable to notional principal contracts entered into in 
transactions qualifying under section 1221(a)(7) is not included as a 
qualified item of income, gain, deduction, or loss. The statutory 
language does not provide for the ability to permit an exception to 
these rules based on the character of the income. Accordingly, income 
from foreign currencies and notional principal contracts described in 
the listed sections is excluded from QBI, regardless of whether it is 
ordinary income.
11. Reasonable Methods for Allocation of Items Among Multiple Trades or 
Businesses
    The proposed regulations provide that if an individual or an RPE 
directly conducts multiple trades or businesses, and has items of QBI 
which are properly attributable to more than one trade or business, the 
individual or RPE must allocate those items among the several trades or 
businesses to which they are attributable using a reasonable method 
based on all the facts and circumstances. The chosen reasonable method 
for each item must be consistently applied from one taxable year to 
another and must clearly reflect the income and expenses of each trade 
or business. One commenter suggested that a reasonable approach to 
allocating items that are not clearly attributable to a single trade or 
business could be the cost allocation methods used in Sec.  1.199-
4(b)(2). The commenter suggested that the reasonableness standard could 
be applied to determine the allocation of items of QBI among multiple 
trades or businesses. The commenter also suggested a safe harbor 
allocation method allowing a taxpayer to bypass direct tracing if the 
amount of other items of QBI that must be allocated is below a pre-
determined threshold, such as a percentage of total QBI or a specified 
dollar amount.
    The Treasury Department and the IRS decline to adopt this comment 
as the rules under Sec.  1.199-4 were intended solely for the 
allocation of expenses. By contrast, the rule described in Sec.  
1.199A-3(b)(5) requires the allocation of all qualified items of 
income, gain, loss, and deduction across multiple trades or businesses. 
Whether direct tracing or allocations based on gross income are 
reasonable methods depends on the facts and circumstances of each trade 
or business. Different reasonable methods may be appropriate for 
different items. Accordingly, the final regulations retain the rule in 
the proposed regulations. However, once a method is chosen for an item, 
it must be applied consistently with respect to that item. The Treasury 
Department and the IRS continue to study this issue and request 
additional comments, including comments with respect to potential safe 
harbors.
    Another commenter requested guidance on when or how a method can be 
changed from year to year if, for example, it is no longer reasonable 
or no longer clearly reflects income. The Treasury Department and the 
IRS decline to adopt this comment as it is beyond the scope of these 
regulations. If a method is no longer reasonable or no longer clearly 
reflects income, the method cannot continue to be used. The individual 
or RPE must choose a new method that is reasonable under the facts and 
circumstances and apply it consistently going forward.

B. Qualified REIT Dividends

1. Regulated Investment Companies
    A number of commenters requested guidance that would allow a 
shareholder in a RIC to take a section 199A deduction with respect to 
certain distributions or deemed distributions from the RIC attributable 
to qualified REIT dividends received by the RIC. One of these 
commenters also suggested that RICs should be able to pass through 
qualified PTP income. As noted in part II.A.2. of this Summary of 
Comments and Explanation of Revisions, the final regulations do not 
treat a RIC as an RPE, because a RIC is a C corporation, not a 
passthrough entity. However, concurrently with the publication of these 
final regulations, the Treasury Department and the IRS are publishing 
elsewhere in this issue of the Federal Register proposed regulations 
under section 199A (REG-134652-18, RIN 1545-BP12) that address the 
payment by RICs of dividends that certain shareholders may include as 
qualified REIT dividends under section 199A(b)(1)(B). The pass through 
by RICs of qualified PTP income would raise several novel issues and 
the commenter suggesting that RICs be allowed to pass through such 
income did not address

[[Page 2966]]

how these issues should be resolved. Accordingly, the proposed 
regulations do not provide for the pass through of qualified PTP income 
by RICs, but request comments on the issues that would be presented if 
RICs were allowed to pass through qualified PTP income.
2. Meaning of Qualified REIT Dividend
    The proposed regulations provide that a REIT dividend is not a 
qualified REIT dividend if the stock with respect to which it is 
received is held for fewer than 45 days, taking into account the 
principles of sections 246(c)(3) and (4). One commenter interpreted the 
rule as requiring the REIT stock to have been held at least 45 days 
prior to the dividend, and asked that the definition of qualified REIT 
dividend not be conditioned on a 45-day holding period. The commenter 
suggested that the reporting entity might not have sufficient 
information to determine whether the holding period was met and thus 
whether a particular dividend was in fact a qualified REIT dividend. 
The commenter also argued that the proposed rule was not part of the 
statutory text and could create significant administrative burdens, 
including in situations where there is no abuse and potentially subject 
a REIT or broker to information reporting penalties. The commenter 
suggested two alternatives. First, the section 199A deduction could be 
disallowed to the extent it offsets short-term capital gains. Second, 
the holding period could be eliminated as part of the definition of 
qualified REIT dividend and the Treasury Department and the IRS could 
be given authority to disallow the deduction in the event that the 
taxpayer held the stock for the period specified in section 
246(c)(1)(A).
    The Treasury Department and the IRS have determined that a holding 
period for REIT stock with respect to which a qualified REIT dividend 
is received is appropriate in order to prevent abuse. The holding 
period in the proposed regulations requires holding the stock no fewer 
than any 45 days, not necessarily the 45 days prior to the REIT 
dividend. To provide additional certainty regarding the holding period 
requirements, these final regulations define the requisite holding 
period for the REIT stock as the period described in section 
246(c)(1)(A). Generally, use of a holding period to prevent abuse is 
consistent with established principles under the Code, and the 
application of these principles and the duration of the holding period 
should be familiar to affected entities. Furthermore, the Treasury 
Department and the IRS intend to provide guidance to REITs and brokers 
on how to report qualified REIT dividends in instances in which it is 
impractical to determine whether the shareholder has met the requisite 
holding period. This guidance is expected to be similar to guidance 
instructing a person required to make a return under section 6042 to 
report a dividend as a qualified dividend on a Form 1099-DIV if such 
person determines that the recipient of the dividend has satisfied the 
holding period test in section 1(h)(11)(B)(iii) or it is impractical 
for such person to make such determination. See Notice 2003-79, 2003-2 
C.B. 1206; Notice 2004-71, 2004-2 C.B. 793 and Notice 2006-3, 2006-1 
C.B. 306. The Treasury Department and the IRS also intend to inform 
REIT shareholders that they may receive Forms 1099-DIV reporting 
qualified REIT dividends that are not actually qualified REIT dividends 
because the shareholders have not met the holding period requirement.

V. Aggregation

A. Overview

    As described in part II of this Summary of Comments and Explanation 
of Revisions, the final regulations incorporate the principles of 
section 162 for determining whether a trade or business exists for 
purposes of section 199A. A taxpayer can have more than one section 162 
trade or business. See Sec.  1.446-1(d)(1). Multiple trades or 
businesses can also be conducted within one entity. A trade or 
business, however, cannot generally be conducted across multiple 
entities for tax purposes. The preamble to the proposed regulations 
acknowledges that it is not uncommon for what may be thought of as 
single trades or businesses to be operated across multiple entities, 
for various legal, economic, or other non-tax reasons. It is because 
trades or businesses may be structured this way that the proposed 
regulations permit aggregation.
    The proposed regulations provide a set of rules under which an 
individual can aggregate multiple trades or businesses for purposes of 
applying the W-2 wage and UBIA of qualified property limitations 
described in Sec.  1.199A-1(d)(2)(iv). Based on comments received, the 
final regulations retain these rules with modifications as described in 
the remainder of this part V. The Treasury Department and the IRS 
received comments in support of the aggregation rules generally, though 
some commenters suggested that the grouping rules described in the 
regulations under section 469 be used to determine when a taxpayer may 
aggregate. The Treasury Department and the IRS decline to adopt this 
suggestion. For reasons stated in the proposed regulations (that is, 
the differences in the definition of trade or business, section 469's 
reliance on a taxpayer's level of involvement in the trade or business, 
and the use of separate rules for specified service trades or 
businesses), the Treasury Department and the IRS do not consider the 
grouping rules under section 469 an appropriate method for determining 
whether a taxpayer can aggregate trades or businesses for purposes of 
applying section 199A. Another commenter suggested looking to the 
controlled group rules under section 414 rather than creating a new 
framework for aggregation. The Treasury Department and the IRS decline 
to adopt the controlled group rules under section 414 as those rules 
are too specific to be applied as a general aggregation rule under 
section 199A.
    The preamble to the proposed regulations requested comments on 
whether the aggregation method described in Sec.  1.199A-4 would be an 
appropriate grouping method for purposes of sections 469 and 1411, in 
addition to section 199A. One commenter suggested that the section 199A 
aggregation method would not be an appropriate method for sections 469 
and 1411 because the primary focus of grouping under those sections is 
based on the taxpayer's level of participation. Another commenter, 
noting that the standard for aggregation under the proposed regulations 
is narrower than the section 469 grouping requirements, recommended 
that taxpayers be permitted to adopt their section 199A aggregation for 
purposes of section 469. The commenter stated that this would provide 
taxpayers with an option to mitigate the administrative burden of 
multiple grouping rules. The Treasury Department and the IRS continue 
to study this issue and request additional comments.

B. General Rules

    The proposed regulations provide rules that allow a taxpayer to 
aggregate trades or businesses based on a 50-percent ownership test, 
which must be maintained for a majority of the taxable year. The final 
regulations clarify that majority of the taxable year must include the 
last day of the taxable year. One commenter requested guidance on 
whether each individual included in making the ownership determination 
must own an interest in each trade or business to be aggregated. 
Another commenter suggested that to avoid

[[Page 2967]]

abuse in situations where actual overlapping ownership is low, anyone 
who owns less than 10 percent of the value of an enterprise could be 
excluded from the group of owners whose ownership is considered in 
testing. The commenter suggested clarification or modification of the 
overlapping ownership requirement including by requiring a minimum 
ownership threshold of the trades or businesses, or that the 50 percent 
test use each owner's lowest interest in the RPE. The ownership rule in 
the proposed regulations does not require that every person involved in 
the ownership determination own an interest in every trade or business. 
The rule is satisfied so long as one person or group of persons holds a 
50 percent or more ownership interest in each trade or business. The 
Treasury Department and the IRS decline to require a minimum ownership 
threshold for purposes of the ownership test as the abuse potential is 
outweighed by the administrative complexity such a rule would create. 
The Treasury Department and the IRS note that trades or businesses to 
be aggregated must meet all of the requirements of Sec.  1.199A-4, not 
just the ownership requirement.
    Other commenters suggested that aggregation should be allowed for 
trades or businesses that do not meet the common ownership test if the 
general partner or managing member is the same for each entity. The 
Treasury Department and the IRS decline to adopt this recommendation. 
The aggregation rules are intended to allow aggregation of what is 
commonly thought of as a single trade or business where the business is 
spread across multiple entities. Common ownership is an essential 
element of a single trade or business.
    Several commenters noted that the family attribution rules under 
section 199A do not include grandparents, siblings, or adopted 
children. One commenter requested clarification that the family 
attribution rules would not cause an aggregated trade or business to 
cease to qualify for aggregation when children and grandchildren 
reached adulthood. A few commenters requested guidance on the manner in 
which beneficial interests in trusts are considered for purposes of the 
common ownership rule. Other commenters suggested that the attribution 
rules in sections 267 and 707 should be used in place of the family 
attribution rule. Another commenter suggested that final regulations 
provide a specific attribution rule that treats owners of entities as 
owning a pro rata share of any business owned by the entity for 
purposes of the 50 percent ownership test. Another commenter 
recommended defining ``directly or indirectly'' as used in the proposed 
regulations by reference to a specific ownership rule. The final 
regulations address these recommendations by requiring that the same 
person or group of persons, directly or by attribution through sections 
267(b) or 707(b), own 50 percent or more of each trade or business. A C 
corporation may constitute part of this group.
    In addition, the proposed regulations require that all items 
attributable to aggregated trades or businesses be reported on returns 
for the same taxable year. Several commenters recommended that this 
requirement be removed, arguing that trades or businesses that meet the 
ownership and factor tests could have different taxable years. The 
Treasury Department and the IRS decline to adopt this recommendation 
because the aggregation rules are intended for use in applying the W-2 
wage and UBIA of qualified property limitations. As described in Sec.  
1.199A-2(b), W-2 wages are determined based on a calendar year. 
Allowing trades or businesses with different taxable years to aggregate 
would require special rules for apportioning W-2 wages for purposes of 
applying the W-2 wage limitation. Accordingly, the final regulations 
retain the requirement that all of the items attributable to each trade 
or business to be aggregated are reported on returns at the trade or 
business level with the same taxable year, not taking into account 
short taxable years. One commenter asked for clarification regarding 
whether the majority of the taxable year requirement refers to the 
taxable year of the taxpayer claiming the deduction or of the RPE 
reporting the items. The aggregation rules are applied at the trade or 
business level. Accordingly, the majority of the taxable year 
requirement refers to the individual or RPE that conducts the trade or 
business to be aggregated.
    The proposed regulations also provide that an SSTB cannot be 
aggregated. One commenter requested guidance on whether SSTBs with de 
minimis gross receipts are permitted to aggregate. A trade or business 
with gross receipts from a specified service activity below the de 
minimis thresholds described in Sec.  1.199A-5(c)(1) is not treated as 
an SSTB and therefore may be aggregated under the rules described in 
Sec.  1.199A-4. Another commenter suggested that the prohibition on 
aggregation for SSTBs is unnecessary because a taxpayer must combine W-
2 wages and UBIA of qualified property for the aggregated trade or 
business prior to applying the W-2 wages and UBIA limitations. The 
commenter recommended that at a minimum, the prohibition be removed for 
taxpayers within the phase-in range and that taxpayers should be 
permitted to aggregate SSTBs with other SSTBs for reporting purposes. 
The Treasury Department and the IRS decline to adopt the recommendation 
to allow SSTBs to aggregate as doing so would increase administrative 
burden and complexity without providing significant benefit. 
Aggregation is intended to assist taxpayers in applying the W-2 wage 
and UBIA of qualified property limitations. A taxpayer with taxable 
income below the threshold amount does not need to apply the W-2 wage 
and UBIA of qualified property limitations and therefore will not 
benefit from aggregation. Further, the Treasury Department and the IRS 
decline to adopt the recommendation that the prohibition on aggregation 
of SSTBs be removed for taxpayers with taxable income within the phase-
in range as taxpayers may have taxable income within the phase-in range 
for some taxable years and taxable income that exceeds the phase-in 
range in other taxable years.
    To determine whether trades or businesses may be aggregated, the 
proposed regulations provide that multiple trades or businesses must, 
among other requirements, satisfy two of three listed factors, which 
demonstrate that the businesses are part of a larger, integrated trade 
or business. These factors include: (1) The businesses provide products 
and services that are the same (for example, a restaurant and a food 
truck) or customarily provided together (for example, a gas station and 
a car wash); (2) the businesses share facilities or share significant 
centralized business elements (for example, common personnel, 
accounting, legal, manufacturing, purchasing, human resources, or 
information technology resources); or (3) the businesses are operated 
in coordination with, or reliance on, other businesses in the 
aggregated group (for example, supply chain interdependencies). Some 
commenters expressed support for the factors in the proposed 
regulations while others suggested modifications to the test. One 
commenter questioned whether, to meet the first factor, trades or 
businesses must provide both products and services that are the same. 
Another commenter noted that it is unclear how to apply the first 
factor with respect to real estate as real estate is neither a product 
nor a service. In

[[Page 2968]]

response to these comments, the final regulations describe the first 
factor as products, property, or services that are the same or 
customarily offered together. Additionally, the final regulations add 
examples clarifying when a real estate trade or business satisfies the 
aggregation rules. Other commenters requested additional guidance on 
whether certain fact patterns regarding specific trades or businesses 
would satisfy a particular factor. The Treasury Department and the IRS 
decline to address specific fact patterns or trades or businesses 
because this test is based on all the facts and circumstances. 
Therefore, specific rules would be impractical and imprecise. 
Similarly, the Treasury Department and the IRS decline to define 
``significant'' in terms of centralized business elements in the second 
factor because the answer is dependent on the facts and circumstances 
of each combination of trades and businesses.
    Another commenter suggested that operational interdependence could 
be determined more precisely by using tests such as the twelve factor 
test outlined in Sec.  1.469-4T(g)(3). The commenter noted that such a 
test would be less likely to inappropriately preclude a section 199A 
deduction. Other commenters suggested that taxpayers be permitted to 
aggregate when two of the four factors are met. The Treasury Department 
and the IRS have carefully considered alternatives, including the 
factors outlined in Sec.  1.469-4T(g)(3). Aggregation of multiple 
trades or businesses is not provided for in the statutory text, but was 
added to the regulations to enhance administrability for taxpayers and 
the IRS in situations when what is thought of as a single trade or 
business is operated across multiple entities for various legal, 
economic, or other non-tax reasons. Aggregation is optional and the 
inability to aggregate does not preclude a taxpayer with QBI from 
multiple trades or businesses from claiming a section 199A deduction on 
the separate trades or businesses to the extent otherwise allowed by 
section 199A and these regulations. The Treasury Department and the IRS 
believe that reducing the required number of factors would allow the 
aggregation of trades or businesses that are not owned and operated as 
integrated businesses. Conversely, adding new factors would increase 
complexity and burden for both taxpayers and the IRS. Accordingly, the 
final regulations retain the factors provided in the proposed 
regulations, modified to take real estate into account.

C. Aggregation by RPEs

    Multiple commenters recommended that RPEs be permitted to aggregate 
at the entity level. One commenter suggested that allowing aggregation 
at the entity level would reduce reporting requirements if the owners 
or beneficiaries of the entity were required to follow the entity's 
aggregation. The commenter also suggested that entity aggregation would 
help non-majority owners by allowing them to benefit from aggregation 
without requiring the entity to provide ownership information. Another 
commenter suggested that reporting would be simplified if aggregation 
was allowed at the entity level when it is known that the owners want 
to aggregate. A third commenter suggested that aggregation should be 
allowed where each owner provides consent, including through provisions 
in the operating agreements. Another commenter suggested that if entity 
level aggregation is not allowed generally, an exception should be made 
for disregarded and wholly-owned entities.
    The Treasury Department and the IRS agree that aggregation should 
be allowed at the entity level. Accordingly, the final regulations 
permit an RPE to aggregate trades or businesses it operates directly or 
through lower-tier RPEs. The resulting aggregation must be reported by 
the RPE and by all owners of the RPE. An individual or upper-tier RPE 
may not separate the aggregated trade or business of a lower-tier RPE, 
but instead must maintain the lower-tier RPE's aggregation. An 
individual or upper-tier RPE may aggregate additional trades or 
businesses with the lower-tier RPE's aggregation if the rules of Sec.  
1.199A-4 are otherwise satisfied. Each RPE in a tiered structure is 
subject to the disclosure and reporting requirements in Sec.  1.199A-
4(c)(1). Further, as discussed in part II.C.1 of this Summary of 
Comments and Explanation of Revisions, Sec.  1.199A-1(e)(2) of the 
final regulations provides that an entity with a single owner that is 
treated as disregarded as an entity separate from its owner under any 
other provision of the Code is disregarded for purposes of section 199A 
and Sec. Sec.  1.199A-1 through 1.199A-6.

D. Reporting and Disclosure

    The proposed regulations require consistent reporting of aggregated 
trades or businesses. Each individual who chooses to aggregate must 
attach a statement to their return annually identifying each trade or 
business to be aggregated. A few commenters requested clarification of 
these rules in situations in which a taxpayer did not aggregate or 
failed to report an aggregation. Several commenters suggested that 
taxpayers be required to file only one disclosure in the first year the 
taxpayer chooses to aggregate and that any subsequent aggregation 
information be reported on the same form used to report a taxpayer's 
section 199A deduction. Further, these commenters suggested that 
taxpayers be allowed to remedy a failure to provide the required 
information by filing an amended return or upon examination, provided 
that the taxpayer can establish reasonable cause for the failure. One 
commenter recommended that any required aggregation information be 
reported on a form for the section 199A deduction instead of as a 
separate statement. Additionally, commenters requested guidance as to 
whether a taxpayer is required to aggregate in its first year and if 
the failure to aggregate precludes aggregation in a later year. 
Finally, one commenter requested guidance regarding when a taxpayer 
could re-aggregate. The commenter suggested that options could include 
during an open season; after a change in circumstances; under a formal 
process similar to a change in accounting method; or based on a list of 
circumstances that would allow for automatic permission to re-
aggregate.
    Based on these comments, the final regulations provide that a 
taxpayer's failure to aggregate trades or businesses will not be 
considered to be an aggregation under this rule; that is, later 
aggregation is not precluded. The final regulations do not generally 
allow for an initial aggregation to be made on an amended return as 
this would allow aggregation decisions to be made with the benefit of 
hindsight. A taxpayer who fails or chooses not to aggregate in Year 1 
can still choose to aggregate in Year 2 or other future year (but 
cannot amend returns to choose to aggregate for Year 1). A taxpayer who 
chooses to aggregate must continue to aggregate each taxable year 
unless there is a material change in circumstances that would cause a 
change to the aggregation. However, the Treasury Department and the IRS 
acknowledge that many individuals and RPEs may be unaware of the 
aggregation rules when filing returns for the 2018 taxable year. 
Therefore, the IRS will allow initial aggregations to be made on 
amended returns for the 2018 taxable year. The final regulations retain 
the annual disclosure requirement and, in order to provide flexibility 
as forms and instructions change, allow the Commissioner to require 
disclosure of information on aggregated trades or businesses as 
provided in a variety of

[[Page 2969]]

formats including forms, instructions, or published guidance. The final 
regulations contain similar reporting and disclosure rules for RPEs.
    The preamble to the proposed regulations requested comments on 
whether reporting requirements should be imposed on RPEs requiring 
majority owners to provide information about all of the other RPEs in 
which they hold a majority interest. One commenter stated that the 
extra time and cost of imposing additional reporting requirements on 
aggregated trades or businesses would not be worth the potential 
benefit a non-majority owner may gain by having such information. 
Another commenter suggested that the need for such a rule would be 
reduced if the final regulations allowed aggregation by RPEs. The 
Treasury Department and the IRS agree with these comments. Accordingly, 
the final regulations do not adopt a rule requiring the disclosure of 
such information to non-majority owners.
    The proposed regulations permit the Commissioner to disaggregate 
trades or businesses if a taxpayer fails to attach the required annual 
disclosure. The preamble to the proposed regulations requested comments 
on an administrable standard under which trades or businesses will be 
disaggregated. One commenter suggested that a disaggregation rule is 
unnecessary because the Commissioner can always assert that an 
aggregation that was inappropriate should be disregarded. The commenter 
suggested that the Treasury Department and the IRS consider a rule 
allowing the Commissioner to aggregate trades or businesses in which 
the taxpayer engages in a transaction or series of transactions to 
divide trades or businesses in a manner that allows the taxpayer to use 
the aggregation rules to artificially increase the taxpayer's section 
199A deduction.
    The Treasury Department and the IRS decline to adopt both of these 
suggestions. Although the Treasury Department and the IRS agree with 
the commenter that the Commissioner can always assert that an 
inappropriate aggregation should be disregarded, the reporting 
requirements, including the disaggregation rule, are necessary for the 
Commissioner to administer section 199A in accordance with the 
statutory intent. The final regulations clarify that the disaggregation 
is not permanent by providing that trades or businesses that are 
disaggregated by the Commissioner may not be re-aggregated for the 
three subsequent taxable years, similar to the typical period during 
which a tax return may be audited. The Treasury Department and the IRS 
also decline to adopt the commenter's suggestion that the final 
regulations include an additional anti-abuse rule that would allow the 
Commissioner to aggregate trades or business in cases in which a 
division of the taxpayer's trades or businesses is used in conjunction 
with the aggregation rules with a principal purpose of increasing the 
taxpayer's section 199A deduction. As explained in part II.D. of this 
Summary of Comments and Explanation of Revisions, taxpayers and 
entities can have more than one trade or business. The suggested anti-
abuse rule is overly broad and would create unnecessary complexity for 
both taxpayers and the IRS.

E. Examples

    The proposed regulations provide several examples of the 
aggregation rules. One commenter noted that proposed Sec.  1.199A-
4(b)(1)(i) refers to the capital or profits of a partnership while the 
examples refer to the capital and profits of a partnership. The 
language in the examples was intended to demonstrate that the taxpayers 
were sharing proportionately in all items. For clarification, the final 
regulations retain the reference to capital or profits in Sec.  1.199A-
4(b)(1)(i) and update the examples to remove the references to capital 
and profits.

VI. Specified Service Trades or Businesses and the Trade or Business of 
Being an Employee

A. Definition of Specified Service Trade or Business

1. In General
    The proposed regulations provide definitional guidance on the 
meaning of a trade or business involving the performance of services in 
each of the fields listed in section 199A(d)(2). Multiple commenters 
requested guidance on whether specific trades or businesses would 
constitute SSTBs. In many cases, the determination of whether a 
specific trade or business is an SSTB depends on whether the facts and 
circumstances demonstrate that the trade or business is in one of the 
listed fields. Although the Treasury Department and the IRS understand 
the desire for certainty, because the determination of whether a 
particular trade or business is an SSTB is factually dependent, this 
analysis is beyond the scope of these regulations.
    Several commenters argued that the meaning of performance of 
services in the various fields should be limited to the definitions 
provided in Sec.  1.448-1T(e)(4). A few commenters noted that any 
expansion beyond these definitions is contrary to legislative intent as 
expressed in ``Tax Cuts and Jobs Act,'' Statement of Managers to the 
Conference Report to Accompany H.R. 1, H.R. Rept. 115-466 (Dec. 15, 
2017), p. 216-222. These commenters argue that the Statement of 
Managers notes that the committee adopted the Senate Amendment and 
described the section 448 regulations as an indicator of the meaning of 
services in the health, performing arts, and consulting fields 
referenced in section 1202(e)(3)(A) as incorporated by section 199A. 
The Treasury Department and the IRS decline to adopt these comments. 
While the Statement of Managers does reference Sec.  1.448-1T(e)(4), 
nothing in the language of the report limits the definitions for 
purposes of section 199A to those provided in Sec.  1.448-1T(e)(4). 
Section 199A does not reference section 448; instead, section 199A 
incorporates section 1202(e)(3)(A) with modifications. The Treasury 
Department and the IRS believe it is appropriate to look to the 
definitions provided for in the regulations under section 448 because 
guidance under section 1202 is limited. However, as stated in the 
preamble to the proposed regulations, the existing guidance under 
section 448 is not a substitute for guidance under section 199A.
    The intent of section 448 and the intent of section 199A are 
different. Section 448 prohibits certain taxpayers from computing 
taxable income under the cash receipts and disbursements method of 
accounting. Qualified personal services corporations are excluded from 
this prohibition. Section 448(d)(2) defines the term qualified personal 
service corporation to include certain employee-owned corporations, 
substantially all of the activities of which involve the performance of 
services in the fields of health, law, engineering architecture, 
accounting, actuarial sciences, performing arts, or consulting. By 
contrast, section 199A provides a deduction based on QBI from a 
qualified trade or business. For taxpayers with taxable income above 
the phase-in range, an SSTB is not a qualified trade or business. 
Section 199A, through reference to section 1202, defines an SSTB as a 
trade or business involving the performance of services in the fields 
of health, law, accounting, actuarial science, performing arts, 
consulting, athletics, financial services, brokerage services, or any 
trade or business where the principal asset of such trade or business 
is the reputation or skill of one or more of its employees or owners. 
The trade or business of the

[[Page 2970]]

performance of services that consist of investing and investment 
management, trading, or dealing in securities (as defined in section 
475(c)(2)), partnership interests, or commodities (as defined in 
section 475(e)(2)) is also defined as an SSTB for purposes of section 
199A. Further, section 199A looks to the trade or business of 
performing services involving one or more of the listed fields, and not 
the performance of services themselves in determining whether a trade 
or business is an SSTB. The designation of a trade or business as an 
SSTB applies to owners of the trade or business, regardless of whether 
the owner is passive or participated in any specified service activity. 
Accordingly, it is both necessary and consistent with the statute and 
the legislative history to expand the definitions of the fields of 
services listed in section 199A(d)(1) and (2) and Sec.  1.199A-5 beyond 
those provided in Sec.  1.448-1T(e)(4).
    One commenter suggested that in order to provide certainty and 
further economic growth, the final regulations should include a 
franchising example to clarify that a franchisor will not be considered 
to be an SSTB based solely on the selling of a franchise in a listed 
field of service. The Treasury Department and the IRS adopt this 
comment and have included a franchising example in the final 
regulations.
    Finally, the final regulations add two rules of general 
application. First, the final regulations specify that the rules for 
determining whether a business is an SSTB within the meaning of section 
199A(d)(2) apply solely for purposes of section 199A and therefore, may 
not be taken into account for purposes of applying any other provision 
of law, except to the extent that another provision expressly refers to 
section 199A(d). Second, the final regulations include a hedging rule 
that is applicable to any trade or business conducted by an individual 
or an RPE. The hedging rule provides that income, deduction, gain, or 
loss from a hedging transaction entered into in the normal course of a 
trade or business is included as income, deduction, gain, or loss from 
that trade or business. A hedging transaction for these purposes is 
defined in Sec.  1.1221-2(b) and the timing rules of Sec.  1.446-4 are 
also applicable.
    The remainder of this part VI.A. responds to those comments 
advocating that a specific category of trade or business should be 
excluded from one of the listed fields in section 199(d)(2) or from the 
SSTB provisions entirely.
2. Health
    Multiple commenters submitted comments requesting additional 
guidance on the meaning of performance of services in the field of 
health. Several commenters recommended that the definition of the 
performance of services in the field of health should differentiate 
between institutional health care providers (such as skilled nursing 
homes), which bill on a fee-for-service or per diem-basis, versus 
health care providers who provide and bill for professional services 
(such as a physician's practice). Another commenter suggested a 
distinction between these types of providers based on whether the trade 
or business had made the capital investment necessary to function as a 
custodial institution. One commenter recommended the definition be 
restricted to health care providers who derive a majority of their 
revenue from billing patients and third party payers for professional 
services, thereby excluding health care providers who derive a majority 
of their revenue from billing for institutional services (skilled 
nursing facilities, hospitals, ambulatory surgery centers, home health 
care agencies, outpatient radiology centers, and hospice agencies).
    Commenters noted the many services that skilled nursing facilities 
and assisted living facilities provide are unrelated to health care, 
including housing, meals, laundry facilities, security, and 
socialization activities. In some cases, skilled nursing and similar 
facilities may make available independent contractors who provide 
services related to health care available to patients, without the 
facility receiving any payment or revenue with respect to such 
services. Another commenter suggested that skilled nursing facilities, 
assisted living, and similar facilities should be excluded from the 
definition of services in the field of health unless 95 percent or more 
of the time spent by employees of the facility are directly related to 
providing medical care.
    The Treasury Department and the IRS agree that skilled nursing, 
assisted living, and similar facilities provide multi-faceted services 
to their residents. Whether such a facility and its owners are in the 
trade or business of performing services in the field of health 
requires a facts and circumstances inquiry that is beyond the scope of 
these final regulations. The final regulations provide an additional 
example of one such facility offering services that the Treasury 
Department and the IRS do not believe rises to the level of the 
performance of services in the field of health.
    Several commenters asked for clarification regarding when two 
separate activities would generally be viewed separately, particularly 
in the context of health care facilities such as emergency centers, 
urgent care centers, and surgical centers that provide improved real 
estate and equipment but do not directly provide treatment or 
diagnostic care to service recipients. One commenter noted that there 
is precedent under section 469 for distinguishing between the provision 
of direct treatment and diagnostic care versus the business of 
providing services or facilities ancillary to direct care, even if the 
physicians own an interest in the entity owning the facilities. The 
commenter suggested that the final regulations provide examples or 
other clarification regarding when these and similar facilities will be 
treated as performing services in the field of health, particularly if 
one of the owners of a facility also performs medical services in the 
facility. The final regulations provide an additional example of an 
outpatient surgical center demonstrating a fact pattern that the 
Treasury Department and the IRS do not believe is a trade or business 
providing services in the field of health.
    Several commenters requested clarification regarding whether a 
retail pharmacy selling pharmaceuticals or medical devices is engaged 
in a health service trade or business. One commenter suggested that 
final regulations include an example of when a pharmacist would be 
considered in the health profession. The commenter agreed that a 
pharmacist working as an independent contractor at various pharmacies, 
a pharmacist providing inoculations directly to the patient, and a 
consulting pharmacist working as an independent contractor would all be 
examples of a pharmacist engaged in an SSTB. Another commenter stated 
that the inclusion of pharmacists in the definition might be overbroad, 
suggesting that a pharmacist who was also a pharmacy owner generating 
revenue from selling pharmaceuticals or medical devices would not be 
engaged in an SSTB while a pharmacist operating as a consultant and 
paid as an independent contractor would be engaged in an SSTB. A third 
commenter suggested that a pharmacist working as an independent 
contractor for several pharmacies would not be performing services in 
the field of health unless the pharmacists provides medical services, 
such as inoculations, directly to a patient.

[[Page 2971]]

    The Treasury Department and the IRS agree that the sale of 
pharmaceuticals and medical devices by a retail pharmacy is not by 
itself a trade or business performing services in the field of health. 
As the commenters note, however, some services provided by a retail 
pharmacy through a pharmacist are the performance of services in the 
field of health. The final regulations provide an additional example of 
a pharmacist performing services in the field of health.
    Another commenter argued that gene therapy and similar injectable 
products such as stem cell therapy and RNA-based therapies manufactured 
or produced from the patient's body itself should be treated in the 
same manner as pharmaceuticals. The commenter argued that their 
manufacture and production should not be treated as an SSTB, regardless 
of whether they take place in a hospital or in a separate production 
facility. The Treasury Department and the IRS decline to adopt this 
recommendation as this is a question of facts and circumstances.
    Another commenter argued that veterinary medicine should not be 
considered an SSTB. The commenter stated that delivery of veterinary 
care is different than delivery of human health care because veterinary 
patients are property and the nature of the animal may dictate the 
level of veterinary care provided by the owner. Most veterinary 
practices have other streams of income such as retail, laboratory and 
diagnostic services, boarding and grooming services, and pharmacies, 
and the commenter expressed concern that it would be difficult for 
veterinarians to segregate those other streams of income. The commenter 
noted that animal boarding and grooming would ordinarily generate 
income eligible for the deduction and that should not change when 
services are provided by a veterinarian. The commenter also stated that 
Federal health legislation does not apply to veterinarians unless the 
legislation specifically refers to veterinarians, veterinary medicine, 
or animal health. Finally, the commenter noted that Sec.  1.448-
1T(e)(4)(ii) does not reference veterinarians, suggesting that this is 
an indication that Congress did not intend for veterinary medicine to 
be treated as a business in the field of health.
    Issued nearly three decades ago, Rev. Rul. 91-30, 1991-1 C.B. 61, 
described a corporation in which employees spend all of their time in 
the performance of veterinary services, including diagnostic and 
recuperative services as well as activities, such as the boarding and 
grooming of animals, that are incident to the performance of these 
services. The ruling also describes the definition of the performance 
of services in the field of health contained in Sec.  1.448-
1T(e)(4)(ii) and holds that a corporation whose employees perform 
veterinary services is a qualified personal service corporation within 
the meaning of sections 448(d)(2) and 11(b)(2) and a personal service 
corporation within the meaning of section 441(i). Accordingly, the 
Treasury Department and the IRS believe that it is appropriate to 
continue the long-standing treatment of veterinary services as the 
performance of services in the field of health for purposes of section 
199A and these final regulations.
    Another commenter noted that there is a dividing line between 
physical therapists and other health-related occupations. For example, 
reimbursement rates from third-party payers are higher for doctors, 
nurses, and dentists. The commenter also noted that Congress initially 
attempted to exclude physical therapists from participating in Medicare 
and Medicaid incentive programs and health service student loan 
forgiveness programs. The Treasury Department and the IRS decline to 
adopt this comment as multiple health services are reimbursed 
differently, but are still within the field of health.
    One commenter suggested that services are not performed in the 
field of health unless services are performed directly to a patient. As 
an example, the commenter argued that a physician who reads x-rays for 
another physician but does not work directly with the patient would not 
be performing a service in the field of health. Another commenter 
stated that defining services in the field of health by proximity to 
patients could lead to arbitrary results, pointing out that a 
radiologist who acts as an expert consultant to a physician engages in 
the same exercise of medical skills and judgment as a physician who 
sees patients. The commenter suggested that technicians who operate 
medical equipment or test samples, but are not required to exercise 
medical judgment should not be considered as performing services in the 
field of health. The Treasury Department and the IRS agree with the 
second commenter that proximity to patients is not a necessary 
component of providing services in the field of health. Accordingly, 
the final regulations remove the requirement that medical services be 
provided directly to the patient. The final regulations do not adopt 
the suggestion that technicians who operate medical equipment or test 
samples are not considered to be performing services in the field of 
health as this is a question of fact. However, the final regulations do 
include an additional example related to laboratory services.
3. Accounting
    One commenter suggested that real estate settlement agents should 
be excluded from the definition of those who perform services in the 
field of accounting. The commenter recommended that final regulations 
define the performance of services in the field of accounting as the 
performance of core accounting services such as bookkeeping (including 
data entry), write-up work, review services, and attest functions, as 
well as tax preparation and similar functions. As an alternative, the 
commenter recommends that settlement agents be added as not 
constituting the practice of accounting. A second commenter stated that 
the definition of accounting should be narrowed to the ordinary meaning 
of accounting. This comment noted that the field of accounting should 
include bookkeeping and financial statement preparation, but not tax 
return advice and preparation. A third commenter noted that the 
proposed regulations treat bookkeeping services, which do not require 
professional training or license, as an accounting service. The 
commenter argued that if the intent of section 199A is to create parity 
between C corporations and passthrough entities, the regulations should 
narrowly define SSTBs, as was done for reputation and skill, and not 
expand the definitions beyond what was expressly contemplated by 
Congress.
    The Treasury Department and the IRS decline to adopt these 
comments. As noted in the preamble to the proposed regulations, the 
provision of services in the field of accounting is not limited to 
services requiring state licensure. It is based on a common 
understanding of accounting, which includes tax return and bookkeeping 
services. Whether a real estate settlement agent is engaged in the 
performance of services in the field of accounting depends on the facts 
and circumstances including the specific services offered and performed 
by the trade or business.
4. Actuarial Science
    The proposed regulations provide that the performance of services 
in the field of actuarial science means the provision of services by 
individuals such as actuaries and similar professionals performing 
services in their capacity as such. One commenter stated that the 
definition creates uncertainty for businesses that employ actuaries but 
do not separately bill for the services (such

[[Page 2972]]

as insurance businesses). The commenter recommended providing a rule 
similar to the rule for consulting services related to the manufacture 
and sale of goods for actuarial science. The Treasury Department and 
the IRS decline to adopt this comment as section 199A looks to the 
trade or business of performing services rather than the performance of 
services themselves. As stated in the preamble to the proposed 
regulations, the field of actuarial science does not include the 
provision of services by analysts, economists, mathematicians, and 
statisticians not engaged in analyzing or assessing the financial cost 
of risk or uncertainty of events. The mere employment of an actuary 
does not itself cause a trade or business to be treated as performing 
services in the field of actuarial science. Whether a trade or business 
is providing actuarial services is a question of fact and circumstance.
5. Performing Arts
    Multiple commenters stated that the definition of performance of 
services in the field of performing arts should be limited to the 
definition in Sec.  1.448-1T(e)(4)(iii). One commenter argued that the 
position in the proposed regulations that includes individuals who 
participate in the creation of the performing arts is not supported by 
the legislative history, namely the Statement of Managers that 
references the section 448 regulations. As described in part VII.A.1. 
of this Summary of Comments and Explanation of Revisions, the Treasury 
Department and the IRS decline to limit the definition of the 
performance of services in the field of performing arts to the 
definition in Sec.  1.448-1T(e)(4)(iii). Another commenter suggested 
that writers should fall outside the definition of the performance of 
services in the field of performing arts because writing does not 
require a skill unique to the creation of performing arts. Further, 
writers create a wide variety of works not intended to be performed 
before an audience. The Treasury Department and the IRS also decline to 
adopt this comment. To the extent that a writer is paid for written 
material, such as a song or screenplay, that is integral to the 
creation of the performing arts, the writer is performing services in 
the field of performing arts.
6. Consulting
    One commenter suggested that proposed Sec.  1.199A-5(b)(3), Example 
3, should be modified to clarify that C, a taxpayer in the business of 
providing services that assist unrelated entities in making their 
personnel structures more efficient, does not provide any temporary 
workers, and C's compensation and fees are not affected by whether C's 
clients use temporary workers. The commenter argued that such a change 
would prevent the example from being interpreted as treating any 
recommendation for a business to use temporary workers as consulting 
services. The commenter also suggested that the final regulations 
include an additional example similar to Example 7 of Sec.  1.448-
1T(e)(4)(iv)(B) related to staffing firms. The commenter recommended 
that the example provide that a business that assists other businesses 
in meeting their personnel needs by referring job applicants to them 
does not engage in the performance of services in the field of 
consulting when the compensation for the business referring job 
applicants is based on whether the applicants accept employment 
positions with the businesses searching for employees. The final 
regulations adopt these suggestions.
    Another commenter suggested that final regulations clarify whether 
services provided by engineers and architects could be considered to be 
an SSTB if their services meet the definition of consulting services. 
The Treasury Department and the IRS adopt this comment. Section 1.199A-
5(b)(2)(vii) of the final regulations provides that services within the 
fields of architecture and engineering are not treated as consulting 
services for purposes of section 199A.
    One commenter suggested that the definition of consulting should be 
narrowed to stand-alone advice and counsel with no link to production, 
manufacturing, sales, or licensing of products. The Treasury Department 
and the IRS decline to adopt this suggestion as it would be difficult 
to administer and subject to manipulation. Another commenter suggested 
that the phrase ``provision of professional advice and counsel to 
clients to assist the client in achieving goals and solving problems'' 
is overly broad as it could apply to almost any service-based business 
that assists clients in achieving goals and solving problems. The 
commenter stated that applying the ancillary rule would be difficult 
where a taxpayer is required to separately bill for embedded consulting 
services under state or local sales tax laws. The commenter suggested 
that the consulting field should be limited to taxpayers that fall 
under a consulting-related business activity code under the North 
American Industry Classification Systems (NAICS). The Treasury 
Department and the IRS agree with the commenter that many service-based 
businesses could be construed as providing professional advice and 
counsel to clients to assist the client in achieving goals and solving 
problems; however, the Treasury Department and the IRS decline to adopt 
the recommendation to limit the consulting field based on NAICS codes. 
Section 1.199A-5(b)(2)(vii) excludes the performance of services other 
than providing advice and counsel from the field of consulting. At 
issue is whether advice and counsel is provided in the context of the 
provision of goods or services (that are not otherwise SSTBs). This is 
a question of facts and circumstances. Consulting services that are 
separately billed are generally not considered to be provided in the 
context of the provisions of goods or services.
7. Athletics
    A few commenters suggested that the definition of a trade or 
business involving the performance of services in the field of 
athletics should not include the trade or business of owning a 
professional sports team. One commenter stated that the definition 
should be limited to entities that are either owned or controlled by, 
or whose primary beneficiaries are, professional athletes or that 
involve the performance of services by those athletes; in other words, 
the definition should apply solely to athletes' personal services 
companies.
    Another commenter recommended that Sec.  1.199A-5(b)(3) Example 2 
be revised to reflect that neither sports clubs nor club owners perform 
services described in section 1202(e)(3)(A). The commenter stated that 
a professional sports club and its owners do not perform services in 
the field of athletics. Instead, a sports club sells tickets, licenses, 
sponsorships, and other intellectual property, creates digital content, 
engages in community activities, manages a stadium, and produces an 
entertainment product. The commenter argued that Congress intended 
through the SSTB rules to prevent W-2 wage income from being converted 
to QBI and that only the trade or business of an athlete involves W-2 
wage income from athletic performance. The commenter continued, stating 
that professional sports clubs are not described in section 
1202(e)(3)(A) or provided in section 448(d)(2)(A).
    The Treasury Department and the IRS decline to adopt this comment. 
As described in part VII.A.1. of this Summary of Comments and 
Explanation of Revisions, the Treasury Department and the IRS do not 
believe that definitional guidance should be limited

[[Page 2973]]

to that provided in Sec.  1.448-1T(e)(4)(i) (by analogy to performing 
arts for athletics). While sports club and team owners are not 
performing athletic services directly, that is not a requirement of 
section 199A, which looks to whether there is income attributable to a 
trade or business involving the performance of services in a specified 
activity, not who performed the services. A professional sports club 
may operate more than one trade or business. For example, a team may 
operate its concession services as a separate trade or business. The 
Treasury Department and the IRS agree that such concession services 
generally would not be a trade or business of performing services in 
the field of athletics. Nonetheless, a professional sports club's 
operation of an athletic team is a trade or business of performing 
services in the field of athletics. Income from that trade or business, 
including income from ticket sales and broadcast rights, is income from 
a trade or business of performing services in the field of athletics. 
The performance of services in the field of athletics does not include 
the provision of services by persons who broadcast or otherwise 
disseminate video or audio of athletic events to the public.
8. Financial Services
    Several commenters suggested that final regulations clarify that 
financing, including taking deposits, making loans, and entering into 
financing contracts, is not a financial service. One commenter 
requested an explicit rule clarifying that non-bank mortgage bankers 
are not SSTBs and that customary activities of mortgage bankers 
including mortgage loan origination, sales of mortgage loans, mortgage 
loan servicing, and sale of mortgage servicing rights are not financial 
services. The preamble to the proposed regulations provides that the 
provision of financial services does not include taking deposits or 
making loans. The final regulations clarify that the provision of 
financial services does not include taking deposits or making loans.
    One commenter stated that the determination that banking is not a 
financial service appears to be wrong and inconsistent with statutory 
construction since any common definition of financial services includes 
banking services. As stated in the preamble to the proposed 
regulations, banking is listed in section 1202(e)(3)(B) but not section 
1202(e)(3)(A). As a matter of statutory construction, the Treasury 
Department and the IRS believe that banking must therefore be excluded 
from the definition of financial services for purposes of section 199A. 
Another commenter suggested that insurance should be categorically 
excluded from the meaning of financial services because insurance is 
described in section 1202(e)(3)(B). The Treasury Department and the IRS 
agree that by operation of section 1202(e)(3)(B), insurance cannot be 
considered a financial service for purposes of section 199A. The 
commenter also suggested that a rule similar to the ancillary services 
rule for consulting should be extended to cover financial services. 
Another commenter argued that insurance agents and others who provide 
investment advice are not in the field of financial services, unless 
the agent receives a fee for the advice, rather than a commission on 
the sale. The Treasury Department and the IRS decline to categorically 
exclude services provided by insurance agents from the definition of 
financial services as financial services such as managing wealth, 
advising clients with respect to finances, and the provision of 
advisory and other similar services that can be provided by insurance 
agents. However, the Treasury Department and the IRS note that the 
provision of these services to the extent that they are ancillary to 
the commission-based sale of an insurance policy will generally not be 
considered the provision of financial services for purposes of section 
199A.
9. Brokerage Services
    One commenter stated that the ordinary definition of a broker is 
any person who buys and sells goods or services for others, including 
agents, and argued that nothing in the statute limits this to stock 
brokers. The commenter said that the definition in the proposed 
regulations artificially narrows the standard to appease special 
interests without any justification. The definition provided for in the 
proposed regulations applies more broadly than stock brokers and 
includes all services in which a person arranges transactions between a 
buyer and a seller with respect to securities (as defined in section 
475(c)(2)) for a commission or fee. While the term ``broker'' is 
sometimes used in a broad sense to include anyone who facilitates the 
purchase and sale of goods for a fee or commission, the term 
``brokerage services'' is most commonly associated with services, such 
as those provided by brokerage firms, involving the facilitation of 
purchases and sales of stock and other securities.
    Another commenter suggested that final regulations clarify that 
life insurance products are not securities for purposes of section 199A 
or that life insurance brokers engaged in their capacity as such are 
not brokers in securities for purposes of section 199A. Other 
commenters requested the final regulations clarify that the business of 
financing or making loans, including the services provided by mortgage 
banking companies, does not fall within the definition of brokerage 
services. The Treasury Department and the IRS address this comment in 
the final regulations by explicitly stating that although the 
performance of services in the field of financial services does not 
include taking deposits or making loans, it does include arranging 
lending transactions between a lender and borrower. The final 
regulations define securities by reference to section 475(c)(2).
10. Investing and Investment Management
    One commenter recommended that the performance of services that 
consist of investing and investment management be limited to investment 
management and investment advisory businesses whose income is 
principally attributable to the performance of personal services 
involving the provision of investment advice or the regular and 
contemporaneous management of investors' assets by individual employees 
or owners of the business. The commenter recommended that the 
definition exclude large, diversified asset managers that invest 
significant capital in and derive significant income from the research, 
development, and sale of investment products. The commenter suggested 
that rather than making business-by-business determinations, the final 
regulations should look to rules such as the regulations under now 
repealed section 1348, which did not treat income from a business in 
which capital is a material income producing factor as earned income. 
As an alternative, the commenter suggested that the final regulations 
could provide a safe harbor for firms that research, develop, and sell 
investment products, including changes to the de minimis and incidental 
rules necessary to effectuate the safe harbor. An example of such a 
rule could be similar to the rule provided for ancillary consulting 
services.
    The Treasury Department and the IRS decline to adopt this comment 
as the regulations under now repealed section 1348 looked to earned 
income including fees received by taxpayers engaged in a professional 
occupation. Section 199A is focused on a trade or business, not a 
profession of an individual. Accordingly, the determination of whether 
a trade or business in an SSTB

[[Page 2974]]

must be made on a business-by-business basis.
    Another commenter suggested that final regulations clarify that 
investing and investment management does not include the sale of life 
insurance products and that life insurance products are not investments 
for purposes of section 199A. The Treasury Department and the IRS 
decline to define investment for purposes of section 199A but note that 
commission-based sales of insurance policies generally will not be 
considered the performance of services in the field of investing and 
investing management for purposes of section 199A.
    Another commenter recommended that final regulations clarify that 
directly managing real property includes management through agents and 
affiliates acting as agents for the property manager. The SSTB 
limitations apply to direct and indirect owners of a trade or business 
that is an SSTB, regardless of whether the owner is passive or 
participated in any specified service activity. Accordingly, direct and 
indirect management of real property includes management through 
agents, employees, and independent contractors.
11. Dealing
a. Mortgage Banking, Credit Sales, and Non-Bank Lending
    Several commenters suggested that the provisions regarding dealing 
in securities should exclude mortgage banking and other lending 
activities in which lending is the primary business focus. Several of 
these commenters noted that the plain language meaning of ``purchasing 
securities'' does not include making loans. One commenter suggested 
that the reference to the definition of negligible sales should be 
clarified to explain that negligible sales as defined in Sec.  
1.475(c)-1(c)(2) and (4) does not apply if the loan is in connection 
with mortgage servicing contracts as excluded in section 451(b)(1)(B). 
Another commenter suggested that portfolio lenders should also be able 
to use the negligible sales exemption and all sales of loans outside 
the ordinary course of business should be excluded from consideration 
in applying the negligible sales test. A third commenter suggested that 
the regulation clarify that the negligible sales exception is simply an 
exception to the general definition of dealing in securities. Another 
commenter suggested that application of dealing in securities should be 
limited to taxpayers engaged in broker-dealer activities for which 
registration under Federal law would be required. Another commenter 
suggested that the creation of a loan should not be construed as a 
purchase and a taxpayer should be considered a dealer in securities 
only if they both purchase and sell securities. As an alternative, this 
commenter suggested that negligible sales could be defined in terms of 
the number of customers that the lender sells loans to each year. For 
this purpose, the Government National Mortgage Association (GNMA) would 
be considered to be the customer for purpose of sales of GNMA mortgage 
pools through the issuance of mortgage backed securities. Another 
commenter suggested that sales of retail installment contracts or loans 
for purposes of liquidity, portfolio diversification, and similar 
purposes should be considered to be outside of recurring business 
activity and thus not dealing in securities. In response to these 
comments, the final regulations provide that for purposes of section 
199A and the definition of performing services that consist of dealing 
in securities, the performance of services to originate a loan is not 
treated as the purchase of a security from the borrower. Additionally, 
the final regulations remove the reference to the negligible sales 
exception under Sec.  1.475(c)-1(c)(2) and (4) from the definition of 
dealing in securities.
    Another commenter suggested that under section 199A, the term 
``securities'' should be defined by reference to section 475 but not 
the terms ``dealer'' or ``dealer in securities.'' The commenter 
suggested that a lender should be considered to be a dealer in 
securities for purposes of section 199A only to the extent that loans, 
including retail sales contracts, acquired by the lender are held in 
inventory or held for sale to customers in the ordinary course of a 
trade or business within the meaning of section 1221. The commenter 
also suggested that when a loan is acquired with a view towards holding 
the loan to maturity in the lender's portfolio and the loan is later 
sold outside the normal course of business; such a sale should not 
result in the lender being viewed as a dealer in securities. Another 
commenter suggested that the meaning of sales to customers should be 
clarified in the context of a mortgage finance business. This commenter 
requested that the regulations clarify that a mortgage loan originator 
which transfers mortgages to an agency or broker/dealer for cash or 
mortgage-backed securities does not engage in a sale by the originator 
to a customer for purposes of section 199A.
    In response to these comments, the final regulations provide that 
the performance of services to originate a loan is not treated as the 
purchase of a security from the borrower in determining whether the 
lender is performing services consisting of dealing in securities. The 
comment regarding the definition of a dealer in securities, however, is 
not accepted, as the definition of a securities dealer has never 
depended on whether securities were held in inventory. The final 
regulations also do not address loans that are sold outside the normal 
course of business, which is an inherently factual question. Similarly, 
the Treasury Department and the IRS decline to address the question of 
whether a person is a customer as this is a subject which is beyond the 
scope of these regulations.
b. Banking
    Many commenters recommended that traditional banking activities be 
excluded entirely from the definition of an SSTB, including the 
performance of services that consist of dealing in securities. The 
commenters argued that Congress intended banks that elect under section 
1362(a) to be S corporations (subchapter S banks) to have the same 
relative reduction in taxes as C corporation banks after enactment of 
the TCJA. Many commenters noted that subchapter S bank activities are 
already strictly limited by the Bank Holding Company Act and this 
effectively serves as a guardrail against abuse of the section 199A 
deduction. As an alternative, commenters suggested that the definition 
of SSTB should be more narrowly drawn to exclude bank services such as 
trust or fiduciary services, securities brokerage, and the origination 
and sale of mortgages and loans. Commenters also expressed concern that 
the de minimis rule is insufficient to protect banks. These commenters 
suggested revisions including raising the de minimis threshold to 25 
percent regardless of the amount of gross receipts and using net income 
rather than gross receipts for the measure.
    The Treasury Department and the IRS decline to accept these 
comments. Although the final regulations continue to exclude taking 
deposits or making loans from the definition of an SSTB involving the 
performance of financial services, and exclude the origination of loans 
from the definition of dealing in securities for purposes of section 
199A, the Treasury Department and the IRS do not believe that there is 
a broad exemption from the listed SSTBs with respect to all services 
that may be legally permitted to be performed by

[[Page 2975]]

banks. Therefore, to the extent a bank operates a single trade or 
business that involves the performance of services listed as SSTBs 
outside of the de minimis exception, such as investing and investment 
management, the bank's single trade or business will be treated as an 
SSTB. However, as noted previously, an RPE, including a subchapter S 
bank, may operate more than one trade or business. Thus, a subchapter S 
bank could segregate specified service activities from an existing 
trade or business and operate such specified service activities as an 
SSTB separate from its remaining trade or business, either within the 
same legal entity or in a separate entity.
c. Commodities
    Several commenters suggested that the final regulations provide 
that a trade or business is not engaged in the performance of services 
of investing, trading, or dealing in commodities if it regularly takes 
physical possession of the underlying commodity in the ordinary course 
of its trade or business. These commenters also argued that a business 
that takes physical possession of the commodity should not be treated 
as an SSTB if it hedges its risk with respect to the commodity as part 
of the ordinary course of its trade or business. The commenters state 
that dealing in commodities for purposes of section 199A should be 
understood to mean an activity similar to dealing in securities and 
should be limited to the dealing in financial instruments referenced to 
commodities, such as commodities futures or options that are traded on 
regulated exchanges. One commenter argued that if the regulations were 
to apply to physical commodities it would result in different tax 
treatment depending on whether the commodity is actively traded and 
that Congress intended the definition of commodities to apply only to 
commodities derivatives. Another commenter suggested that manufacturing 
activities as defined under the now repealed section 199 should be 
expressly excluded from the definition of both trading in commodities 
and dealing in commodities.
    The Treasury Department and the IRS agree with commenters that the 
definition of dealing in commodities for purposes of section 199A 
should be limited to a trade or business that is dealing in financial 
instruments or otherwise does not engage in substantial activities with 
respect to physical commodities. To distinguish a trade or business 
that performs substantial activities with physical commodities from a 
trade or business that engages in a commodities trade or business by 
dealing or trading in financial instruments that are commodities 
(within the meaning of section 475(e)(2)), or a trade or business that 
otherwise does not perform substantial activities with commodities, the 
final regulations adopt rules similar to the rules that apply to 
qualified active sales of commodities in Sec.  1.954-2(f)(2)(iii). 
Those rules generally require a person to be engaged in the active 
conduct of a commodities business as a producer, processor, merchant, 
or handler of commodities and to perform certain activities with 
respect to those commodities.
    Accordingly, for purposes of section 199A, gains and losses from 
the sale of commodities in the active conduct of a commodities business 
as a producer, processor, merchant, or handler of commodities will be 
qualified active sales and gains and losses from qualified active sales 
are not taken into account in determining whether a person is engaged 
in the trade or business of dealing in commodities. Similarly, income, 
deduction, gain, or loss from a hedging transaction (as defined in 
Sec.  1.1221-2(b)) entered into in the normal course of a commodities 
business conducted by a producer, processor, merchant, or handler of 
commodities will be treated as gains and losses from qualified active 
sales that are part of that trade or business. Qualified active sales 
generally require a taxpayer to hold commodities as inventory or 
similar property and to satisfy specified conditions regarding 
substantial and significant activities described in the final 
regulations. A sale by a trade or business of commodities held for 
investment or speculation is not a qualified active sale.
13. Reputation/Skill
    Many commenters expressed support for the position in the proposed 
regulations that reputation or skill was intended to describe a narrow 
set of trades or businesses not otherwise covered by the other listed 
SSTBs, often writing that a more broad interpretation would be 
inherently complex and unworkable. Other commenters disagreed with the 
definition in the proposed regulations, expressing concern that the 
narrowness of the definition is contrary to the language of the statute 
and Congressional intent.
    The Treasury Department and the IRS remain concerned that a broad 
interpretation of the reputation and skill clause would result in 
substantial uncertainty for both taxpayers and the IRS. As stated in 
the preamble to the proposed regulations, it would be inconsistent with 
the text, structure, and purpose of section 199A to potentially exclude 
income from all service businesses from qualifying for the section 199A 
deduction for taxpayers with taxable income above the threshold amount. 
If Congressional intent was to exclude all service businesses, Congress 
clearly could have drafted such a rule. Accordingly, the final 
regulations retain the proposed rule limiting the meaning of the 
reputation or skill clause to fact patterns in which an individual or 
RPE is engaged in the trade or business of receiving income from 
endorsements, the licensing of an individual's likeness or features, 
and appearance fees.
    One commenter requested additional clarification regarding whether 
advertising income received for on air advertising spots in which a 
program host reads a script describing the positive qualities of a 
product or service, and may also choose to describe his or her own 
positive experiences with the product, is endorsement income as 
described in Sec.  1.199A-5(b)(2)(xiv)(A). The commenter argued that 
such income should not be considered endorsement income because it is 
not received in connection with a separate trade or business of making 
endorsements. The Treasury Department and the IRS decline to adopt this 
suggestion as Sec.  1.199A-5(b)(2)(xiv)(A) looks to whether the 
individual or RPE is receiving income from the endorsement of products 
or services, not whether the income is received in connection with a 
separate trade or business of making endorsements. Whether a taxpayer 
endorses a product or services is dependent on the facts and 
circumstances.

B. De Minimis Rule

    The proposed regulations provide that for a trade or business with 
gross receipts of $25 million or less for the taxable year, a trade or 
business is not an SSTB if less than 10 percent of the gross receipts 
of the trade or business are attributable to a specified service field. 
The percentage is reduced to 5 percent in the case of trades or 
businesses with gross receipts in excess of $25 million. Several 
commenters requested clarification regarding whether the entire trade 
or business is designated an SSTB if the threshold is exceeded. Some of 
these commenters suggested that the rule be modified so that the 
deduction could be claimed on the portion of the trade or business 
activity that was not an SSTB. A few suggested that an allocation 
similar to that in now repealed section 199 could be used. One 
commenter suggested

[[Page 2976]]

using the cost accounting principles of section 861 with a safe harbor 
allowing a simplified method for entities with average annual gross 
receipts less than $25 million. Another commenter stated that treating 
the entire trade or business as an SSTB is a trap for the unwary 
because well-advised taxpayers could avoid application of the rule by 
rearranging their activities into separate entities. One commenter 
suggested that the de minimis rule allow for minor year-to-year changes 
in gross receipts for businesses that are close to the de minimis 
thresholds. The commenter also suggested that the thresholds be 
increased and recommended an incremental approach in which the 
deduction is calculated based on the portion of the business that is 
not engaged in an SSTB. Another commenter suggested that if the rule is 
retained, it should be imposed only at a greater than 50 percent 
threshold since only at that point would SSTB gross receipts 
predominate over non-SSTB gross receipts. The commenter also noted that 
a higher threshold would be easier to track. Several commenters also 
suggested that the de minimis threshold be raised. One commenter 
suggested that the de minimis threshold be raised to 20 percent for all 
qualified businesses, regardless of gross receipts. The commenter 
argued that a 20 percent threshold is supported by Congress's decision 
to use section 1202(e) for its definition of an SSTB, noting that 
section 1202(e)(1)(A) uses an at least 80 percent (by value) rule for 
determining whether a qualified trade or business satisfies the 
section's active business requirement. Other commenters recommended 
that the ten percent threshold should apply for purposes of the de 
minimis threshold regardless of the amount of gross receipts of the 
trade or business. Public comments lacked consensus regarding the 5-
percent de minimis threshold. After considering all of the comments, 
the Treasury Department and the IRS chose to retain the 5-percent 
threshold in the final regulations as it is a de minimis threshold that 
is generally consistent with prior regulations under the Code in 
similar circumstances and therefore, such a standard should be familiar 
to affected entities.
    Another commenter suggested that final regulations clarify whether 
revenue generated from the sale of medical products or devices should 
be excluded from the overall QBI for trades or businesses that provide 
services in the field of health. The commenter noted that physicians 
who provide their patients with medical devices should be able to use 
the deduction with respect to income from such devices and expressed 
concern that the de minimis thresholds could limit the ability of some 
practitioners to use the deduction. Another commenter suggested that a 
business with SSTB gross receipts in excess of the de minimis should 
not be entirely disqualified, but that the facts and circumstances 
should be analyzed to determine the true nature of the trade or 
business. The commenter also suggested that a safe harbor should be 
provided in which a business can make an election to deem the SSTB 
activity as a separate trade or business solely for the purposes of 
section 199A. Finally, one commenter suggested that final regulations 
include an example of what result occurs if a taxpayer's SSTB revenue 
is not de minimis.
    The Treasury Department and the IRS decline to adopt most of the 
recommendations in these comments. As stated in the preamble to the 
proposed regulations, the statutory language of section 199A does not 
provide a certain quantum of activity before an SSTB is found. Rather, 
section 199A looks to whether the trade or business involves the 
performance of services in the list of SSTBs. The use of the word 
``involving'' suggests that any amount of specified service activity 
causes a trade or business to be an SSTB. Consequently, the Treasury 
Department and the IRS believe that it would be inappropriate to adopt 
a pro rata rule. However, requiring all taxpayers to evaluate and 
quantify any amount of specified service activity would be unduly 
burdensome and complex for both taxpayers and the IRS. Accordingly, the 
proposed rule provides a de minimis threshold under which a trade or 
business will not be considered an SSTB merely because it provides a 
small amount of services in a specified service activity. Trades or 
business with gross income from a specified service activity in excess 
of the de minimis threshold are considered to be SSTBs. The final 
regulations retain the proposed rule but add an additional example 
demonstrating the result in which a trade or business has income from a 
specified service activity in excess of the de minimis threshold.
    As discussed in part II of this Summary of Comments and Explanation 
of Revisions, the Treasury Department and the IRS acknowledge that an 
RPE can have more than one trade or business for purposes of section 
162 and thus for section 199A. However, each trade or business is 
required under section 199A to be separately tested to determine 
whether that trade or business is an SSTB. Similarly, the de minimis 
threshold is applied to each trade or business of an RPE separately, 
not in the aggregate to all the trades or businesses of the RPE. Thus, 
to the extent that an individual or RPE has more than one trade or 
business, the presence of specified service activity in one of those 
trades or business will not cause the individual's or RPE's other 
trades or businesses to be considered SSTBs except to the extent that 
the rules in Sec.  1.199A-5(c)(2) (services or property provided to an 
SSTB) apply.

C. Services or Property Provided to an SSTB

    The proposed regulations provide special rules for service or 
property provided to an SSTB by a trade or business with common 
ownership. A trade or business that provides more than 80 percent of 
its property or services to an SSTB is treated as an SSTB if there is 
50 percent or more common ownership of the trades or businesses. In 
cases in which a trade or business provides less than 80 percent of its 
property or services to a commonly owned SSTB, the portion of the trade 
or business providing property to the commonly owned SSTB is treated as 
part of the SSTB with respect to the related parties.
    One commenter suggested that the provision is warranted because of 
abuse potential but is overbroad and prevents legitimate transactions. 
The commenter recommended that the rule be modified into a presumption 
that a taxpayer could rebut with evidence demonstrating that the 
property or services provided to the SSTB by the related RPE are (1) 
comparable to those available from competing organizations and (2) that 
prices charged by the RPE and paid by the SSTB are comparable to those 
charged in the market. The commenter also suggested that the IRS could 
examine the totality of facts and circumstances, including historic 
conduct between the SSTB and RPE. Another commenter suggested that the 
final rule add an exception to the rule for taxpayers that can 
demonstrate they have a substantial purpose (apart from Federal income 
tax effects) for structuring their trade or business in a particular 
manner. For example, title to a skilled nursing facility could be held 
by one passthrough entity that is operated by a related passthrough 
entity in order to satisfy Department of Housing and Urban Development 
lending requirements. The Treasury Department and the IRS decline to 
adopt these recommendations. Creating a presumption or substantial 
purpose test would lead to greater complexity

[[Page 2977]]

and administrative burden for both taxpayers and the IRS.
    A few commenters requested clarification regarding whether the rule 
applies when the property or services are provided to a commonly-owned 
C corporation. One commenter also asked for clarification on the 
meaning of 50 percent or more common ownership, examples of how 
ownership is determined, and whether the definition is different than 
the 50 percent or more common ownership test used in the aggregation 
rules. One commenter suggested that the rule should apply only to those 
owners who make up the 50 percent ownership test. Another commenter 
suggested that the rule should not apply to real estate rentals to a 
commonly owned SSTB. Another commenter suggested that structures that 
existed before December 22, 2017, be grandfathered so that the rule 
would not apply. In response to comments, the final regulations clarify 
that the rule applies only to those who make up the 50 percent test. As 
discussed in section V.B. of this Summary of Comments and Explanation 
of Revisions, the final regulations provide that sections 267(b) and 
707(b) apply in determining common ownership for purposes of the 
aggregation rules. The Treasury Department and the IRS decline to 
exempt real estate rentals or to structures that existed before 
December 22, 2017, as the rule is intended to address goods and 
services that are provided to an SSTB regardless of the type of good or 
service provided or the date on which the structure was put into place.
    One commenter stated that the rule is overbroad and not based on 
statutory authority and unfairly punishes related party transactions. 
Other commenters suggested that the rule automatically treating a trade 
or business that provides more than 80 percent of its goods or services 
to a commonly owned SSTB as an SSTB is unnecessary, as there are no 
abuse concerns regarding the portions of goods or services provided to 
a third party. The Treasury Department and the IRS agree with this 
comment and have removed the 80 percent rule in the final regulations. 
Accordingly, the final regulations provide that if a trade or business 
provides property or services to an SSTB and there is 50 percent or 
more common ownership of the trade or business, the portion of the 
trade or business providing property or services to the 50 percent or 
more commonly-owned SSTB will be treated as a separate SSTB with 
respect to related parties.

D. Incidental to a Specified Service Trade or Business

    The proposed regulations provide that if a trade or business (that 
would not otherwise be treated as an SSTB) has both 50 percent or more 
common ownership with an SSTB and shared expenses with an SSTB, then 
the trade or business is treated as incidental to and, therefore, part 
of the SSTB, if the gross receipts of the trade or business represent 
no more than five percent of the total combined gross receipts of the 
trade or business and the SSTB in a taxable year. One commenter 
recommended that this rule be removed because it is unnecessary and 
causes administrative difficulties for taxpayers who must determine 
whether a trade or business is incidental in order to apply the rule. 
If the rule is retained, the commenter recommended that final 
regulations define gross receipts and shared expenses, make adjustments 
to avoid double counting the same gross receipts, clarify what 
businesses are taken into account for purposes of the rule, and treat a 
trade or business to which the anti-abuse rule applies as a separate 
SSTB rather than as part of the SSTB. Another commenter suggested that 
the final regulations add an exception for start-ups such as a three to 
five year grace period and also clarify the ownership standard, how the 
rule would apply if the trades or business have different tax years, 
and how shared expenses would be determined. In accordance with the 
comments, the rule is removed from the final regulations.

E. Trade or Business of Performing Services as an Employee

    Multiple commenters expressed support for the rule in the proposed 
regulations that provides that an individual who was previously treated 
as an employee and is subsequently treated as other than an employee 
while performing substantially the same services to the same person, or 
a related person, will be presumed to be in the trade or business of 
performing services as an employee for purposes of section 199A. The 
commenters noted that the presumption furthers the public policy goal 
of preventing worker misclassification, preserves agency resources, and 
prevents a decline in Federal and state tax revenues. The commenters 
also state that regulations should not incentivize workers to accept 
misclassification by their employer in order to obtain a tax benefit.
    Other commenters recommended that the presumption be removed 
arguing that the common law test under current law is sufficient for 
determining whether a former employee is properly classified as an 
employee and that the presumption would impede the objective of 
ensuring similar treatment of similarly situated taxpayers because two 
similarly situated taxpayers who provide services to the same company 
would be treated differently if one was a former employee of the 
company and the other was not. The commenter also notes that the 
presumption would create uncertainty for taxpayers and would cause 
former employees to not claim the deduction in order to avoid a dispute 
with the IRS.
    Another commenter expressed concern that the presumption as written 
in the proposed regulations could create a dual standard for worker 
classification under the Code, in which a worker could be classified as 
an independent contractor for employment tax purposes, and an employee 
for purposes of claiming section 199A deduction. This could result in 
an independent contractor being held liable for self-employment taxes 
and unable to claim the section 199A deduction on income that would 
otherwise qualify as QBI. The commenter suggested that if the 
presumption is retained, it should include an exemption for certain 
independent contractors based on factors including income, source of 
income, industry practice, and timeframe.
    A different commenter suggested that the presumption should provide 
that an independent contractor is operating as such and that it is up 
to the relevant Federal agencies to determine whether the business 
misclassified the individual. The commenter also noted that the IRS is 
barred from issuing regulations with respect to the employment status 
of any individual for employment tax purposes under Section 530(b) of 
the Revenue Act of 1978 (Pub. L. 95-600), as amended by section 9(d)(2) 
of Public Law 96-167, section 1(a) of Public Law 96-541, and section 
269(c) of Public Law 97-248, and that the presumption could result in 
an individual otherwise subject to self-employment tax to not get the 
benefit of the section 199A deduction. Another commenter argued that an 
employee who changes his status from employee to independent contractor 
so he may deduct business expenses on Schedule C and claim a section 
199A deduction is exercising his right to structure his business 
transactions to minimize his tax liability.
    Another commenter questioned how the rule would be applied, asking 
for clarification on whether the rule is intended to prohibit employers 
from firing employees and rehiring them as

[[Page 2978]]

independent contractors; whether it applies to former employees 
regardless of current relationship; and how far the IRS would look back 
at prior employees. Another commenter suggested that a new example be 
added to the final regulations demonstrating that the presumption is 
inapplicable when the facts demonstrate that a service recipient and a 
service provider have materially modified their relationship such that 
its proper classification is that of a service recipient and a partner.
    The Treasury Department and the IRS believe that the presumption is 
necessary to prevent misclassifications but agree that some 
clarification of the presumption is necessary. In accordance with 
commenter's suggestions, the final regulations provide a three-year 
look back rule for purposes of the presumption. The final regulations 
provide that an individual may rebut the presumption by showing 
records, such as contracts or partnership agreements, that are 
sufficient to corroborate the individual's status as a non-employee for 
three years from the date a person ceases to treat the individual as an 
employee for Federal employment taxes. Finally, the final regulations 
contain an additional example demonstrating the application of the 
presumption for the situation in which an employee has materially 
modified his relationship with his employer such that the employee can 
successfully rebut the presumption.

VII. Relevant Passthrough Entities, Publicly Traded Partnerships, 
Trusts, and Estates

A. Reporting Rules

    The proposed regulations provide that an RPE must determine and 
separately report QBI, W-2 wages, UBIA of qualified property, and 
whether the trade or business is an SSTB for each of the RPE's trades 
or businesses. To help simplify the administration and compliance 
burden, several commenters suggested that there be an option to 
compute, aggregate, and report activities at the RPE or entity level. 
As discussed in part V of this Summary of Comments and Explanation of 
Revisions, the final regulations allow an RPE to aggregate its trades 
or businesses provided the rules of Sec.  1.199A-4 are satisfied. An 
RPE that chooses to aggregate can report combined QBI, W-2 wages, and 
UBIA of qualified property for the aggregated trade of business. This 
aggregation must be maintained and reported by all direct and indirect 
owners of the RPE, including upper-tier RPEs.
    The proposed regulations provide that if an RPE fails to separately 
identify or report any QBI, W-2 wages, UBIA of qualified property, or 
SSTB determinations, the owner's share (and the share of any upper-tier 
indirect owner) of QBI, W-2 wages, and UBIA of qualified property 
attributable to trades or businesses engaged in by that RPE will be 
presumed to be zero. A few commenters suggested that the final 
regulations clarify that if an RPE fails to separately identify or 
report each owner's allocable share of QBI, W-2 wages, or UBIA of 
qualified property, then only the unidentified or unreported amount is 
presumed to be zero. Another commenter suggested that a return be 
considered substantially complete even if an RPE chooses not to report 
QBI, W-2 wages, and UBIA of qualified property, while other commenters 
suggested that taxpayers could rebut the presumption. One commenter 
requested that the final regulations clarify that if an RPE fails to 
report QBI, W-2 wages, UBIA of qualified property, and SSTB 
information, the information can still be reported on an amended or 
late filed return if filed while the period of limitations is still 
open. Another commenter suggested that to incentivize accurate and 
timely reporting, taxpayers should be given reasonable opportunities to 
correct errors and not be subject to penalties for such errors.
    The Treasury Department and the IRS agree with commenters that all 
of an RPE's items related to section 199A should not be presumed to be 
zero because of a failure to report one item. For example, an RPE may 
have sufficient W-2 wages and send out that information, but decline to 
provide information for UBIA of qualified property because it is not 
necessary or is an insignificant amount. Accordingly, the final 
regulations retain the reporting requirement but revise the presumption 
to provide that if an RPE fails to separately identify or report an 
item of QBI, W-2 wages, or UBIA of qualified property, the owner's 
share of each unreported item of positive QBI, W-2 wages, or UBIA of 
qualified property attributable to trades or businesses engaged in by 
that RPE will be presumed to be zero. The final regulations also 
provide that such information can be reported on an amended or late 
filed return for any open tax year. Guidance on the application of 
penalties is beyond the scope of these regulations.
    The preamble to the proposed regulations requested comments 
regarding whether it is administrable to provide a special rule that if 
none of the owners of the RPE have taxable income above the threshold 
amount, the RPE does not need to determine and report W-2 wages, UBIA 
of qualified property, or whether the trade or business is an SSTB. One 
commenter recommended that a special rule be provided that an RPE need 
not determine or report W-2 wages, UBIA of qualified property or 
whether the trade or business is an SSTB if none of the owners of the 
RPE have taxable income above the threshold amount. The commenter 
suggested that the final regulations provide an exception to the 
reporting requirements if (1) an RPE does not have gross receipts that 
constitute QBI; (2) none of the owners of the RPE are non-corporate 
taxpayers; or (3) none of the RPE owners have taxable income above the 
threshold amount. The commenter suggested that an RPE could establish 
the taxable income of its owners through the review and maintenance of 
its owners' tax returns or written statements signed under the penalty 
of perjury. Another commenter suggested that an RPE should not be 
subject to the reporting requirements unless the RPE is aware of a non-
corporate owner. Another commenter suggested that the RPE only needs to 
report W-2 wages when it is clear that the amount will result in an 
amount greater than 20 percent of QBI. Another commenter requested 
guidance on how to qualify for the special rule and what information 
the RPE would be required to report to its owners and retain in 
connection with the rule. One commenter, however, cautioned against a 
special rule because of the lack of knowledge the RPE has about the 
owners. The commenter also suggested that a certification process by 
the owners would create an administrative burden. The commenter 
requested guidance on who would be responsible for corrections and 
penalties due to failure to disclose the information on the Schedule K-
1 when the determination affects the owner's QBI deduction. One 
commenter suggested that RPEs should not have to report QBI, W-2 wages, 
and UBIA of qualified property with respect to trades or businesses not 
effectively connected with the United States.
    The Treasury Department and the IRS remain concerned that RPEs do 
not have sufficient information to determine an ultimate owner's 
taxable income or whether the ultimate owner will require W-2 wage or 
UBIA of qualified property information for the RPE's trades or 
businesses in order to determine the owner's section 199A deduction. 
Conversely, the RPE itself, not its ultimate owners, is in the best 
position to determine the RPE's section 199A

[[Page 2979]]

items. Accordingly, the final regulations do not contain a special 
reporting rule for RPEs based on whether the RPE's owners have taxable 
income below the threshold amounts. Similarly, the Treasury Department 
and the IRS decline to create a reporting exception based on whether an 
RPE has non-corporate owners. Finally, a trade or businesses that is 
not effectively connected with the United States produces no QBI, W-2 
wages, or UBIA of qualified property and thus has no reporting 
requirement under Sec.  1.199A-6.

B. Application to Trusts and Estates

1. Charitable Remainder Trust Beneficiary's Eligibility for the 
Deduction
    The preamble to the proposed regulations requested comments with 
respect to whether taxable recipients of annuity and unitrust interests 
in charitable remainder trusts and taxable beneficiaries of other 
split-interest trusts may be eligible for the section 199A deduction to 
the extent that the amounts received by such recipients include amounts 
that may give rise to the deduction. Concurrently with the publication 
of these proposed regulations, the Treasury Department and the IRS are 
publishing proposed regulations under section 199A (REG-134652-18) that 
address the eligibility of taxable recipients of annuity and unitrust 
interests in charitable remainder trusts and taxable beneficiaries of 
other split-interests trusts to receive the section 199A deduction.
2. Tax Exempt Trusts
    One commenter requested guidance on whether ``exempt trust 
organizations'' (that is, trusts that are exempt from income tax under 
section 501(a) or ``tax exempt trusts'') are entitled to a section 199A 
deduction in computing their unrelated business taxable income. The 
commenter also requested confirmation regarding whether the method of 
determining or separating trades of businesses is the same for sections 
199A and 512(a)(6). The Treasury Department and the IRS decline to 
adopt these comments here because they are beyond the scope of these 
final regulations. The Treasury Department and the IRS continue to 
study this issue and request comments on the interaction of sections 
199A and 512. We will consider all comments and decide whether further 
guidance on these issues, including as part of a forthcoming notice of 
a proposed rulemaking under section 512(a)(6), is warranted.
3. ESBTs
    One commenter supported the proposed regulation's position on 
ESBT's eligibility for the deduction. Another commenter stated that 
based on Sec.  1.641(c)-1(a) and its reference to an ESBT being two 
separate trusts for purposes of chapter 1 of subtitle A of the Code 
(except regarding administrative purposes), the S portion and non-S 
portion should each have its own threshold. The Treasury Department and 
the IRS disagree with this comment. Although an ESBT has separate 
portions, it is one trust. Therefore, in order to provide clarity, the 
final regulations state that the S and non-S portions of an ESBT are 
treated as a single trust for purposes of determining the threshold 
amount.
4. Inclusion of Trust Distributions in Taxable Income
    Multiple commenters suggested that distributions should not be 
counted twice in determining whether the threshold amount is met or 
exceeded, saying this is counter to the statute and beyond the 
regulatory authority of the Treasury Department and the IRS. Further, 
sections 651 and 661 are fundamental principles of fiduciary income 
taxation and the possible duplication of the threshold is better 
addressed in anti-abuse provisions. Another commenter suggested that 
double counted income should be ignored, arguing that double counting 
is punitive because it fails to take into account the economic 
consequences of distributions and is inconsistent with the longstanding 
fundamental principles of subchapter J. Another commenter recommended 
that the distribution deduction should be given effect in computing 
thresholds, consistent with section 1411 and fiduciary obligations. The 
Treasury Department and IRS agree with the commenters that 
distributions should reduce taxable income because the trust is not 
taxed on that income. The final regulations remove the provision that 
would exclude distributions from taxable income for purposes of 
determining whether taxable income for a trust or estate exceeds the 
threshold amount. The final regulations specifically provide that for 
purposes of determining whether a trust or estate has taxable income 
that exceeds the threshold amount, the taxable income of the trust or 
estate is determined after taking into account any distribution 
deduction under sections 651 or 661.
5. Allocation Between Trust or Estate and Beneficiaries
    One commenter argued that proposed Sec.  1.199A-6(d)(3)(v)(C) and 
(D) and the accompanying example are wrong in allocating the whole 
depreciation deduction to the trust. Instead, the commenter said that 
the depreciation should be allocated based on fiduciary accounting 
income. Another commenter stated that the QBI net loss should be 
allocated entirely to the trust or estate and not passed through to the 
beneficiaries. Another commenter stated that the example in proposed 
Sec.  1.199A-6(d)(3)(vi) overlooks section 167(d) and that final 
regulations should clarify whether reporting of depreciation is being 
changed. An additional commenter stated that a charitable lead trust's 
threshold amount should be the same as other trusts after the 
charitable deduction. Based on comments received, the final regulations 
provide that the treatment of depreciation applies solely for purposes 
of section 199A, and the example has been revised to clarify the 
allocation of QBI and depreciation to the trust and the beneficiaries. 
As an RPE, the final regulations continue to require that a trust or 
estate allocates QBI (which may be a negative amount) to its 
beneficiaries based on the relative portions of DNI distributed to its 
beneficiaries or retained by the trust or estate.
6. Section 199A Anti-Abuse Rule
    One commenter requested clarification on whether a trust with a 
reasonable estate or business planning purpose would be respected. 
Another commenter argued that the rule is overbroad and lacks clarity 
as to what would be abusive and what the consequences would be of not 
respecting the trust for section 199A purposes. The commenter also 
stated that the rule is not needed because of Sec.  1.643-1 and if both 
rules are retained, they should use the same test (principal versus 
significant purpose). Finally, the commenter asked for clarification on 
whether the rule applies to a single trust and suggested it should 
apply on an annual basis. This last suggestion has not been adopted 
because the test goes to the creation of the trust, factors which would 
not change in later years. The final regulations clarify that the anti-
abuse rule is designed to thwart the creation of even one single trust 
with a principal purpose of avoiding, or using more than one, threshold 
amount. If such trust creation violates the rule, the trust will be 
aggregated with the grantor or other trusts from which it was funded

[[Page 2980]]

for purposes of determining the threshold amount for calculating the 
deduction under section 199A.

VIII. Treatment of Multiple Trusts

    Two commenters requested clarification regarding whether multiple 
trusts will be aggregated if section 643(f) requirements are met. 
Specifically, the commenters asked for clarification on what it means 
to form or fund a trust with a significant purpose of receiving a 
section 199A deduction. These commenters state that trusts should not 
be combined simply because the section 199A deduction is increased if a 
legitimate non-tax reason led to the creation of the trusts.
    Other commenters objected to the presumption of a tax-avoidance 
purpose, arguing that it will shift the focus to a requirement that 
there be a non-tax purpose for creating multiple trusts. The commenters 
also asked whether the reference to income tax includes state income 
tax, as the proposed rule refers to the avoidance of more than Federal 
income tax.
    Another commenter agreed with the need for the rule but asked for 
clarification on the definitions of primary beneficiary, significant 
tax benefit, principal purpose, and arrangement involving multiple 
trusts; the application of the substantially the same beneficiary rule; 
and whether trusts for different children, with other children as 
default beneficiaries, are the same. Another commenter noted that the 
use of substantial purpose rather than principal purpose is 
inconsistent with the statutory language.
    Another commenter asked for clarification of the effective date 
regarding modifications or contributions to pre-effective date trusts, 
and of the identification of trusts to which the regulation applies. 
Another commenter requested that final regulations address the 
applicability of the rule to the conversion of grantor trusts to non-
grantor trusts post enactment of the TCJA.
    One commenter requested that examples be given for each of the 
three requirements under section 643(f) and requested that Sec.  
1.643(f)-1, Example 2, be clarified to describe the trusts as non-
grantor trusts.
    Based on the comments received, the Treasury Department and the IRS 
have removed the definition of ``principal purpose'' and the examples 
illustrating this rule that had been included in the proposed 
regulations, and are taking under advisement whether and how these 
questions should be addressed in future guidance. This includes 
questions of whether certain terms such as ``principal purpose'' and 
``substantially identical grantors and beneficiaries'' should be 
defined or their meaning clarified in regulations or other guidance, 
along with providing illustrating examples for each of these terms. 
Nevertheless, the position of the Treasury Department and the IRS 
remains that the determination of whether an arrangement involving 
multiple trusts is subject to treatment under section 643(f) may be 
made on the basis of the statute and the guidance provided regarding 
that provision in the legislative history of section 643(f), in the 
case of any arrangement involving multiple trusts entered into or 
modified before the effective date of these final regulations.

Availability of IRS Documents

    IRS notices cited in this preamble are made available by the 
Superintendent of Documents, U.S. Government Printing Office, 
Washington, DC 20402.

Request for Comments

    The Treasury Department and the IRS request comments on various 
aspects of section 199A and these regulations, as described in this 
preamble. All comments that are submitted as prescribed in this 
preamble under the ADDRESSES heading will be available at 
www.regulations.gov and upon request.

Effective/Applicability Date

    Section 7805(b)(1)(A) and (B) of the Code generally provide that no 
temporary, proposed, or final regulation relating to the internal 
revenue laws may apply to any taxable period ending before the earliest 
of (A) the date on which such regulation is filed with the Federal 
Register, or (B) in the case of a final regulation, the date on which a 
proposed or temporary regulation to which the final regulation relates 
was filed with the Federal Register.
    Consistent with authority provided by section 7805(b)(1)(A), 
Sec. Sec.  1.199A-1 through 1.199A-6 generally apply to taxable years 
ending after February 8, 2019. However, taxpayers may rely on the rules 
set forth in Sec. Sec.  1.199A-1 through 1.199A-6, in their entirety, 
or on the proposed regulations under Sec. Sec.  1.199A-1 through 
1.199A-6 issued on August 16, 2018, in their entirety, for taxable 
years ending in calendar year 2018. In addition, to prevent abuse of 
section 199A and the regulations thereunder, the anti-abuse rules in 
Sec. Sec.  1.199A-2(c)(1)(iv), 1.199A-3(c)(2)(ii), 1.199A-5(c)(2), 
1.199A-5(d)(3), and 1.199A-6(d)(3)(vii) apply to taxable years ending 
after December 22, 2017, the date of enactment of the TCJA. Finally, 
the provisions of Sec.  1.643-1, which prevent abuse of the Code 
generally through the use of trusts, apply to taxable years ending 
after August 16, 2018.
    Section 199A(f)(1) provides that section 199A applies at the 
partner or S corporation shareholder level, and that each partner or 
shareholder takes into account such person's allocable share of each 
qualified item. Section 199A(c)(3) provides that the term ``qualified 
item'' means items that are effectively connected with a U.S. trade or 
business, and ``included or allowed in determining taxable income from 
the taxable year.'' Section 199A applies to taxable years beginning 
after December 31, 2017. However, there is no statutory requirement 
under section 199A that a qualified item arise after December 31, 2017.
    Section 1366(a) generally provides that, in determining the income 
tax of a shareholder for the shareholder's taxable year in which the 
taxable year of the S corporation ends, the shareholder's pro rata 
share of the corporation's items is taken into account. Similarly, 
section 706(a) generally provides that, in computing the taxable income 
of a partner for a taxable year, the partner includes items of the 
partnership for any taxable year of the partnership ending within or 
with the partner's taxable year. Therefore, income flowing to an 
individual from a partnership or S corporation is subject to the tax 
rates and rules in effect in the year of the individual in which the 
entity's year closes, not the year in which the item actually arose.
    Accordingly, for purposes of determining QBI, W-2 wages, UBIA of 
qualified property, and the aggregate amount of qualified REIT 
dividends and qualified PTP income, the effective date provisions 
provide that if an individual receives QBI, W-2 wages, UBIA of 
qualified property, and the aggregate amount of qualified REIT 
dividends and qualified PTP income from an RPE with a taxable year that 
begins before January 1, 2018, and ends after December 31, 2017, such 
items are treated as having been incurred by the individual during the 
individual's tax year during which such RPE taxable year ends.

Special Analyses

I. Regulatory Planning and Review--Economic Analysis

    Executive Orders 13563 and 12866 direct agencies to assess costs 
and benefits of available regulatory alternatives and, if regulation is 
necessary, to select regulatory approaches that maximize net benefits 
(including potential economic,

[[Page 2981]]

environmental, public health and safety effects, distributive impacts, 
and equity). Executive Order 13563 emphasizes the importance of 
quantifying both costs and benefits, of reducing costs, of harmonizing 
rules, and of promoting flexibility.
    These final regulations have been designated as subject to review 
under Executive Order 12866 pursuant to the Memorandum of Agreement 
(April 11, 2018) between the Treasury Department and the Office of 
Management and Budget (OMB) regarding review of tax regulations. OIRA 
has designated this final regulation as economically significant under 
section 1(c) of the Memorandum of Agreement. Accordingly, these final 
regulations have been reviewed by 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 provide individuals, estates, and 
trusts a deduction of up to 20 percent of QBI from domestic businesses, 
which includes trades or businesses operated as a sole proprietorship 
or through a partnership, S corporation, trust, or estate. As stated in 
the Summary of Comments and Explanation of Revisions, these regulations 
are necessary to provide taxpayers with computational, definitional, 
and anti-avoidance guidance regarding the application of section 199A. 
The final regulations provide guidance to taxpayers for purposes of 
calculating the section 199A deduction. They provide clarity for 
taxpayers in determining their eligibility for the deduction and the 
amount of the allowed deduction. Among other benefits, this clarity 
helps ensure that taxpayers all calculate the deduction in a similar 
manner, which encourages decision-making that is economically efficient 
contingent on the provisions of the overall Code.
    The final regulations contain seven sections, six under section 
199A (Sec. Sec.  1.199A-1 through 1.199A-6) and one under section 
643(f) (Sec.  1.643(f)-1). Each of Sec. Sec.  1.199A-1 through 1.199A-6 
provides rules relevant to the section 199A deduction and Sec.  
1.643(f)-1 would establish anti-abuse rules to prevent taxpayers from 
establishing multiple non-grantor trusts or contributing additional 
capital to multiple existing non-grantor trusts in order to avoid 
Federal income tax, including abuse of section 199A. This economic 
analysis describes the economic benefits and costs of each of the seven 
sections of the final regulations.

B. Baseline

    The analysis in this section compares the final regulation to a no-
action baseline reflecting anticipated Federal income tax-related 
behavior in the absence of these regulations.

C. Economic Analysis of Changes in Final Regulations

    The Treasury Department and the IRS received comments from the 
public in response to the section 199A proposed regulations. This 
section discusses significant issues brought up in the comments for 
which economic reasoning would be particularly insightful. For a full 
discussion of comments received see the Summary of Comments and 
Explanation of Revisions section of this preamble.
1. UBIA of Qualified Property
    Relative to the proposed 199A regulations, the final regulations 
make several changes in the determination of UBIA of qualified 
property. In particular, proposed Sec.  1.199A-2 adjusted UBIA for (i) 
qualified property contributed to a partnership or S corporation in a 
nonrecognition transaction, (ii) like-kind exchanges, or (iii) 
involuntary conversions. Upon review of comments received addressing 
these rules, the Treasury Department and the IRS have amended these 
rules in the final regulations such that UBIA of qualified property 
generally remains unadjusted as a result of these three types of 
transactions. As several commenters pointed out, the proposed 
regulations would have introduced distortions into the economic 
incentives for businesses to invest or earn income. In cases where UBIA 
would have been reduced following a nonrecognition transfer under the 
proposed regulations, the treatment under the proposed regulations 
would have discouraged such transactions by introducing a financial 
cost (in the form of a reduced 199A deduction) where no resource cost 
exists. An analogous distortion exists for the other two types of 
transactions. Such distortions are economically inefficient.
    To avoid such distortion, the final regulations establish that 
qualified property contributed to a partnership or S corporation in a 
nonrecognition transaction generally retains its UBIA on the date it 
was first placed in service by the contributing partner or shareholder. 
Similar rules are adopted for the other two transaction forms mentioned 
above. In particular, the final regulations provide that the UBIA of 
qualified property received in a section 1031 like-kind exchange is 
generally the UBIA of the relinquished property. The rule is the same 
for qualified property acquired pursuant to an involuntary conversion 
under section 1033.
2. Entity Aggregation
    The final regulations allow an RPE to aggregate trades or 
businesses it operates directly or through lower-tier RPEs for the 
purposes of calculating the section 199A deduction in addition to 
allowing aggregation at the individual owner level. This change to the 
proposed rules allows RPEs, if they meet the ownership and other tests 
outlined in the regulations, to aggregate QBI, wages, and capital 
amounts and report aggregated figures to owners. This change was made 
in response to comments suggesting that allowing aggregation at the RPE 
level would simplify reporting and compliance efforts for owners 
because the RPEs may more easily obtain the information to determine 
whether the trades or businesses meet the tests for aggregation and 
whether it is beneficial to aggregate. Because RPEs that aggregate must 
meet all of the aggregation requirements, the change is consistent with 
the aggregation concept, which allows trades or businesses that operate 
across multiple entities but are commonly considered one business to 
benefit from calculating their section 199A deduction using combined 
income and expenses.
3. Anti-Abuse Rules
    The final regulations removed the ``incidental to an SSTB'' rule 
requiring that businesses with majority ownership and shared expenses 
with an SSTB be considered as part of the same trade or business for 
purposes of the section 199A deduction. This anti-abuse rule was 
intended to limit the ability of taxpayers to separate their SSTB and 
non-SSTB income into two trades or businesses in order to receive the 
deduction on their non-SSTB income. In response to comments, the rule 
was removed from the final regulations for a number of reasons. First, 
defining when two businesses have shared expenses is difficult to 
administer and could be overly inclusive. Second, there was a concern 
that start-up businesses could be excluded from the section 199A 
deduction if they shared expenses and ownership with a larger business 
that could be considered an SSTB.
    The final regulations modify the anti-abuse rule concerning 
services or property provided to an SSTB. The rule is meant to disallow 
SSTBs from splitting their trade or business into two pieces with one 
providing services or leasing property to the other. For

[[Page 2982]]

example, imagine a dentist office that owns a building. The dental 
practice would be considered an SSTB. Suppose the dentist split the 
business into two trades or businesses, the first of which was the 
dental practice and the second of which owned the building and leased 
it to the dental practice. This rule states that the income from 
leasing the building to the dental practice would also be considered 
SSTB income and ineligible for the section 199A deduction. Under the 
proposed regulations, a trade or business that provides more than 80 
percent of its property or services to an SSTB is treated as an SSTB if 
there is 50 percent or more common ownership of the trades or 
businesses. In cases in which a trade or business provides less than 80 
percent of its property or services to a commonly owned SSTB, the 
portion of the trade or business providing property to the commonly 
owned SSTB is treated as part of the SSTB with respect to the related 
parties. The final regulations remove the 80 percent threshold and 
allow any portion that is not provided to an SSTB to be eligible for 
the section 199A deduction. For example, if the dentist's leasing trade 
or business leased 90 percent of the building to the dental office and 
10 percent to a coffee shop, the 10 percent would now be eligible for 
the section 199A deduction. This change removed a threshold in the 
anti-abuse rule, which will remove any incentive to stay below the 80 
percent threshold, while still disallowing the income from providing 
property or services to related SSTBs to be eligible for the deduction.

C. Economic Analysis of Sec.  1.199A-1

1. Background
    Because the section 199A deduction has not previously been 
available, a large number of the relevant terms and necessary 
calculations taxpayers are currently required to apply under the 
statute can benefit from greater specificity. For example, the statute 
uses the term trade or business to refer to the enterprise whose income 
would be potentially eligible for the deduction but does not define 
what constitutes a trade or business for purposes of section 199A; the 
final regulations provide that taxpayers should generally apply the 
trade or business standard used for section 162(a). The definition of 
trade or business in Sec.  1.199A-1 is extended beyond the section 162 
standard if a taxpayer chooses to aggregate businesses under the rules 
of Sec.  1.199A-4. In addition, solely for purposes of section 199A, 
the rental or licensing of property to a related trade or business is 
treated as a trade or business if the rental or licensing and the other 
trade or business are commonly controlled under Sec.  1.199A-
4(b)(1)(i). The regulations also make clear that the section 199A 
deduction is allowed when calculating alternative minimum taxable 
income of individuals.
    Because the section 199A deduction has multiple components that may 
interact in determining the deduction, it is also valuable to lay out 
rules for calculating the deduction since the statute does not provide 
each of those particulars.
    Alternative approaches the Treasury Department and the IRS could 
have taken would be to remain silent on additional definitional 
specificities and to allow post-limitation netting in calculating the 
section 199A deduction. The Treasury Department and the IRS concluded 
these approaches would likely give rise to less economically efficient 
tax-related decisions than would relying on statutory language alone 
and requiring or leaving open the possibility of post-limitation 
netting.
2. Anticipated Benefits of Sec.  1.199A-1
    The Treasury Department and the IRS expect that the definitions and 
guidance provided in Sec.  1.199A-1 will implement the section 199A 
deduction in an economically efficient manner. An economically 
efficient tax system generally aims to treat income derived from 
similar economic decisions similarly in order to reduce incentives to 
make choices based on tax rather than market incentives. In this 
context, the principal benefit of Sec.  1.199A-1 is to reduce taxpayer 
uncertainty regarding the calculation of the section 199A deduction 
relative to an alternative scenario in which no such regulations were 
issued. In the absence of the clarifications in Sec.  1.199A-1 
regarding, for example, the definition of an eligible trade or 
business, similarly situated taxpayers might interpret the statutory 
rules of section 199A differently, given the statute's limited 
prescription or absence of implementation details. In addition, without 
these regulations it is likely that many taxpayers impacted by section 
199A would take on more (or less) than the optimal level of risk in 
allocating resources within or across their businesses. Both of these 
actions would give rise to economic inefficiencies. The final 
regulations would provide a uniform signal to businesses and thus lead 
taxpayers to make decisions that are more economically efficient 
contingent on the overall Code. As an example, Sec.  1.199A-1 
prescribes the steps taxpayers must take to calculate the QBI deduction 
in a manner that avoids perverse incentives for shifting wages and 
capital assets across businesses. The statute does not address the 
ordering for how the W-2 wages and UBIA of qualified property 
limitations should be applied when taxpayers have both positive and 
negative QBI from different businesses. The final regulations clarify 
that in such cases the negative QBI should offset positive QBI prior to 
applying the wage and capital limitations. For taxpayers who would have 
assumed in the alternate that negative QBI offsets positive QBI after 
applying the wage and capital limitations, the regulations weaken the 
incentive to shift W-2 wage labor or capital (in the form of qualified 
property) from one business to another to maximize the section 199A 
deduction.
    To illustrate this, consider a taxpayer who is above the statutory 
threshold and owns two non-service sector businesses, A and B. A has 
net qualified income of $10,000, while B has net qualified income of -
$5,000. Suppose that A paid $3,000 in W-2 wages, B paid $1,000 in W-2 
wages, and neither business has tangible capital. If negative QBI 
offsets positive QBI after applying the wage and capital limitations, 
then A generates a tentative deduction of $1,500, while B generates a 
tentative deduction of -$1,000, for a total deduction of $500. After 
moving B's W-2 wages to A, A's tentative deduction rises to $2,000, 
while B's remains -$1,000, increasing the total deduction to $1,000. 
If, on the other hand, negative QBI offsets positive QBI prior to 
applying the wage and capital limitations (as in the final 
regulations), then A and B have combined income of $5,000, and the 
total deduction is $1,000 because the wage and capital limitations are 
non-binding. After moving B's wages to A, the total deduction remains 
$1,000. Thus, an incentive to shift wages arises if negative QBI 
offsets positive QBI after applying the wage and capital limitations. 
By taking the opposite approach, Sec.  1.199A-1 reduces incentives for 
such tax-motivated, economically inefficient reallocations of labor (or 
capital) relative to a scenario in which offsets were taken after wage 
and capital limitations were applied.
3. Anticipated Costs of Sec.  1.199A-1
    The Treasury Department and the IRS do not anticipate any 
meaningful economic distortions to be induced by Sec.  1.199A-1. 
However, changes to the collective paperwork burden arising from this 
and other sections of these regulations are discussed in section J,

[[Page 2983]]

Anticipated impacts on administrative and compliance costs, of this 
analysis.

D. Economic Analysis of Sec.  1.199A-2

1. Background
    Section 199A provides a deduction of up to 20 percent of the 
taxpayer's income from qualifying trades or businesses. Taxpayers with 
incomes above a threshold amount cannot enjoy the full 20 percent 
deduction unless they determine that their businesses pay a sufficient 
amount of wages and/or maintain a sufficient stock of tangible capital, 
among other requirements.
    Because this deduction has not previously been available, Sec.  
1.199A-2 provides greater specificity than is available from the 
statute regarding the definitions of W-2 wages and UBIA of qualified 
property (that is, depreciable capital stock) relevant to this aspect 
of the deduction. For example, the final regulations make clear that 
property that is transferred or acquired within a specific timeframe 
with a principal purpose of increasing the section 199A deduction is 
not considered qualified property for purposes of the section 199A 
deduction. In addition, Sec.  1.199A-2 generally follows prior guidance 
for the former section 199 deduction in determining which W-2 wages are 
relevant for section 199A purposes, with additional rules for 
allocating wages amongst multiple trades or businesses. In these and 
other cases, the final regulations generally aim, within the context of 
the legislative language and other tax considerations, to ensure that 
only genuine business income is eligible for the section 199A 
deduction, and to reduce business compliance costs and government 
administrative costs.
    Alternative approaches would be to remain silent or to choose 
different definitions of W-2 wages or qualified property for the 
purposes of claiming the deduction. The Treasury Department and the IRS 
rejected these alternatives as being inconsistent with other 
definitions or requirements under the Code and therefore unnecessarily 
costly for taxpayers to comply with and the IRS to administer.
2. Anticipated Benefits of Sec.  1.199A-2
    The Treasury Department and the IRS expect that Sec.  1.199A-2 will 
implement the section 199A deduction in an economically efficient 
manner. For example, Sec.  1.199A-2 will discourage some inefficient 
transfers of capital given the statute's silence regarding the 
circumstances in which certain property transfers would or would not be 
considered under section 199A. Specifically, the final rules make clear 
that property transferred or acquired within a specific timeframe with 
a principal purpose of increasing the section 199A deduction is not 
considered qualified for purposes of the section 199A deduction.
    The final regulations will also reduce taxpayer uncertainty 
regarding the implementation of the section 199A deduction relative to 
a scenario in which no regulations were issued. In the absence of such 
clarification, similarly situated taxpayers would likely interpret the 
section 199A deduction differently to the extent that the statute does 
not adequately specify the particular implementation issues addressed 
by Sec.  1.199A-2, such as the determination of UBIA for nonrecognition 
transfers and like-kind exchanges. As a result, taxpayers might take on 
more (or less) than the optimal level of risk in their interpretations. 
The final regulations would lead taxpayers to make decisions that were 
more economically efficient, conditional on the overall Code.
3. Anticipated Costs of Sec.  1.199A-2
    The Treasury Department and the IRS do not anticipate any 
meaningful economic distortions to be induced by Sec.  1.199A-2. 
However, changes to the collective paperwork burden arising from this 
and other sections of these regulations are discussed in section J, 
Anticipated impacts on administrative and compliance costs, of this 
analysis.

E. Economic Analysis of Sec.  1.199A-3

1. Background
    Section 199A provides a deduction of up to 20 percent of the 
taxpayer's income from qualifying trades or businesses. In the absence 
of legislative and regulatory constraints, taxpayers would have an 
incentive to count as income some income that, from an economic 
standpoint, did not accrue specifically from qualifying economic 
activity. The final regulations clarify what does and does not 
constitute QBI for purposes of the section 199A deduction, providing 
greater implementation specificity than provided by the statute. 
Because guaranteed payments for capital, for example, are not at risk 
in the same way as other forms of income, it would generally be 
economically efficient to exclude them from QBI. Similarly, the 
Treasury Department and the IRS proposes that income that is a 
guaranteed payment, but which is filtered through a tiered partnership 
in order to avoid being labeled as such, should be treated similarly to 
guaranteed payments in general and therefore excluded from QBI. This 
principle applies to other forms of income that similarly represent 
income that either is not at risk or does not flow from the specific 
economic value provided by a qualifying trade or business, such as 
returns on investments of working capital.
2. Anticipated Benefits of Sec.  1.199A-3
    The Treasury Department and the IRS expect that the Sec.  1.199A-3 
regulations will implement the section 199A deduction in an 
economically efficient manner. For example, Sec.  1.199A-3 will 
discourage the creation of tiered partnerships purely for the purposes 
of increasing the section 199A deduction. In the absence of regulation, 
some taxpayers would likely create tiered partnerships under which a 
lower-tier partnership would make a guaranteed payment to an upper-tier 
partnership, and the upper-tier partnership would pay out this income 
to its partners without guaranteeing it. Such an organizational 
structure would likely be economically inefficient because it was, 
apparently, created solely for tax minimization purposes and not for 
reasons related to efficient economic decision-making.
    The Treasury Department and the IRS further expect that the final 
regulations will reduce uncertainty over whether particular forms of 
income do or do not constitute QBI relative to a scenario in which no 
regulations were issued. In the absence of regulations, taxpayers would 
still need to determine what income is considered QBI and similarly 
situated taxpayers might interpret the statutory rules differently and 
pursue income-generating activities based on different assumptions 
about whether that income would qualify for QBI. Section 1.199A-3 
provides clearer guidance for how to determine QBI, helping to ensure 
that taxpayers face uniform incentives when making economic decisions, 
a tenet of economic efficiency.
3. Anticipated Costs of Sec.  1.199A-3
    The Treasury Department and the IRS do not anticipate any 
meaningful economic distortions to be induced by Sec.  1.199A-3. 
However, changes to the collective paperwork burden arising from this 
and other sections of these regulations are discussed in section J, 
Anticipated impacts on administrative and compliance costs, of this 
analysis.

F. Economic Analysis of Sec.  1.199A-4

1. Background
    Businesses may organize either as C corporations, which are owned 
by stockholders, or in a form generally

[[Page 2984]]

called a passthrough, which may take one of several legal forms 
including sole proprietorships, under which there does not exist a 
clear separation between the owners and the business's decision-makers. 
Each organizational structure, in some circumstance, may be 
economically efficient, depending on the risk profile, information 
asymmetries, and decision-making challenges pertaining to the specific 
business and on the risk preferences and economic situations of the 
individual owners. An economically efficient tax system would keep the 
choice among organizational structures neutral contingent on the 
provisions of the corporate income tax.
    This principle of neutral tax treatment further applies to the 
various organizational structures that qualify as passthroughs. Many 
passthrough business entities are connected through ownership, 
management, or shared decision-making. The aggregation rule allows 
individuals or entities to aggregate their trades or businesses for the 
purposes of calculating the section 199A deduction. It thus helps 
ensure that significant choices over ownership and management 
relationships within businesses are not chosen solely to increase the 
section 199A deduction.
    An alternative approach would be not to allow aggregation for 
purposes of claiming the deduction. The Treasury Department and the IRS 
decided to allow aggregation in the specified circumstances to minimize 
or avoid distortions in organizational form that could arise if 
aggregation were not allowed.
2. Anticipated Benefits of Sec.  1.199A-4
    The Treasury Department and the IRS expect that the aggregation 
guidance provided in Sec.  1.199A-4 will implement the section 199A 
deduction in an economically efficient manner. Economic tax principles 
are called into play here because a large number of businesses that 
could commonly be thought of as a single trade or business actually may 
be divided across multiple entities for legal or economic reasons. 
Allowing individual owners and entities to aggregate trades or 
businesses offers taxpayers a means of putting together what they think 
of as their trade or business for the purposes of claiming the 
deduction under section 199A without otherwise changing market-driven 
ownership and management structure incentives. If such aggregation were 
not permitted, certain taxpayers would restructure their businesses 
solely for tax purposes, with the resulting structures leading to less 
efficient economic decision-making.
3. Anticipated Costs of Sec.  1.199A-4
    The final regulations require common majority ownership, in 
addition to other requirements, to apply the aggregation rule. If no 
aggregation were allowed, taxpayers would have to combine businesses to 
calculate the deduction based on the combined income, wages, and 
capital. The majority ownership threshold may thus encourage owners to 
concentrate their ownership in order to benefit from the aggregation 
rule. The additional costs of the final regulations would be limited to 
those owners who would find merging entities too costly based on other 
market conditions, but under these regulations may find it beneficial 
to increase their ownership share in order to aggregate their 
businesses and maximize their QBI deduction.
    Changes to the collective paperwork burden arising from Sec.  
1.199A-4 and other sections of these regulations are discussed in 
section J, Anticipated impacts on administrative and compliance costs, 
of this analysis.

G. Economic Analysis of Sec.  1.199A-5

1. Background
    Section 199A provides a deduction of up to 20 percent of the 
taxpayer's income from qualifying trades or businesses. In the absence 
of legislative and regulatory constraints, taxpayers have an incentive 
to receive labor income as income earned as a an independent contractor 
or through ownership of an RPE, even though this income may not derive 
from the risk-bearing or decision-making efficiencies that are unique 
to being an independent contractor or to owning an equity interest in 
an RPE. The TCJA provided several provisions that bear on this 
distinction.
    Section 1.199A-5 provides guidance on what trades or businesses 
would be characterized as an SSTB under each type of services trade or 
business listed in the legislative text. In addition, Sec.  1.199A-5 
provides an exception to the SSTB exclusion if the trade or business 
only earns a small fraction of its gross income from specified service 
activities (de minimis exception). Finally, the final regulations state 
that former employees providing services as independent contractors to 
their former employer will be presumed to be acting as employees unless 
they provide evidence that they are providing services in a capacity 
other than an employee.
    An alternative approach to the de minimis exception would be to 
require businesses or their owners to trigger the SSTB exclusion 
regardless of the share of gross income from specified service 
activities. The Treasury Department and the IRS concluded that 
providing a de minimis exception is necessary to avoid very small 
amounts of SSTB activity within a trade or business making the entire 
trade or business ineligible for the deduction, an outcome that is 
inefficient in the context of section 199A.
2. Anticipated Benefits of Sec.  1.199A-5
    The Treasury Department and the IRS expect that Sec.  1.199A-5 will 
implement the section 199A deduction in an economically efficient 
manner. To this end, Sec.  1.199A-5 clarifies the definition of an 
SSTB. In the absence of such clarification, similarly situated 
taxpayers might interpret the legislative text differently, leading 
some taxpayers to invest in particular businesses under the assumption 
income earned from that entity was eligible for the deduction while 
other taxpayers might forgo that investment due to the opposite 
assumption. These disparate investment signals generate economic 
inefficiencies. Additionally, similarly situated taxpayers may 
interpret the legislative text differently leading to equity concerns 
and possibly disadvantaging taxpayers who take a less aggressive 
approach. These distortions are reduced by the specificity provided in 
these final regulations relative to a scenario without regulations.
    Furthermore, in the absence of the regulations, some owners of 
businesses may find it advantageous to separate their business activity 
into SSTB and non-SSTB businesses in order to receive the section 199A 
deduction on their non-SSTB activity. The final regulations would 
disallow this behavior by stating that a taxpayer that provides 
property or services to an SSTB that is commonly-owned will have the 
portion of property or services provided to the SSTB treated as 
attributable to an SSTB. Additionally without these regulations, some 
businesses may have an incentive to change employment relationships in 
favor of independent contractors. Either of these actions would entail 
some loss of economic efficiency due to changes in businesses' 
decision-making structures based on tax incentives. The final 
regulations help to avoid these sources of inefficiency.
    In addition to the statutory threshold amount, below which SSTB 
status is not relevant, Sec.  1.199A-5 provides a de minimis rule with 
tiered thresholds of gross revenues arising from specified service 
activity in determining whether a trade or business is classified as an 
SSTB. The threshold for trades or businesses with less than $25 million 
of

[[Page 2985]]

gross receipts is 10 percent, and for trades or businesses with more 
than $25 million of gross receipts it is 5 percent. This de minimis 
rule allows trades and businesses that have very little SSTB activity 
to benefit from the deduction. Absent these regulations, any income 
from SSTB activity could make the entire trade or business ineligible 
for the deduction.
    The de minimis thresholds were set at these levels to balance the 
desire of the Treasury Department and the IRS to allow the deduction 
for trades and businesses with very small amounts of SSTB activity with 
the intent of the legislation to disallow the deduction for trades or 
businesses involving SSTB activity. The $25 million threshold is used 
in multiple statutory provisions enacted into law by the TCJA as a 
threshold to apply certain rules to smaller businesses. For example, 
businesses with average annual gross receipts under $25 million are 
exempt from the application of the interest deduction limitation under 
section 163(j), the uniform capitalization (UNICAP) rules under section 
263A, and the inventory accounting rules of section 471. The Treasury 
Department and the IRS chose to adopt this threshold for Sec.  1.199A-5 
because of its prevalent use in the TCJA as a threshold applicable to 
smaller businesses and to avoid a proliferation of varying thresholds 
applicable to such businesses in TCJA-related rule-making.
    The SSTB gross revenue percentages for businesses above and below 
the $25 million threshold were selected to represent small fractions of 
income. At present, the Treasury and IRS do not have data to determine 
what fraction of activity within a trade or business arises from SSTB 
activity. Treasury and the IRS also do not have data to determine 
whether or to what extent it would be advantageous for businesses to 
restructure in order to avoid the SSTB classification based on de 
minimis standards set at various percentage levels nor, if businesses 
were to restructure, what the economic consequences would be at those 
various percentage levels. The stipulated percentages represent the 
best judgment of Treasury and the IRS regarding percentages that 
efficiently balance compliance costs for taxpayers, effective 
administration of section 199A, and revenue considerations. Treasury 
and the IRS received several comments on these percentages and discuss 
these comments in the preamble.
3. Anticipated Costs of Sec.  1.199A-5
    By providing a de minimis rule to allow a small fraction of gross 
receipts to be derived from SSTB activity, the regulation may cause 
businesses near the threshold to decrease their specified service 
activities or increase their non-specified service activities to avoid 
being classified as an SSTB. Additionally, the de minimis rule may 
encourage smaller entities engaged in SSTBs to merge with larger 
entities not engaged in an SSTB. The economic costs of these mergers 
are difficult to quantify.
    Changes to the collective paperwork burden arising from Sec.  
1.199A-5 and other sections of these regulations are discussed in 
section J, Anticipated impacts on administrative and compliance costs, 
of this analysis.

H. Economic Analysis of Sec.  1.199A-6

1. Background
    The section 199A deduction is reduced below 20 percent for some 
businesses and taxpayers. The attributes that determine any such 
reduction must be determined by taxpayers claiming the section 199A 
deduction. Section 1.199A-6 provides rules for RPEs, PTPs, trusts, and 
estates relevant to making these determinations. In particular, RPEs 
are required to calculate and report their owners' QBI, SSTB status, W-
2 wages, UBIA of qualified property, REIT dividends, and PTP income. 
Similarly, PTPs must calculate and report their owners' QBI, SSTB 
status, REIT dividends, and other PTP income.
2. Anticipated Benefits of Sec.  1.199A-6
    The Treasury Department and the IRS expect that Sec.  1.199A-6 will 
implement the section 199A deduction in an economically efficient 
manner. As with other regulations discussed in these Analyses, a 
principal benefit of Sec.  1.199A-6 is to increase the likelihood that 
all taxpayers interpret the statutory rules of section 199A similarly. 
Additionally, we expect that requiring RPEs to determine and report the 
information necessary to compute the section 199A deduction will result 
in a more accurate and uniform application of the regulations and 
statute relative to an alternative approach under which individual 
owners would most likely determine these items.
3. Anticipated Costs of Sec.  1.199A-6 Relative to the Baseline
    The Treasury Department and the IRS do not anticipate any 
meaningful economic distortions to be induced by Sec.  1.199A-6. 
However, changes to the collective paperwork burden arising from this 
and other sections of these regulations are discussed in section J, 
Anticipated impacts on administrative and compliance costs, of this 
analysis.

I. Economic Analysis of Sec.  1.643(f)-1

1. Background
    Section 1.643(f)-1 provides that taxpayers cannot set up multiple 
trusts in certain cases with a principal purpose of tax avoidance, 
which would include the avoidance of the statutory threshold amounts 
under section 199A.
2. Anticipated Benefits of Sec.  1.643(f)-1 Relative to the Baseline
    The Treasury Department and the IRS expect that the Sec.  1.643(f)-
1 will implement the section 199A deduction in an economically 
efficient manner. Because Sec.  1.643(f)-1 defines the manner in which 
multiple trusts are subject to the threshold amount, the Treasury 
Department and the IRS anticipate that the final regulations will lead 
to fewer resources being devoted to setting up trusts in attempts to 
avoid the threshold amount rules under section 199A. If multiple trusts 
have substantially the same grantors and beneficiaries, and a principal 
purpose for establishing such trusts or contributing additional cash or 
other property to such trusts is the avoidance of Federal income tax, 
then the various trusts would be generally considered one trust, 
including for section 199A purposes.
3. Anticipated Costs of Sec.  1.643(f)-1 Relative to the Baseline
    The Treasury Department and the IRS do not anticipate any 
meaningful economic distortions to be induced by Sec.  1.643(f)-1. 
However, changes to the collective paperwork burden arising from this 
and other sections of these regulations are discussed in section J, 
Anticipated impacts on administrative and compliance costs, of this 
analysis.

J. Anticipated Impacts on Administrative and Compliance Costs

1. Discussion
    The final regulations have a number of effects on taxpayers' 
compliance costs. Section 1.199A-2 provides guidance in determining a 
taxpayer's share of W-2 wages and UBIA of qualified property. The 
Treasury Department and the IRS expect that this guidance reduces the 
tax compliance costs of making this determination and reduces 
uncertainty. In the absence of the regulations, taxpayers would still 
need to determine how to allocate W-2 wages and UBIA of qualified 
property, among other calculations. These regulations provide clear 
instructions for how to do this, simplifying the process of complying 
with the law.

[[Page 2986]]

    Section 1.199A-4 requires that owners who decide to aggregate their 
trades or businesses report the aggregation annually. This reporting 
requirement adds to the tax compliance burden of these owners. For 
owners who consider aggregating, these regulations increase compliance 
costs because the owners must calculate their deduction for both 
disaggregated and aggregated trades or businesses to make the 
aggregation decision. These additional compliance costs would be 
voluntary and accrue only to owners who find it beneficial to aggregate 
for the purposes of calculating their section 199A deduction. The final 
regulations also allow for aggregation at the entity level. This will 
generally reduce reporting and compliance costs for individual owners, 
relative to allowing aggregation only at the individual owner level, 
because the entity may have easier access to the facts and 
circumstances required for aggregation.
    Section 1.199A-5 includes a requirement for former employees 
working as independent contractors for their former employer to show 
that their employment relationship has changed in order to be eligible 
for the section 199A deduction. The burden to substantiate employment 
status exists without these regulations; however, the final regulation 
may increase these individuals' compliance costs slightly.
    Section 1.199A-6 specifies that RPEs must report relevant section 
199A information to owners. Due to these entity reporting requirements, 
the final regulations will increase compliance costs for RPEs. These 
entities will need to keep records of new information relevant to the 
calculation of their owners' section 199A deduction, such as QBI, W-2 
wages, SSTB status, and UBIA of qualified property. This recordkeeping 
is costly. Without these regulations, it is likely that only some RPEs 
would engage in this record keeping.
    Section 1.199A-6 reduces the compliance burden on many individuals 
that own RPEs relative a scenario in which no regulations were issued 
or regulatory alternatives that assigned each owner of an RPE the 
responsibility to acquire the required information were issued without 
any requirement for the RPE to provide such information. Under the 
final regulations, owners will receive information pertaining to the 
section 199A deduction from the RPE, such as whether a given trade or 
business is an SSTB, whereas in the alternate they could have been 
required to make such determinations themselves.
    Overall, it is likely to be more efficient for RPEs, rather than 
individual owners, to keep records of section 199A deduction 
information. Therefore, the Treasury Department and the IRS expect that 
Sec.  1.199A-6 will reduce compliance costs on net and relative to 
these alternative scenarios.
2. Estimated Effect on Compliance Costs
    As explained above, key provisions of Sec. Sec.  1.199A-1 through 
1.199A-6 will reduce compliance costs that taxpayers would likely have 
incurred in the absence of the regulations. Most notably, the de 
minimis rule of Sec.  1.199A-5 provides that a trade or business will 
not be considered to be an SSTB merely because it provides a small 
amount of services in a specified service activity. This provision is 
expected to reduce compliance costs associated with section 199A for 
millions of U.S. businesses. In addition, the aggregation rules will 
reduce overall costs for taxpayers because some taxpayers would 
otherwise restructure their business arrangements in order to receive 
the benefit of the deduction. These and other discretionary choices by 
the Treasury Department and the IRS in the final regulations will 
substantially reduce taxpayers' compliance costs.
    The Treasury Department and the IRS also assessed the provisions of 
the final regulations that could increase compliance burdens. The 
Treasury Department and the IRS estimate that these regulations will 
lead to a gross (not net) increase in total reporting burden of 25 
million hours annually. This estimate primarily reflects two effects of 
the regulations. First, the Treasury Department and the IRS project 
that approximately 1.2 million individuals with more than one directly 
owned or passthrough business who voluntarily choose to aggregate will 
spend 0.66 hours annually complying with Sec.  1.199A-4, resulting in a 
0.7 million hour increase in reporting burden. Second, the Treasury 
Department and the IRS project that--in complying with the Sec.  
1.199A-6 requirement to report relevant section 199A information to 
their approximately 8.8 million owners--RPEs will spend 2.75 hours 
annually per owner, resulting in a 24.2 million hour increase in 
reporting burden. These estimates do not include the decrease in 
compliance costs to individuals who would no longer find it necessary 
to compute the quantities detailed in Sec.  1.199A-6 because they would 
receive this information from each RPE. Nor do these estimates reflect 
the decrease in compliance costs outlined above.
    Valuations of the burden hours of $39/hour in the case of 
individuals making aggregation decisions and $53/hour in the case of 
RPEs reporting section 199A information lead to gross reporting 
annualized costs to taxpayers of $1.36 billion (3 percent rate) to 
$1.37 billion (7 percent rate) ($2017). These estimates do not account 
for the provisions of the final regulations that will substantially 
reduce compliance costs. These estimates assume that the costs are 
approximately the same proportion of GDP each year. It is possible, 
however, that costs will be higher in the first years that the 
deduction is allowed and lower in future years once taxpayers have more 
experience with the calculations and reporting requirements associated 
with the deduction. Finally, the estimates reflect data for entities of 
a size and form expected to be impacted by section 199A. More 
specifically, because of the scope of the section 199A deduction, the 
Treasury Department and the IRS expect the majority of affected 
entities to be primarily small, and medium in size.
    The Treasury Department and the IRS received a comment that the 
hours assumptions for the compliance costs were too small. The hours 
estimates were not revised because the commenter's discussion focused 
mainly on the effort required to compute the values necessary to 
calculate the deduction not on the specific aggregation or reporting 
requirements estimated here.

--------------------------------------------------------------------------------------------------------------------------------------------------------
Annualized monetized effect on compliance
       costs from final regulations         Years 2018 to 2027 (3% discount rate, millions $2017)  Years 2018 to 2027 (7% discount rate, millions $2017)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Estimated Gross Costs....................  $1,357................................................  $1,368.
Estimated Savings........................  Not quantified........................................  Not quantified.
Estimated net change in compliance costs.  Not quantified........................................  Not quantified.
--------------------------------------------------------------------------------------------------------------------------------------------------------


[[Page 2987]]

OMB control number 1545-0123 represents a total estimated burden time, 
including all other related forms and schedules, of 3.157 billion hours 
and total estimated monetized costs of $58.148 billion (available at: 
https://www.federalregister.gov/documents/2018/10/09/2018-21846/proposed-collection-comment-request-for-forms-1065-1065-b-1066-1120-1120-c-1120-f-1120-h-1120-nd). Likewise, OMB control number 1545-0074 
represents a total estimated burden time, including all other related 
forms and schedules, of 1.784 billion hours and total estimated 
monetized costs of $31.764 billion. OMB Control number 1545-0092 
represents burden hours of roughly 917,800 hours. The burden estimates 
provided by the IRS under the OMB Numbers listed in the above table are 
aggregate amounts that relate to the entire package of forms associated 
with the OMB control number, and do not include the estimated burden 
changes related to the additional burdens contemplated in this final 
rule such as attaching the applicable statement to Form 1040 or 
Schedule K-1 for the Form 1041, Form 1065, or Form 1120S, as 
appropriate, to ensure the correct amount of deduction is reported 
under section 199A. The Treasury department anticipates incorporating 
these burdens in the next annual cycle of the above aggregated 
collections, and the public will have an opportunity to comment on 
those estimates at that time.

K. Executive Order 13771

    These final regulations have been designated as regulatory under 
E.O. 13771.

II. Regulatory Flexibility Act

    It is hereby certified that the collections of information in 
Sec. Sec.  1.199A-4 and 1.199A-6 will not have a significant economic 
impact on a substantial number of small entities. Based on Joint 
Committee on Taxation (JCT) analysis of 2014 tax returns, there were 
approximately 4.3 million S corporations, 3.6 million partnerships, 
24.6 million non-farm sole proprietorships with receipts below $10 
million, and 1.8 million farm sole proprietorships with gross income 
below $10 million. See Present Law and Background Regarding the Federal 
Income Taxation of Small Businesses JCX-32-17. The Treasury Department 
and the IRS have determined that the regulations may affect a 
substantial number of small entities (businesses entities with receipts 
below $10 million) but have also concluded that the economic impact on 
small entities as a result of the collections of information in this 
regulation is not expected to be significant.
    The collection in Sec.  1.199A-4 may apply to RPEs, individuals, 
and certain trusts or estates that have qualified business income (QBI) 
under section 199A and that choose to aggregate two or more trades or 
businesses for purposes of section 199A. If a taxpayer chooses to 
aggregate its trades or businesses, the taxpayer, must include an 
attachment to its tax return identifying and describing each trade or 
business aggregated, describing changes to the aggregated group, and 
providing other information as the Commissioner may require in forms, 
instructions, or other published guidance. Aggregation is not required 
by a person claiming the section 199A deduction, and therefore, the 
collection of information in Sec.  1.199A-4 is required only if the 
person or RPE chooses to aggregate multiple trades or businesses. 
Because the Treasury Department and the IRS do not yet have data on how 
many small entities will choose to aggregate multiple trades or 
businesses, the number of affected entities is not estimated at this 
time. However, the Treasury Department and the IRS have determined that 
the majority of businesses and particularly small businesses 
(businesses entities with receipts below $10 million) will choose not 
to aggregate or will have no call to do so. Aggregation is potentially 
beneficial to businesses with individual owners who have taxable income 
above $315,000 for married filing joint taxpayers and $157,500 for 
others. Approximately three-quarters of passthrough businesses are 
structured as a sole proprietorship and therefore only have one owner. 
The Treasury Department and the IRS estimate that approximately 95 
percent of these businesses have owners below the income threshold and 
therefore, would not need to aggregate to receive the full benefit of 
the section 199A deduction.
    The small entities subject to the collection of information in 
Sec.  1.199A-6 are business entities formed as estates, trusts, 
partnerships, or S corporations that conduct, directly or indirectly, 
one or more trades or businesses. Section 1.199A-6 requires such an 
entity to attach a statement describing the QBI, W-2 wages, and UBIA of 
qualified property for each separate trade or business to the Schedule 
K-1 required under existing law to be issued to each beneficiary, 
partner, or shareholder. Although data is not available to estimate the 
number of small entities (business entities with receipts below $10 
million) affected by the Sec.  1.199A-6 requirements, the Treasury 
Department and the IRS project that number would include a substantial 
number of small entities.
    As discussed elsewhere in this preamble, the reporting burden is 
estimated at 30 minutes to 20 hours, depending on individual 
circumstances, with an estimated average of 2.5 hours for all affected 
entities, regardless of size. The burden on entities (those with 
business receipts below $10 million) is expected to be at the lower end 
of the range (30 minutes to 2.5 hours). Using the IRS's taxpayer 
compliance cost estimates, taxpayers who are self-employed with 
multiple businesses are estimated to have a monetization rate of $39 
per hour. Passthroughs that issue K-1s have a monetization rate of $53 
per hour. Thus, the annual aggregate burden on businesses with gross 
receipts below $10 million is between $19.50 and $132.50 per business.
    Moreover, the Treasury Department and the IRS have determined that 
there would be no significant economic impact on affected entities. 
Based on published information from the Conference Report accompanying 
the Act, H.R. Rep. No. 155-446, at 683 (2017), and Statistics of Income 
aggregate data, the projected net tax revenue losses from section 199A 
are estimated to be only a small fraction of the business receipts of S 
corporations (including subchapter S banks), partnerships, and non-farm 
sole proprietorships projected to 2027. See the following table in this 
Part II. These revenue projections, which represent a reduced tax 
liability for these businesses, include both the effects of the statute 
as well as the regulations. The reduction in tax liability varies from 
0.02 percent to 0.49 percent of gross receipts, an economic impact that 
is not regarded as substantial under the Regulatory Flexibility Act.

--------------------------------------------------------------------------------------------------------------------------------------------------------
          Fiscal years               2018        2019        2020        2021        2022        2023        2024        2025        2026        2027
--------------------------------------------------------------------------------------------------------------------------------------------------------
Net Tax Reduction \1\                   27.7        47.1        49.9        51.8        52.8        52.2        53.6        53.2        24.2         1.9
 ($billions)....................
Total Business Receipts \2\ ($       10095.1     10306.7     10415.2     10525.7     10638.0     10752.2     10868.4     10986.5    11106.96     11228.7
 billions)......................

[[Page 2988]]

 
Percent.........................        0.27        0.46        0.48        0.49        0.50        0.49        0.49        0.48        0.22        0.02
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ Tax revenue effects of 199A are from the Conference Report accompanying the Act.
\2\ To the extent that some ``not small'' passthroughs are reflected in this table, the percentages reported represent an underestimate of the tax cut
  that those small businesses will receive.
\3\ Business receipt figures for 2013 S Corp (https://www.irs.gov/statistics/soi-tax-stats-table-1-returns-of-active-corporations-form-1120s), 2016 Sole
  Prop (https://www.irs.gov/statistics/soi-tax-stats-nonfarm-sole-proprietorship-statistics), and 2015 Partnerships (https://www.irs.gov/statistics/soi-tax-stats-partnership-statistics-by-sector-or-industry) come from published SOI data. Amounts for 2017 through 2029 are projected using historical
  growth rates.

    Finally, no comments regarding the economic impact of these 
regulations on small entities were received. For these reasons, the 
Treasury Department and the IRS have determined that the collection of 
information in this final rulemaking will not have a significant 
economic impact. Accordingly, a regulatory flexibility analysis under 
the Regulatory Flexibility Act (5 U.S.C. chapter 6) is not required.
    Pursuant to section 7805(f) of the Code, this final rulemaking has 
been submitted to the Chief Counsel for Advocacy of the Small Business 
Administration for comment on its impact on small business.

Drafting Information

    The principal authors of these regulations are Robert D. Alinsky, 
Vishal R. Amin, Margaret Burow, Frank J. Fisher, and Wendy L. Kribell, 
Office of the Associate Chief Counsel (Passthroughs and Special 
Industries). However, other personnel from the Treasury Department and 
the IRS participated in their development.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Amendments to the Regulations

    Accordingly, 26 CFR part 1 is amended as follows:

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 is amended by adding 
sectional authorities for Sec. Sec.  1.199A-1 through 1.199A-6 and 
Sec.  1.643(f) to read in part as follows:


    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 under 26 U.S.C. 199A(c)(4)(C) and 
(f)(4).
    Section 1.199A-4 also issued under 26 U.S.C. 199A(f)(4).
    Section 1.199A-5 also issued under 26 U.S.C. 199A(f)(4).
    Section 1.199A-6 also issued under 26 U.S.C. 199A(f)(1)(B) and 
(f)(4).
* * * * *
    Section 1.643(f)-1 also issued under 26 U.S.C. 643(f).
* * * * *


0
Par. 2. Section 1.199A-0 is added to read as follows:


Sec.  1.199A-0  Table of contents.

    This section lists the section headings that appear in Sec. Sec.  
1.199A-1 through 1.199A-6.

Sec.  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) Net capital gain.
    (4) Phase-in range.
    (5) Qualified business income (QBI).
    (6) QBI component.
    (7) Qualified PTP income.
    (8) Qualified REIT dividends.
    (9) Reduction amount.
    (10) Relevant passthrough entity (RPE).
    (11) Specified service trade or business (SSTB).
    (12) Threshold amount.
    (13) Total QBI amount.
    (14) Trade or business.
    (15) Unadjusted basis immediately after the acquisition of 
qualified property (UBIA of qualified property).
    (16) W-2 Wages.
    (c) Computation of the section 199A deduction for individuals 
with taxable income not exceeding threshold amount.
    (1) In general.
    (2) Carryover rules.
    (i) Negative total QBI amount.
    (ii) Negative combined qualified REIT dividends/qualified PTP 
income.
    (3) Examples.
    (d) Computation of the section 199A deduction for individuals 
with taxable income 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 QBI amount.
    (iv) QBI component calculation.
    (A) General rule.
    (B) Taxpayers with taxable income within phase-in range.
    (3) Qualified REIT dividends/qualified PTP income component.
    (i) In general.
    (ii) SSTB exclusion.
    (iii) Negative combined qualified REIT dividends/qualified PTP 
income.
    (4) Examples.
    (e) Special rules.
    (1) Effect of deduction.
    (2) Disregarded entities.
    (3) Self-employment tax and net investment income tax.
    (4) Commonwealth of Puerto Rico.
    (5) Coordination with alternative minimum tax.
    (6) Imposition of accuracy-related penalty on underpayments.
    (7) Reduction for income received from cooperatives.
    (f) Applicability date.
    (1) General rule.
    (2) Exception for non-calendar year RPE.

Sec.  1.199A-2 Determination of W-2 Wages and unadjusted basis 
immediately after acquisition of qualified property.

    (a) Scope.
    (1) In general.
    (2) W-2 wages.
    (3) UBIA of qualified property.
    (i) In general.
    (ii) UBIA of qualified property held by a partnership.
    (iii) UBIA of qualified property held by an S corporation.
    (iv) UBIA and section 743(b) basis adjustments.
    (A) In general.
    (B) Excess section 743(b) basis adjustments.
    (C) Computation of partner's share of UBIA with excess section 
734(b) basis adjustments.
    (D) Examples.
    (b) W-2 wages.
    (1) In general.
    (2) Definition of W-2 wages.
    (i) In general.
    (ii) Wages paid by a person other than a common law employer.
    (iii) Requirement that wages must be reported on return filed 
with the Social Security Administration.
    (A) In general.
    (B) Corrected return filed to correct a return that was filed 
within 60 days of the due date.
    (C) Corrected return filed to correct a return that was filed 
later than 60 days after the due date.
    (iv) Methods for calculating W-2 Wages.
    (A) In general.
    (B) Acquisition or disposition of a trade or business.
    (1) In general.
    (2) Acquisition or disposition.
    (C) Application in the case of a person with a short taxable 
year.
    (1) In general.
    (2) Short taxable year that does not include December 31.
    (D) Remuneration paid for services performed in the Commonwealth 
of Puerto Rico.
    (3) Allocation of wages to trades or businesses.
    (4) Allocation of wages to QBI.
    (5) Non-duplication rule.

[[Page 2989]]

    (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 under section 168.
    (iii) Qualified property acquired in transactions subject to 
section 1031 or section 1033.
    (A) Replacement property received in a section 1031 or 1033 
transaction.
    (B) Other property received in a section 1031 or 1033 
transaction.
    (iv) Qualified property acquired in transactions subject to 
section 168(i)(7)(B).
    (v) Excess section 743(b) basis adjustment.
    (3) Unadjusted basis immediately after acquisition.
    (i) In general.
    (ii) Qualified property acquired in a like-kind exchange.
    (A) In general.
    (B) Excess boot.
    (iii) Qualified property acquired pursuant to an involuntary 
conversion.
    (A) In general.
    (B) Excess boot.
    (iv) Qualified property acquired in transactions described in 
section 168(i)(7)(B).
    (v) Qualified property acquired from a decedent.
    (vi) Property acquired in a nonrecognition transaction with 
principal purpose of increasing UBIA.
    (4) Examples.
    (d) Applicability date.
    (1) General rule.
    (2) Exceptions.
    (i) Anti-abuse rules.
    (ii) Non-calendar year RPE.

Sec.  1.199A-3 Qualified business income, qualified REIT dividends, 
and qualified PTP income.

    (a) In general.
    (b) Definition of qualified business income.
    (1) In general.
    (i) Section 751 gain.
    (ii) Guaranteed payments for the use of capital.
    (iii) Section 481 adjustments.
    (iv) Previously disallowed losses
    (v) Net operating losses.
    (vi) Other deductions.
    (2) Qualified items of income, gain, deduction, and loss.
    (i) In general.
    (ii) Items not taken into account.
    (3) Commonwealth of Puerto Rico.
    (4) Wages.
    (5) Allocation of items among directly-conducted trades or 
businesses.
    (c) Qualified REIT dividends and qualified PTP income.
    (1) In general.
    (2) Qualified REIT dividend.
    (3) Qualified PTP income.
    (i) In general.
    (ii) Special rules.
    (d) [Reserved]
    (e) Applicability date.
    (1) General rule.
    (2) Exceptions.
    (i) Anti-abuse rules.
    (ii) Non-calendar year RPE.

Sec.  1.199A-4 Aggregation.

    (a) Scope and purpose.
    (b) Aggregation rules.
    (1) General rule.
    (2) Operating rules.
    (i) Individuals.
    (ii) RPEs.
    (c) Reporting and consistency.
    (1) For individual.
    (2) Individual disclosure.
    (i) Required annual disclosure.
    (ii) Failure to disclose.
    (3) For RPEs.
    (i) Required annual disclosure.
    (ii) Failure to disclose.
    (d) Examples.
    (e) Applicability date.
    (1) General rule.
    (2) Exception for non-calendar year RPE.

Sec.  1.199A-5 Specified service trades or businesses and the trade 
or business of performing services as an employee.

    (a) Scope and effect.
    (1) Scope.
    (2) Effect of being an SSTB.
    (3) Trade or business of performing services as an employee.
    (b) Definition of specified service trade or business.
    (1) Listed SSTBs.
    (2) Additional rules for applying section 199A(d)(2) and 
paragraph (b) of this section.
    (i) In general.
    (A) No effect on other tax rules.
    (B) Hedging transactions.
    (ii) Meaning of services performed in the field of health.
    (iii) Meaning of services performed in the field of law.
    (iv) Meaning of services performed in the field of accounting.
    (v) Meaning of services performed in the field of actuarial 
science.
    (vi) Meaning of services performed in the field of performing 
arts.
    (vii) Meaning of services performed in the field of consulting.
    (viii) Meaning of services performed in the field of athletics.
    (ix) Meaning of services performed in the field of financial 
services.
    (x) Meaning of services performed in the field of brokerage 
services.
    (xi) Meaning of the provision of services in investing and 
investment management.
    (xii) Meaning of the provision of services in trading.
    (xiii) Meaning of the provision of services in dealing.
    (A) Dealing in securities.
    (B) Dealing in commodities.
    (1) Qualified active sale.
    (2) Active conduct of a commodities business.
    (3) Directly holds commodities as inventory or similar property.
    (4) Directly incurs substantial expenses in the ordinary course.
    (5) Significant activities for purposes of paragraph 
(b)(2)(xiii)(B)(4)(iii) of this section.
    (C) Dealing in partnership interests.
    (xiv) Meaning of trade or business where the principal asset of 
such trade or business is the reputation or skill of one or more of 
its employees or owners.
    (3) Examples.
    (c) Special rules.
    (1) De minimis rule.
    (i) Gross receipts of $25 million or less.
    (ii) Gross receipts of greater than $25 million.
    (2) Services or property provided to an SSTB.
    (i) In general.
    (ii) 50 percent or more common ownership.
    (iii) Examples.
    (d) Trade or business of performing services as an employee.
    (1) In general.
    (2) Employer's Federal employment tax classification of employee 
immaterial.
    (3) Presumption that former employees are still employees.
    (i) Presumption.
    (ii) Rebuttal of presumption.
    (iii) Examples.
    (e) Applicability date.
    (1) General rule.
    (2) Exceptions.
    (i) Anti-abuse rules.
    (ii) Non-calendar year RPE.

Sec.  1.199A-6 Relevant passthrough entities (RPEs), publicly traded 
partnerships (PTPs), trusts, and estates.

    (a) Overview.
    (b) Computational and reporting rules for RPEs.
    (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 for PTPs.
    (1) Computational rules.
    (2) Reporting rules.
    (d) Application to trusts, estates, and beneficiaries.
    (1) In general.
    (2) Grantor trusts.
    (3) Non-grantor trusts and estates.
    (i) Calculation at entity level.
    (ii) Allocation among trust or estate and beneficiaries.
    (iii) [Reserved]
    (iv) Threshold amount.
    (v) [Reserved]
    (vi) Electing small business trusts.
    (vii) Anti-abuse rule for creation of a trust to avoid exceeding 
the threshold amount.
    (viii) Example.
    (e) Applicability date.
    (1) General rule.
    (2) Exceptions.
    (i) Anti-abuse rules.
    (ii) Non-calendar year RPE.


0
Par. 3. Section 1.199A-1 is added to read as follows:


Sec.  1.199A-1  Operational rules.

    (a) Overview--(1) In general. This section provides operational 
rules for calculating the section 199A(a) qualified business income 
deduction (section 199A deduction) under section 199A of the Internal 
Revenue Code (Code). This

[[Page 2990]]

section refers to the rules in Sec. Sec.  1.199A-2 through 1.199A-6. 
This paragraph (a) provides an overview of this section. Paragraph (b) 
of this section provides definitions that apply for purposes of section 
199A and Sec. Sec.  1.199A-1 through 1.199A-6. Paragraph (c) of this 
section provides computational rules and examples for individuals whose 
taxable income does not exceed the threshold amount. Paragraph (d) of 
this section provides computational rules and examples for individuals 
whose taxable income exceeds the threshold amount. Paragraph (e) of 
this section provides special rules for purposes of section 199A and 
Sec. Sec.  1.199A-1 through 1.199A-6. This section and Sec. Sec.  
1.199A-2 through 1.199A-6 do not apply for purposes of calculating the 
deduction in section 199A(g) for specified agricultural and 
horticultural cooperatives.
    (2) Usage of term individual. For purposes of applying the rules of 
Sec. Sec.  1.199A-1 through 1.199A-6, a reference to an individual 
includes a reference to a trust (other than a grantor trust) or an 
estate to the extent that the section 199A deduction is determined by 
the trust or estate under the rules of Sec.  1.199A-6.
    (b) Definitions. For purposes of section 199A and Sec. Sec.  
1.199A-1 through 1.199A-6, the following definitions apply:
    (1) Aggregated trade or business means two or more trades or 
businesses that have been aggregated pursuant to Sec.  1.199A-4.
    (2) Applicable percentage means, with respect to any taxable year, 
100 percent reduced (not below zero) by the percentage equal to the 
ratio that the taxable income of the individual for the taxable year in 
excess of the threshold amount, bears to $50,000 (or $100,000 in the 
case of a joint return).
    (3) Net capital gain means net capital gain as defined in section 
1222(11) plus any qualified dividend income (as defined in section 
1(h)(11)(B)) for the taxable year.
    (4) Phase-in range means a range of taxable income between the 
threshold amount and the threshold amount plus $50,000 (or $100,000 in 
the case of a joint return).
    (5) Qualified business income (QBI) means the net amount of 
qualified items of income, gain, deduction, and loss with respect to 
any trade or business (or aggregated trade or business) as determined 
under the rules of Sec.  1.199A-3(b).
    (6) QBI component means the amount determined under paragraph 
(d)(2) of this section.
    (7) Qualified PTP income is defined in Sec.  1.199A-3(c)(3).
    (8) Qualified REIT dividends are defined in Sec.  1.199A-3(c)(2).
    (9) Reduction amount means, with respect to any taxable year, the 
excess amount multiplied by the ratio that the taxable income of the 
individual for the taxable year in excess of the threshold amount, 
bears to $50,000 (or $100,000 in the case of a joint return). For 
purposes of this paragraph (b)(9), the excess amount is the amount by 
which 20 percent of QBI exceeds the greater of 50 percent of W-2 wages 
or the sum of 25 percent of W-2 wages plus 2.5 percent of the UBIA of 
qualified property.
    (10) Relevant passthrough entity (RPE) means a partnership (other 
than a PTP) or an S corporation that is owned, directly or indirectly, 
by at least one individual, estate, or trust. Other passthrough 
entities including common trust funds as described in Sec.  1.6032-T 
and religious or apostolic organizations described in section 501(d) 
are also treated as RPEs if the entity files a Form 1065, U.S. Return 
of Partnership Income, and is owned, directly or indirectly, by at 
least one individual, estate, or trust. A trust or estate is treated as 
an RPE to the extent it passes through QBI, W-2 wages, UBIA of 
qualified property, qualified REIT dividends, or qualified PTP income.
    (11) Specified service trade or business (SSTB) means a specified 
service trade or business as defined in Sec.  1.199A-5(b).
    (12) Threshold amount means, for any taxable year beginning before 
2019, $157,500 (or $315,000 in the case of a taxpayer filing a joint 
return). In the case of any taxable year beginning after 2018, the 
threshold amount is the dollar amount in the preceding sentence 
increased by an amount equal to such dollar amount, multiplied by the 
cost-of-living adjustment determined under section 1(f)(3) of the Code 
for the calendar year in which the taxable year begins, determined by 
substituting ``calendar year 2017'' for ``calendar year 2016'' in 
section 1(f)(3)(A)(ii). The amount of any increase under the preceding 
sentence is rounded as provided in section 1(f)(7) of the Code.
    (13) Total QBI amount means the net total QBI from all trades or 
businesses (including the individual's share of QBI from trades or 
business conducted by RPEs).
    (14) Trade or business means a trade or business that is a trade or 
business under section 162 (a section 162 trade or business) other than 
the trade or business of performing services as an employee. In 
addition, rental or licensing of tangible or intangible property 
(rental activity) that does not rise to the level of a section 162 
trade or business is nevertheless treated as a trade or business for 
purposes of section 199A, if the property is rented or licensed to a 
trade or business conducted by the individual or an RPE which is 
commonly controlled under Sec.  1.199A-4(b)(1)(i) (regardless of 
whether the rental activity and the trade or business are otherwise 
eligible to be aggregated under Sec.  1.199A-4(b)(1)).
    (15) Unadjusted basis immediately after acquisition of qualified 
property (UBIA of qualified property) is defined in Sec.  1.199A-2(c).
    (16) W-2 wages means W-2 wages of a trade or business (or 
aggregated trade or business) properly allocable to QBI as determined 
under Sec.  1.199A-2(b).
    (c) Computation of the section 199A deduction for individuals with 
taxable income not exceeding threshold amount--(1) In general. The 
section 199A deduction is determined for individuals with taxable 
income for the taxable year that does not exceed the threshold amount 
by adding 20 percent of the total QBI amount (including the 
individual's share of QBI from an RPE and QBI attributable to an SSTB) 
and 20 percent of the combined amount of qualified REIT dividends and 
qualified PTP income (including the individual's share of qualified 
REIT dividends and qualified PTP income from RPEs and qualified PTP 
income attributable to an SSTB). That sum is then compared to 20 
percent of the amount by which the individual's taxable income exceeds 
net capital gain. The lesser of these two amounts is the individual's 
section 199A deduction.
    (2) Carryover rules--(i) Negative total QBI amount. If the total 
QBI amount is less than zero, the portion of the individual's section 
199A deduction related to QBI is zero for the taxable year. The 
negative total QBI amount is treated as negative QBI from a separate 
trade or business in the succeeding taxable years of the individual for 
purposes of section 199A and this section. This carryover rule does not 
affect the deductibility of the loss for purposes of other provisions 
of the Code.
    (ii) Negative combined qualified REIT dividends/qualified PTP 
income. If the combined amount of REIT dividends and qualified PTP 
income is less than zero, the portion of the individual's section 199A 
deduction related to qualified REIT dividends and qualified PTP income 
is zero for the taxable year. The negative combined amount must be 
carried forward and used to offset the combined amount of REIT 
dividends and qualified PTP income in the succeeding taxable years of 
the

[[Page 2991]]

individual for purposes of section 199A and this section. This 
carryover rule does not affect the deductibility of the loss for 
purposes of other provisions of the Code.
    (3) Examples. The following examples illustrate the provisions of 
this paragraph (c). For purposes of these examples, unless indicated 
otherwise, assume that all of the trades or businesses are trades or 
businesses as defined in paragraph (b)(14) of this section and all of 
the tax items are effectively connected to a trade or business within 
the United States within the meaning of section 864(c). Total taxable 
income does not include the section 199A deduction.

     (i) Example 1. A, an unmarried individual, owns and operates a 
computer repair shop as a sole proprietorship. The business 
generates $100,000 in net taxable income from operations in 2018. A 
has no capital gains or losses. After allowable deductions not 
relating to the business, A's total taxable income for 2018 is 
$81,000. The business's QBI is $100,000, the net amount of its 
qualified items of income, gain, deduction, and loss. A's section 
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 
total taxable income for the taxable year ($81,000 x 20% = $16,200).
     (ii) Example 2. Assume the same facts as in Example 1 of 
paragraph (c)(3)(i) of this section, except that A also has $7,000 
in net capital gain for 2018 and that, after allowable deductions 
not relating to the business, A's taxable income for 2018 is 
$74,000. A's taxable income minus net capital gain is $67,000 
($74,000-$7,000). A's section 199A deduction is equal to $13,400, 
the lesser of 20% of A'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 x 20% = $13,400).
     (iii) Example 3. B and C are married and file a joint 
individual income tax return. B earns $50,000 in wages as an 
employee of an unrelated company in 2018. C owns 100% of the shares 
of X, an S corporation that provides landscaping services. X 
generates $100,000 in net income from operations in 2018. X pays C 
$150,000 in wages in 2018. B and C have no capital gains or losses. 
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 income from a trade or business for purposes of the section 199A 
deduction. Because X is an S corporation, its QBI is determined at 
the S corporation level. X's QBI is $100,000, the net amount of its 
qualified items of income, gain, deduction, and loss. The wages paid 
by X to C are considered to be a qualified item of deduction for 
purposes of determining X's QBI. The section 199A deduction with 
respect to X's QBI 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 the business ($100,000 x 20% = $20,000) and 20% of B and 
C's total taxable income for the taxable year ($270,000 x 20% = 
$54,000).
     (iv) Example 4. Assume the same facts as in Example 3 of 
paragraph (c)(3)(iii) of this section except that B also earns 
$1,000 in qualified REIT dividends and $500 in qualified PTP income 
in 2018, increasing taxable income to $271,500. B and C's section 
199A deduction is equal to $20,300, the lesser of:
    (A) 20% of C's QBI from the business ($100,000 x 20% = $20,000) 
plus 20% of B's combined qualified REIT dividends and qualified PTP 
income ($1,500 x 20% = $300); and
    (B) 20% of B and C's total taxable for the taxable year 
($271,500 x 20% = $54,300).

    (d) Computation of the section 199A deduction for individuals with 
taxable income above threshold amount--(1) In general. The section 199A 
deduction is determined for individuals with taxable income for the 
taxable year that exceeds the threshold amount by adding the QBI 
component described in paragraph (d)(2) of this section and the 
qualified REIT dividends/qualified PTP income component described in 
paragraph (d)(3) of this section (including the individual's share of 
qualified REIT dividends and qualified PTP income from RPEs). That sum 
is then compared to 20 percent of the amount by which the individual's 
taxable income exceeds net capital gain. The lesser of these two 
amounts is the individual's section 199A deduction.
    (2) QBI component. An individual with taxable income for the 
taxable year that exceeds the threshold amount determines the QBI 
component using the following computational rules, which are to be 
applied in the order they appear.
    (i) SSTB exclusion. If the individual's taxable income is within 
the phase-in range, then only the applicable percentage of QBI, W-2 
wages, and UBIA of qualified property for each SSTB is taken into 
account for all purposes of determining the individual's section 199A 
deduction, including the application of the netting and carryover rules 
described in paragraph (d)(2)(iii) of this section. If the individual's 
taxable income exceeds the phase-in range, then none of the 
individual's share of QBI, W-2 wages, or UBIA of qualified property 
attributable to an SSTB may be taken into account for purposes of 
determining the individual's section 199A deduction.
    (ii) Aggregated trade or business. If an individual chooses to 
aggregate trades or businesses under the rules of Sec.  1.199A-4, the 
individual must combine the QBI, W-2 wages, and UBIA of qualified 
property of each trade or business within an aggregated trade or 
business prior to applying the netting and carryover rules described in 
paragraph (d)(2)(iii) of this section and the W-2 wage and UBIA of 
qualified property limitations described in paragraph (d)(2)(iv) of 
this section.
    (iii) Netting and carryover--(A) Netting. If an individual's QBI 
from at least one trade or business (including an aggregated trade or 
business) is less than zero, the individual must offset the QBI 
attributable to each trade or business (or aggregated trade or 
business) that produced net positive QBI with the QBI from each trade 
or business (or aggregated trade or business) that produced net 
negative QBI in proportion to the relative amounts of net QBI in the 
trades or businesses (or aggregated trades or businesses) with positive 
QBI. The adjusted QBI is then used in paragraph (d)(2)(iv) of this 
section. The W-2 wages and UBIA of qualified property from the trades 
or businesses (including aggregated trades or businesses) that produced 
net negative QBI are not taken into account for purposes of this 
paragraph (d) and are not carried over to the subsequent year.
    (B) Carryover of negative total QBI amount. If an individual's QBI 
from all trades or businesses (including aggregated trades or 
businesses) combined is less than zero, the QBI component is zero for 
the taxable year. This negative amount is treated as negative QBI from 
a separate trade or business in the succeeding taxable years of the 
individual for purposes of section 199A and this section. This 
carryover rule does not affect the deductibility of the loss for 
purposes of other provisions of the Code. The W-2 wages and UBIA of 
qualified property from the trades or businesses (including aggregated 
trades or businesses) that produced net negative QBI are not taken into 
account for purposes of this paragraph (d) and are not carried over to 
the subsequent year.
    (iv) QBI component calculation--(A) General rule. Except as 
provided in paragraph (d)(2)(iv)(B) of this section, the QBI component 
is the sum of the amounts determined under this paragraph (d)(2)(iv)(A) 
for each trade or business (or aggregated trade or business). For each 
trade or business (or aggregated trade or business) (including trades 
or businesses operated through RPEs) the individual must determine the 
lesser of--
    (1) 20 percent of the QBI for that trade or business (or aggregated 
trade or business); or
    (2) The greater of--

[[Page 2992]]

    (i) 50 percent of W-2 wages with respect to that trade or business 
(or aggregated trade or business); or
    (ii) The sum of 25 percent of W-2 wages with respect to that trade 
or business (or aggregated trade or business) plus 2.5 percent of the 
UBIA of qualified property with respect to that trade or business (or 
aggregated trade or business).
    (B) Taxpayers with taxable income within phase-in range. If the 
individual's taxable income is within the phase-in range and the amount 
determined under paragraph (d)(2)(iv)(A)(2) of this section for a trade 
or business (or aggregated trade or business) is less than the amount 
determined under paragraph (d)(2)(iv)(A)(1) of this section for that 
trade or business (or aggregated trade or business), the amount 
determined under paragraph (d)(2)(iv)(A) of this section for such trade 
or business (or aggregated trade or business) is modified. Instead of 
the amount determined under paragraph (d)(2)(iv)(A)(2) of this section, 
the QBI component for the trade or business (or aggregated trade or 
business) is the amount determined under paragraph (d)(2)(iv)(A)(1) of 
this section reduced by the reduction amount as defined in paragraph 
(b)(9) of this section. This reduction amount does not apply if the 
amount determined in paragraph (d)(2)(iv)(A)(2) of this section is 
greater than the amount determined under paragraph (d)(2)(iv)(A)(1) of 
this section (in which circumstance the QBI component for the trade or 
business (or aggregated trade or business) will be the unreduced amount 
determined in paragraph (d)(2)(iv)(A)(1) of this section).
    (3) Qualified REIT dividends/qualified PTP income component--(i) In 
general. The qualified REIT dividend/qualified PTP income component is 
20 percent of the combined amount of qualified REIT dividends and 
qualified PTP income received by the individual (including the 
individual's share of qualified REIT dividends and qualified PTP income 
from RPEs).
    (ii) SSTB exclusion. If the individual's taxable income is within 
the phase-in range, then only the applicable percentage of qualified 
PTP income generated by an SSTB is taken into account for purposes of 
determining the individual's section 199A deduction, including the 
determination of the combined amount of qualified REIT dividends and 
qualified PTP income described in paragraph (d)(1) of this section. If 
the individual's taxable income exceeds the phase-in range, then none 
of the individual's share of qualified PTP income generated by an SSTB 
may be taken into account for purposes of determining the individual's 
section 199A deduction.
    (iii) Negative combined qualified REIT dividends/qualified PTP 
income. If the combined amount of REIT dividends and qualified PTP 
income is less than zero, the portion of the individual's section 199A 
deduction related to qualified REIT dividends and qualified PTP income 
is zero for the taxable year. The negative combined amount must be 
carried forward and used to offset the combined amount of REIT 
dividends/qualified PTP income in the succeeding taxable years of the 
individual for purposes of section 199A and this section. This 
carryover rule does not affect the deductibility of the loss for 
purposes of other provisions of the Code.
    (4) Examples. The following examples illustrate the provisions of 
this paragraph (d). For purposes of these examples, unless indicated 
otherwise, assume that all of the trades or businesses are trades or 
businesses as defined in paragraph (b)(14) of this section, none of the 
trades or businesses are SSTBs as defined in paragraph (b)(11) of this 
section and Sec.  1.199A-5(b); and all of the tax items associated with 
the trades or businesses are effectively connected to a trade or 
business within the United States within the meaning of section 864(c). 
Also assume that the taxpayers report no capital gains or losses or 
other tax items not specified in the examples. Total taxable income 
does not include the section 199A deduction.

     (i) Example 1. D, an unmarried individual, operates a business 
as a sole proprietorship. The business generates $1,000,000 of QBI 
in 2018. Solely for purposes of this example, assume that the 
business paid no wages and holds no qualified property for use in 
the business. After allowable deductions unrelated to the business, 
D's total taxable income for 2018 is $980,000. Because D's taxable 
income exceeds the applicable threshold amount, D's section 199A 
deduction is subject to the W-2 wage and UBIA of qualified property 
limitations. D's section 199A deduction is limited to zero because 
the business paid no wages and held no qualified property.
     (ii) Example 2. Assume the same facts as in Example 1 of 
paragraph (d)(4)(i) of this section, except that D holds qualified 
property with a UBIA of $10,000,000 for use in the trade or 
business. D reports $4,000,000 of QBI for 2020. After allowable 
deductions unrelated to the business, D's total taxable income for 
2020 is $3,980,000. Because D's taxable income is above the 
threshold amount, the QBI component of D's section 199A deduction is 
subject to the W-2 wage and UBIA of qualified property limitations. 
Because the business has no W-2 wages, the QBI component of D's 
section 199A deduction is limited to the lesser of 20% of the 
business's QBI or 2.5% of its UBIA of qualified property. Twenty 
percent of the $4,000,000 of QBI is $800,000. Two and one-half 
percent of the $10,000,000 UBIA of qualified property is $250,000. 
The QBI component of D's section 199A deduction is thus limited to 
$250,000. D's section 199A deduction is equal to the lesser of:
    (A) 20% of the QBI from the business as limited ($250,000); or
    (B) 20% of D's taxable income ($3,980,000 x 20% = $796,000). 
Therefore, D's section 199A deduction for 2020 is $250,000.
     (iii) Example 3. E, an unmarried individual, is a 30% owner of 
LLC, which is classified as a partnership for Federal income tax 
purposes. In 2018, the LLC has a single trade or business and 
reports QBI of $3,000,000. The LLC pays total W-2 wages of 
$1,000,000, and its total UBIA of qualified property is $100,000. E 
is allocated 30% of all items of the partnership. For the 2018 
taxable year, E reports $900,000 of QBI from the LLC. After 
allowable deductions unrelated to LLC, E's taxable income is 
$880,000. Because E's taxable income is above the threshold amount, 
the QBI component of E's section 199A deduction will be limited to 
the lesser of 20% of E's share of LLC's QBI or the greater of the W-
2 wage or UBIA of qualified property limitations. Twenty percent of 
E's share of QBI of $900,000 is $180,000. The W-2 wage limitation 
equals 50% of E's share of the LLC's wages ($300,000) or $150,000. 
The UBIA of qualified property limitation equals $75,750, the sum of 
25% of E's share of LLC's wages ($300,000) or $75,000 plus 2.5% of 
E's share of UBIA of qualified property ($30,000) or $750. The 
greater of the limitation amounts ($150,000 and $75,750) is 
$150,000. The QBI component of E's section 199A deduction is thus 
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 to the lesser of 20% of the QBI from the business 
as limited ($150,000) or 20% of E's taxable income ($880,000 x 20% = 
$176,000). Therefore, E's section 199A deduction is $150,000 for 
2018.
     (iv) Example 4. F, an unmarried individual, owns a 50% interest 
in Z, an S corporation for Federal income tax purposes that conducts 
a single trade or business. In 2018, Z reports QBI of $6,000,000. Z 
pays 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 of QBI from Z. F is not an employee of Z and receives no 
wages or reasonable compensation from Z. After allowable deductions 
unrelated to Z and a deductible qualified net loss from a PTP of 
($10,000), F's taxable income is $1,880,000. Because F's taxable 
income is above the threshold amount, the QBI component of F's 
section 199A deduction will be limited to the lesser of 20% of F's 
share of Z's QBI or the greater of the W-2 wage and UBIA of 
qualified property limitations. Twenty percent of F's share of Z's 
QBI ($3,000,000) is $600,000. The W-2 wage limitation equals 50% of 
F's share of Z's W-2 wages ($1,000,000) or $500,000. The UBIA of 
qualified property limitation equals $252,500, the sum of 25%

[[Page 2993]]

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 qualified property ($100,000) or $2,500. The 
greater of the limitation amounts ($500,000 and $252,500) is 
$500,000. The QBI component of F's section 199A deduction is thus 
limited to $500,000, the lesser of 20% of QBI ($600,000) and the 
greater of the limitations amounts ($500,000). F reports a qualified 
loss from a PTP and has no qualified REIT dividend. F does not net 
the ($10,000) loss from the PTP against QBI. Instead, the portion of 
F's section 199A deduction related to qualified REIT dividends and 
qualified PTP income is zero for 2018. F's section is 199A deduction 
is equal to the lesser of 20% of the QBI from the business as 
limited ($500,000) or 20% of F's taxable income over net capital 
gain ($1,880,000 x 20% = $376,000). Therefore, F's section 199A 
deduction is $376,000 for 2018. F must also carry forward the 
($10,000) qualified loss from a PTP to be netted against F's 
qualified REIT dividends and qualified PTP income in the succeeding 
taxable year.
     (v) Example 5: Phase-in range. (A) B and C are married and file 
a joint individual income tax return. B is a shareholder in M, an 
entity taxed as an S corporation for Federal income tax purposes 
that conducts a single trade or business. M holds no qualified 
property. B's share of the M's QBI is $300,000 in 2018. B's share of 
the W-2 wages from M in 2018 is $40,000. C earns wage income from 
employment by an unrelated company. After allowable deductions 
unrelated to M, B and C's taxable income for 2018 is $375,000. B and 
C are within the phase-in range because their taxable income exceeds 
the applicable threshold amount, $315,000, but does not exceed the 
threshold amount plus $100,000, or $415,000. Consequently, the QBI 
component of B and C's section 199A deduction may be limited by the 
W-2 wage and UBIA of qualified property limitations but the 
limitations will be phased in.
    (B) Because M does not hold qualified property, only the W-2 
wage limitation must be calculated. In order to apply the W-2 wage 
limitation, B and C must first determine 20% of B's share of M's 
QBI. Twenty percent of B's share of M's QBI of $300,000 is $60,000. 
Next, B and C must determine 50% of B's share of M's W-2 wages. 
Fifty percent of 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-2 wages ($20,000) is less than 20% 
of B's share of M's QBI ($60,000), B and C must determine the QBI 
component of their section 199A deduction by reducing 20% of B's 
share of M's QBI by the reduction amount.
    (C) B and C are 60% through the phase-in range (that is, their 
taxable income exceeds the threshold amount by $60,000 and their 
phase-in range is $100,000). B and C must determine the excess 
amount, which is the excess of 20% of B's share of M's QBI, or 
$60,000, over 50% of B's share of M's W-2 wages, or $20,000. Thus, 
the excess amount is $40,000. The reduction amount is equal to 60% 
of the excess amount, or $24,000. Thus, the QBI component of B and 
C's section 199A deduction is equal to $36,000, 20% of B's $300,000 
share M's QBI (that is, $60,000), reduced by $24,000. B and C's 
section 199A deduction is equal to the lesser of 20% of the QBI from 
the business as limited ($36,000) or 20% of B and C's taxable income 
($375,000 x 20% = $75,000). Therefore, B and C's section 199A 
deduction is $36,000 for 2018.
     (vi) Example 6. (A) Assume the same facts as in Example 5 of 
paragraph (d)(4)(v) of this section, except that M is engaged in an 
SSTB. Because B and C are within the phase-in range, B must reduce 
the QBI and W-2 wages allocable to B from M to the applicable 
percentage of those items. B and C's applicable percentage is 100% 
reduced by the percentage equal to the ratio that their taxable 
income for the taxable year ($375,000) exceeds their threshold 
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 
x 40% =) $120,000, and the applicable percentage of B's share of W-2 
wages is ($40,000 x 40% =) $16,000. These reduced numbers must then 
be used to determine how B's section 199A deduction is limited.
    (B) B and C must apply the W-2 wage limitation by first 
determining 20% of B's share of M's QBI as limited by paragraph 
(d)(4)(vi)(A) of this section. Twenty percent of B's share of M's 
QBI of $120,000 is $24,000. Next, B and C must determine 50% of B's 
share of M's W-2 wages. Fifty percent of B's share of M's W-2 wages 
of $16,000 is $8,000. Because 50% of B's share of M's W-2 wages 
($8,000) is less than 20% of B's share of M's QBI ($24,000), B and 
C's must determine the QBI component of their section 199A deduction 
by reducing 20% of B's share of M's QBI by the reduction amount.
    (C) B and C are 60% through the phase-in range (that is, their 
taxable income exceeds the threshold amount by $60,000 and their 
phase-in range is $100,000). B and C must determine the excess 
amount, which is the excess of 20% of B's share of M's QBI, as 
adjusted in paragraph (d)(4)(vi)(A) of this section or $24,000, over 
50% of B's share of M's W-2 wages, as adjusted in paragraph 
(d)(4)(vi)(A) of this section, or $8,000. Thus, the excess amount is 
$16,000. The reduction amount is equal to 60% of the excess amount 
or $9,600. Thus, the QBI component of B and 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 to the 
lesser of 20% of the QBI from the business as limited ($14,400) or 
20% of B's and C's taxable income ($375,000 x 20% = $75,000). 
Therefore, B and C's section 199A deduction is $14,400 for 2018.
     (vii) Example 7. (A) F, an unmarried individual, owns as a sole 
proprietor 100 percent of three trades or businesses, Business X, 
Business Y, and Business Z. None of the businesses hold qualified 
property. F does not aggregate the trades or businesses under Sec.  
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 but pays no wages. 
Business Z generates $2,000 of QBI and pays $500,000 of W-2 wages 
with respect to the business. F also has $750,000 of wage income 
from employment with an unrelated company. After allowable 
deductions unrelated to the businesses, F's taxable income is 
$2,722,000.
    (B) Because F's taxable income is above the threshold amount, 
the QBI component of F's section 199A deduction is subject to the W-
2 wage and UBIA of qualified property limitations. These limitations 
must be applied on a business-by-business basis. None of the 
businesses hold qualified property, therefore only the 50% of W-2 
wage limitation must be calculated. Because QBI from each business 
is positive, F applies the limitation by determining the lesser of 
20% of QBI and 50% of W-2 wages for each business. For Business X, 
the lesser of 20% of QBI ($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-2 wages. The lesser of 20% of 
Business Y's QBI ($1,000,000 x 20% = $200,000) and 50% of its W-2 
wages (zero) is zero. For Business Z, the lesser of 20% of QBI 
($2,000 x 20% = $400) and 50% of W-2 wages ($500,000 x 50% = 
$250,000) is $400.
    (C) Next, F must then combine the amounts determined in 
paragraph (d)(4)(vii)(B) of this section and compare that sum to 20% 
of F's taxable income. The lesser of these two amounts equals F's 
section 199A deduction. The total of the combined amounts in 
paragraph (d)(4)(vii)(B) of this section is $200,400 ($200,000 + 
zero + 400). Twenty percent of F's taxable income is $544,400 
($2,722,000 x 20%). Thus, F's section 199A deduction for 2018 is 
$200,400.
     (viii) Example 8. (A) Assume the same facts as in Example 7 of 
paragraph (d)(4)(vii) of this section, except that F aggregates 
Business X, Business Y, and Business Z under the rules of Sec.  
1.199A-4.
    (B) Because F's taxable income is above the threshold amount, 
the QBI component of F's section 199A deduction is subject to the W-
2 wage and UBIA of qualified property limitations. Because the 
businesses are aggregated, these limitations are applied on an 
aggregated basis. None of the businesses holds qualified property, 
therefore only the W-2 wage limitation must be calculated. F applies 
the limitation by determining the lesser of 20% of the QBI from the 
aggregated businesses, which is $400,400 ($2,002,000 x 20%) and 50% 
of W-2 wages from the aggregated businesses, which is $500,000 
($1,000,000 x 50%). F's section 199A deduction 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 for 2018 is $400,400.
     (ix) Example 9. (A) Assume the same facts as in Example 7 of 
paragraph (d)(4)(vii) of this section, except that for taxable year 
2018, Business Z generates a loss that results in ($600,000) of 
negative QBI and pays $500,000 of W-2 wages. After allowable 
deductions unrelated to the businesses, F's taxable income is 
$2,120,000. Because Business Z had negative QBI, F must offset the 
positive QBI from Business X and Business Y with the negative QBI 
from Business Z in proportion to the relative amounts of positive 
QBI from Business X and Business Y. Because Business X and Business 
Y produced the same amount of positive QBI, the negative QBI from

[[Page 2994]]

Business Z is apportioned equally among Business X and Business Y. 
Therefore, the adjusted QBI for each of Business X and Business Y is 
$700,000 ($1 million plus 50% of the negative QBI of $600,000). The 
adjusted QBI in Business Z is $0, because its negative QBI has been 
fully apportioned to Business X and Business Y.
    (B) Because F's taxable income is above the threshold amount, 
the QBI component of F's section 199A deduction is subject to the W-
2 wage and UBIA of qualified property limitations. These limitations 
must be applied on a business-by-business basis. None of the 
businesses hold qualified property, therefore only the 50% of W-2 
wage limitation must be calculated. For Business X, the lesser of 
20% 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. The lesser of 20% of Business Y's QBI ($700,000 x 20% = 
$140,000) and 50% of its W-2 wages (zero) is zero.
    (C) F must combine the amounts determined in paragraph 
(d)(4)(ix)(B) of this section and compare the sum to 20% of taxable 
income. F's section 199A deduction equals the lesser of these two 
amounts. The combined amount from paragraph (d)(4)(ix)(B) of this 
section is $140,000 ($140,000 + zero) and 20% of F's taxable 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 the 
following taxable year for purposes of section 199A.
     (x) Example 10. (A) Assume the same facts as in Example 9 of 
paragraph (d)(4)(ix) of this section, except that F aggregates 
Business X, Business Y, and Business Z under the rules of Sec.  
1.199A-4.
    (B) Because F's taxable income is above the threshold amount, 
the QBI component of F's section 199A deduction is subject to the W-
2 wage and UBIA of qualified property limitations. Because the 
businesses are aggregated, these limitations are applied on an 
aggregated basis. None of the businesses holds qualified property, 
therefore only the W-2 wage limitation must be calculated. F applies 
the limitation by determining the lesser of 20% of the QBI from the 
aggregated businesses ($1,400,000 x 20% = $280,000) and 50% of W-2 
wages from the aggregated businesses ($1,000,000 x 50% = $500,000), 
or $280,000. F's section 199A deduction is equal to the lesser of 
$280,000 and 20% of F's taxable 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 the following taxable year 
for purposes of section 199A.
     (xi) Example 11. (A) Assume the same facts as in Example 7 of 
paragraph (d)(4)(vii) of this section, except that Business Z 
generates a loss that results in ($2,150,000) of negative QBI and 
pays $500,000 of W-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 added together ($1 million plus $1 million 
minus the loss of ($2,150,000)). Because F has a negative combined 
QBI for 2018, F has no section 199A deduction with respect to any 
trade or business for 2018. Instead, the negative combined QBI of 
($150,000) carries forward and will be treated as negative QBI from 
a separate trade or business for purposes of computing the section 
199A deduction in the next taxable year. None of the W-2 wages carry 
forward. However, for income tax purposes, the $150,000 loss may 
offset F's $750,000 of wage income (assuming the loss is otherwise 
allowable under the Code).
    (B) In taxable year 2019, Business X generates $200,000 of net 
QBI and pays $100,000 of W-2 wages with respect to the business. 
Business Y generates $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 with respect to the business. F also has 
$750,000 of wage income from employment with an unrelated company. 
After allowable deductions unrelated to the businesses, F's taxable 
income is $960,000. Pursuant to paragraph (d)(2)(iii)(B) of this 
section, the ($150,000) of negative QBI from 2018 is treated as 
arising in 2019 from a separate trade or business. Thus, F has 
overall net QBI of $80,000 when all trades or businesses are taken 
together ($200,000) plus $150,000 minus $120,000 minus the carryover 
loss of $150,000). Because Business Z had negative QBI and F also 
has a negative QBI carryover amount, F must offset the positive QBI 
from Business X and Business Y with the negative QBI from Business Z 
and the carryover amount in proportion to the relative amounts of 
positive QBI from Business X and Business Y. Because Business X 
produced 57.14% of the total QBI from Business X and Business Y, 
57.14% of the negative QBI from Business Z and the negative QBI 
carryforward must be apportioned to Business X, and the remaining 
42.86% allocated to Business Y. Therefore, the adjusted QBI in 
Business X is $45,722 ($200,000 minus 57.14% of the loss from 
Business Z ($68,568), minus 57.14% of the carryover loss ($85,710). 
The adjusted 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)). The adjusted QBI in Business Z is $0, because its 
negative QBI has been apportioned to Business X and Business Y.
    (C) Because F's taxable income is above the threshold amount, 
the QBI component of F's section 199A deduction is subject to the W-
2 wage and UBIA of qualified property limitations. These limitations 
must be applied on a business-by-business basis. None of the 
businesses hold qualified property, therefore only the 50% of W-2 
wage limitation must 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. 
Twenty percent of Business Y's QBI is $6,856 ($34,278 x 20%) and 50% 
of its W-2 wages (zero) is zero, so the lesser amount is zero.
    (D) F must then compare the combined amounts determined in 
paragraph (d)(4)(xi)(C) of this section to 20% of F's taxable 
income. The section 199A deduction equals the lesser of these 
amounts. F's combined amount from paragraph (d)(4)(xi)(C) of this 
section is $9,144 ($9,144 plus zero) and 20% of F's taxable income 
is $192,000 ($960,000 x 20%) Thus, F's section 199A deduction for 
2019 is $9,144. There is no carryover of any negative QBI into the 
following taxable year for purposes of section 199A.
     (xii) Example 12. (A) Assume the same facts as in Example 11 of 
paragraph (d)(4)(xi) of this section, except that F aggregates 
Business X, Business Y, and Business Z under the rules of Sec.  
1.199A-4. For 2018, F's QBI from the aggregated trade or business is 
($150,000). Because F has a combined negative QBI for 2018, F has no 
section 199A deduction with respect to any trade or business for 
2018. Instead, the negative combined QBI of ($150,000) carries 
forward and will be treated as negative QBI from a separate trade or 
business for purposes of computing the section 199A deduction in the 
next taxable year. However, for income tax purposes, the $150,000 
loss may offset taxpayer's $750,000 of wage income (assuming the 
loss is otherwise allowable under the Code).
    (B) In taxable year 2019, F will have QBI of $230,000 and W-2 
wages of $100,500 from the aggregated trade or business. F also has 
$750,000 of wage income from employment with an unrelated company. 
After allowable deductions unrelated to the 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 trade or business for 
purposes of section 199A. This loss will offset the positive QBI 
from the aggregated trade or business, resulting in an adjusted QBI 
of $80,000 ($230,000 - $150,000).
    (C) Because F's taxable income is above the threshold amount, 
the QBI component of F's section 199A deduction is subject to the W-
2 wage and UBIA of qualified property limitations. These limitations 
must be applied on a business-by-business basis. None of the 
businesses hold qualified property, therefore only the 50% of W-2 
wage limitation must be calculated. For the aggregated trade or 
business, 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 
deduction equals the lesser of that amount ($16,000) and 20% of F's 
taxable income ($960,000 x 20% = $192,000). Thus, F's section 199A 
deduction for 2019 is $16,000. There is no carryover of any negative 
QBI into the following taxable year for purposes of section 199A.

    (e) Special rules--(1) Effect of deduction. In the case of a 
partnership or S corporation, section 199A is applied at the partner or 
shareholder level. The rules of subchapter K and subchapter S of the 
Code apply in their entirety for purposes of determining each partner's 
or shareholder's share of QBI, W-2 wages, UBIA of qualified property, 
qualified REIT dividends, and qualified PTP income or loss. The section 
199A deduction has no effect on the adjusted basis of a partner's 
interest in the partnership, the adjusted basis of a shareholder's 
stock in an S

[[Page 2995]]

corporation, or an S corporation's accumulated adjustments account.
    (2) Disregarded entities. An entity with a single owner that is 
treated as disregarded as an entity separate from its owner under any 
provision of the Code is disregarded for purposes of section 199A and 
Sec. Sec.  1.199A-1 through 1.199A-6.
    (3) Self-employment tax and net investment income tax. The 
deduction allowed under section 199A does not reduce net earnings from 
self-employment under section 1402 or net investment income under 
section 1411.
    (4) Commonwealth of Puerto Rico. If all of an individual's QBI from 
sources within the Commonwealth of Puerto Rico is taxable under section 
1 of the Code for a taxable year, then for purposes of determining the 
QBI of such individual for such taxable year, the term ``United 
States'' includes the Commonwealth of Puerto Rico.
    (5) Coordination with alternative minimum tax. For purposes of 
determining alternative minimum taxable income under section 55, the 
deduction allowed under section 199A(a) for a taxable year is equal in 
amount to the deduction allowed under section 199A(a) in determining 
taxable income for that taxable year (that is, without regard to any 
adjustments under sections 56 through 59).
    (6) Imposition of accuracy-related penalty on underpayments. For 
rules related to the imposition of the accuracy-related penalty on 
underpayments for taxpayers who claim the deduction allowed under 
section 199A, see section 6662(d)(1)(C).
    (7) Reduction for income received from cooperatives. In the case of 
any trade or business of a patron of a specified agricultural or 
horticultural cooperative, as defined in section 199A(g)(4), the amount 
of section 199A deduction determined under paragraph (c) or (d) of this 
section with respect to such trade or business must be reduced by the 
lesser of:
    (i) Nine percent of the QBI with respect to such trade or business 
as is properly allocable to qualified payments received from such 
cooperative; or
    (ii) 50 percent of the W-2 wages with respect to such trade or 
business as are so allocable as determined under Sec.  1.199A-2.
    (f) Applicability date--(1) General rule. Except as provided in 
paragraph (f)(2) of this section, the provisions of this section apply 
to taxable years ending after February 8, 2019.
    (2) Exception for non-calendar year RPE. For purposes of 
determining QBI, W-2 wages, UBIA of qualified property, and the 
aggregate amount of qualified REIT dividends and qualified PTP income, 
if an individual receives any of these items from an RPE with a taxable 
year that begins before January 1, 2018, and ends after December 31, 
2017, such items are treated as having been incurred by the individual 
during the individual's taxable year in which or with which such RPE 
taxable year ends.

0
Par. 4. Section 1.199A-2 is added to read as follows:


Sec.  1.199A-2  Determination of W-2 wages and unadjusted basis 
immediately after acquisition of qualified property.

    (a) Scope--(1) In general. This section provides guidance on 
calculating a trade or business's W-2 wages properly allocable to QBI 
(W-2 wages) and the trade or business's unadjusted basis immediately 
after acquisition of all qualified property (UBIA of qualified 
property). The provisions of this section apply solely for purposes of 
section 199A of the Internal Revenue Code (Code).
    (2) W-2 wages. Paragraph (b) of this section provides guidance on 
the determination of W-2 wages. The determination of W-2 wages must be 
made for each trade or business by the individual or RPE that directly 
conducts the trade or business (or aggregated trade or business). In 
the case of W-2 wages paid by an RPE, the RPE must determine and report 
W-2 wages for each trade or business (or aggregated trade or business) 
conducted by the RPE. W-2 wages are presumed to be zero if not 
determined and reported for each trade or business (or aggregated trade 
or business).
    (3) UBIA of qualified property--(i) In general. Paragraph (c) of 
this section provides guidance on the determination of the UBIA of 
qualified property. The determination of the UBIA of qualified property 
must be made for each trade or business (or aggregated trade or 
business) by the individual or RPE that directly conducts the trade or 
business (or aggregated trade or business). The UBIA of qualified 
property is presumed to be zero if not determined and reported for each 
trade or business (or aggregated trade or business).
    (ii) UBIA of qualified property held by a partnership. In the case 
of qualified property held by a partnership, each partner's share of 
the UBIA of qualified property is determined in accordance with how the 
partnership would allocate depreciation under Sec.  1.704-
1(b)(2)(iv)(g) on the last day of the taxable year.
    (iii) UBIA of qualified property held by an S corporation. In the 
case of qualified property held by an S corporation, each shareholder's 
share of the UBIA of qualified property is the share of the unadjusted 
basis proportionate to the ratio of shares in the S corporation held by 
the shareholder on the last day of the taxable year over the total 
issued and outstanding shares of the S corporation.
    (iv) UBIA and section 743(b) basis adjustments--(A) In general. A 
partner will be allowed to take into account UBIA with respect to an 
item of qualified property in addition to the amount of UBIA with 
respect to such qualified property determined under paragraphs 
(a)(3)(i) and (c) of this section and allocated to such partner under 
paragraph (a)(3)(ii) of this section to the extent of the partner's 
excess section 743(b) basis adjustment with respect to such item of 
qualified property.
    (B) Excess section 743(b) basis adjustments. A partner's excess 
section 743(b) basis adjustment is an amount that is determined with 
respect to each item of qualified property and is equal to an amount 
that would represent the partner's section 743(b) basis adjustment with 
respect to the same item of qualified property, as determined under 
Sec. Sec.  1.743-1(b) and 1.755-1, but calculated as if the adjusted 
basis of all of the partnership's property was equal to the UBIA of 
such property. The absolute value of the excess section 743(b) basis 
adjustment cannot exceed the absolute value of the total section 743(b) 
basis adjustment with respect to qualified property.
    (C) Computation of partner's share of UBIA with excess section 
743(b) basis adjustments. The partnership first computes its UBIA with 
respect to qualified property under paragraphs (a)(3)(i) and (c) of 
this section and allocates such UBIA under paragraph (a)(3)(ii) of this 
section. If the sum of the excess section 743(b) basis adjustment for 
all of the items of qualified property is a negative number, that 
amount will be subtracted from the partner's UBIA of qualified property 
determined under paragraphs (a)(3)(i) and (c) of this section and 
allocated under paragraph (a)(3)(ii) of this section. A partner's UBIA 
of qualified property may not be below $0. Excess section 743(b) basis 
adjustments are computed with respect to all section 743(b) 
adjustments, including adjustments made as a result of a substantial 
built-in loss under section 743(d).
    (D) Examples. The provisions of this paragraph (a)(3)(iv) are 
illustrated by the following examples:

     (1) Example 1--(i) Facts. A, B, and C are equal partners in 
partnership, PRS. PRS has a single trade or business that generates 
QBI. PRS has no liabilities and only one asset, a

[[Page 2996]]

single item of qualified property with a UBIA equal to $900,000. 
Each partner's share of the UBIA is $300,000. A sells its one-third 
interest in PRS to T for $350,000 when a section 754 election is in 
effect. At the time of the sale, the tax basis of the qualified 
property held by PRS is $750,000. The amount of gain that would be 
allocated to T from a hypothetical transaction under Sec.  1.743-
1(d)(2) is $100,000. Thus, T's interest in PRS's previously taxed 
capital is equal to $250,000 ($350,000, the amount of cash T would 
receive if PRS liquidated immediately after the hypothetical 
transaction, decreased by $100,000, T's share of gain from the 
hypothetical transaction). The amount of T's section 743(b) basis 
adjustment to PRS's qualified property is $100,000 (the excess of 
$350,000, T's cost basis for its interest, over $250,000, T's share 
of the adjusted basis to PRS of the partnership's property).
    (iii) Analysis. In order for T to determine its UBIA, T must 
calculate its excess section 743(b) basis adjustment. T's excess 
section 743(b) basis adjustment is equal to an amount that would 
represent T's section 743(b) basis adjustment with respect to the 
same item of qualified property, as determined under Sec. Sec.  
1.743-1(b) and 1.755-1, but calculated as if the adjusted basis of 
all of PRS's property was equal to the UBIA of such property. T's 
section 743(b) basis adjustment calculated as if adjusted basis of 
the qualified property were equal to its UBIA is $50,000 (the excess 
of $350,000, T's cost basis for its interest, over $300,000, T's 
share of the adjusted basis to PRS of the partnership's property). 
Thus, T's excess section 743(b) basis adjustment is equal to 
$50,000. For purposes of applying the UBIA limitation to T's share 
of QBI from PRS's trade or business, T's UBIA is equal to $350,000 
($300,000, T's one-third share of the qualified property's UBIA, 
plus $50,000, T's excess section 743(b) basis adjustment).
     (2) Example 2--(i) Facts. Assume the same facts as in Example 1 
of paragraph (a)(3)(iv)(D)(1) of this section, except that A sells 
its one-third interest in PRS to T for $200,000 when a section 754 
election is in effect. At the time of the sale, the tax basis of the 
qualified property held by PRS is $750,000, and the amount of loss 
that would be allocated to T from a hypothetical transaction under 
Sec.  1.743-1(d)(2) is $50,000. Thus, T's interest in PRS's 
previously taxed capital is equal to $250,000 ($200,000, the amount 
of cash T would receive if PRS liquidated immediately after the 
hypothetical transaction, increased by $50,000, T's share of loss 
from the hypothetical transaction). The amount of T's section 743(b) 
basis adjustment to PRS's qualified property is negative $50,000 
(the excess of $250,000, T's share of the adjusted basis to PRS of 
the partnership's property, over $200,000, T's cost basis for its 
interest).
    (ii) Analysis. In order for T to determine its UBIA, T must 
calculate its excess section 743(b) basis adjustment. T's excess 
section 743(b) basis adjustment is equal to an amount that would 
represent T's section 743(b) basis adjustment with respect to the 
same item of qualified property, as determined under Sec. Sec.  
1.743-1(b) and 1.755-1, but calculated as if the adjusted basis of 
all of PRS's property was equal to the UBIA of such property. T's 
section 743(b) basis adjustment calculated as if adjusted basis of 
the qualified property were equal to its UBIA is negative $100,000 
(the excess of $300,000, T's share of the adjusted basis to PRS of 
the partnership's property, over $200,000, T's cost basis for its 
interest). T's excess section 743(b) basis adjustment to the 
qualified property is limited to the amount of T's section 743(b) 
basis adjustment of negative $50,000. Thus, T's excess section 
743(b) basis adjustment is equal to negative $50,000. For purposes 
of applying the UBIA limitation to T's share of QBI from PRS's trade 
or business, T's UBIA is equal to $250,000 ($300,000, T's one-third 
share of the qualified property's UBIA, reduced by T's negative 
$50,000 excess section 743(b) basis adjustment).

    (b) W-2 wages--(1) In general. Section 199A(b)(2)(B) provides 
limitations on the section 199A deduction based on the W-2 wages paid 
with respect to each trade or business (or aggregated trade or 
business). Section 199A(b)(4)(B) provides that W-2 wages do not include 
any amount which is not properly allocable to QBI for purposes of 
section 199A(c)(1). This section provides a three step process for 
determining the W-2 wages paid with respect to a trade or business that 
are properly allocable to QBI. First, each individual or RPE must 
determine its total W-2 wages paid for the taxable year under the rules 
in paragraph (b)(2) of this section. Second, each individual or RPE 
must allocate its W-2 wages between or among one or more trades or 
businesses under the rules in paragraph (b)(3) of this section. Third, 
each individual or RPE must determine the amount of such wages with 
respect to each trade or business, which are allocable to the QBI of 
the trade or business (or aggregated trade or business) under the rules 
in paragraph (b)(4) of this section.
    (2) Definition of W-2 wages--(i) In general. Section 199A(b)(4)(A) 
provides that the term W-2 wages means with respect to any person for 
any taxable year of such person, the amounts described in section 
6051(a)(3) and (8) paid by such person with respect to employment of 
employees by such person during the calendar year ending during such 
taxable year. Thus, the term W-2 wages includes the total amount of 
wages as defined in section 3401(a) plus the total amount of elective 
deferrals (within the meaning of section 402(g)(3)), the compensation 
deferred under section 457, and the amount of designated Roth 
contributions (as defined in section 402A). For this purpose, except as 
provided in paragraphs (b)(2)(iv)(C)(2) and (b)(2)(iv)(D) of this 
section, the Forms W-2, ``Wage and Tax Statement,'' or any subsequent 
form or document used in determining the amount of W-2 wages, are those 
issued for the calendar year ending during the individual's or RPE's 
taxable year for wages paid to employees (or former employees) of the 
individual or RPE for employment by the individual or RPE. For purposes 
of this section, employees of the individual or RPE are limited to 
employees of the individual or RPE as defined in section 3121(d)(1) and 
(2). (For purposes of section 199A, this includes officers of an S 
corporation and employees of an individual or RPE under common law.)
    (ii) Wages paid by a person other than a common law employer. In 
determining W-2 wages, an individual or RPE may take into account any 
W-2 wages paid by another person and reported by the other person on 
Forms W-2 with the other person as the employer listed in Box c of the 
Forms W-2, provided that the W-2 wages were paid to common law 
employees or officers of the individual or RPE for employment by the 
individual or RPE. In such cases, the person paying the W-2 wages and 
reporting the W-2 wages on Forms W-2 is precluded from taking into 
account such wages for purposes of determining W-2 wages with respect 
to that person. For purposes of this paragraph (b)(2)(ii), persons that 
pay and report W-2 wages on behalf of or with respect to others can 
include, but are not limited to, certified professional employer 
organizations under section 7705, statutory employers under section 
3401(d)(1), and agents under section 3504.
    (iii) Requirement that wages must be reported on return filed with 
the Social Security Administration (SSA)--(A) In general. Pursuant to 
section 199A(b)(4)(C), the term W-2 wages does not include any amount 
that is not properly included in a return filed with SSA on or before 
the 60th day after the due date (including extensions) for such return. 
Under Sec.  31.6051-2 of this chapter, each Form W-2 and the 
transmittal Form W-3, ``Transmittal of Wage and Tax Statements,'' 
together constitute an information return to be filed with SSA. 
Similarly, each Form W-2c, ``Corrected Wage and Tax Statement,'' and 
the transmittal Form W-3 or W-3c, ``Transmittal of Corrected Wage and 
Tax Statements,'' together constitute an information return to be filed 
with SSA. In determining whether any amount has been properly included 
in a return filed with SSA on or before the 60th day after the due date 
(including extensions) for such return, each Form W-2 together with its 
accompanying Form W-3 will be considered a separate information return 
and each Form W-2c together

[[Page 2997]]

with its accompanying Form W-3 or Form W-3c will be considered a 
separate information return. Section 6071(c) provides that Forms W-2 
and W-3 must be filed on or before January 31 of the year following the 
calendar year to which such returns relate (but see the special rule in 
Sec.  31.6071(a)-1T(a)(3)(1) of this chapter for monthly returns filed 
under Sec.  31.6011(a)-5(a) of this chapter). Corrected Forms W-2 are 
required to be filed with SSA on or before January 31 of the year 
following the year in which the correction is made.
    (B) Corrected return filed to correct a return that was filed 
within 60 days of the due date. If a corrected information return 
(Return B) is filed with SSA on or before the 60th day after the due 
date (including extensions) of Return B to correct an information 
return (Return A) that was filed with SSA on or before the 60th day 
after the due date (including extensions) of the information return 
(Return A) and paragraph (b)(2)(iii)(C) of this section does not apply, 
then the wage information on Return B must be included in determining 
W-2 wages. If a corrected information return (Return D) is filed with 
SSA later than the 60th day after the due date (including extensions) 
of Return D to correct an information return (Return C) that was filed 
with SSA on or before the 60th day after the due date (including 
extensions) of the information return (Return C), and if Return D 
reports an increase (or increases) in wages included in determining W-2 
wages from the wage amounts reported on Return C, then such increase 
(or increases) on Return D will be disregarded in determining W-2 wages 
(and only the wage amounts on Return C may be included in determining 
W-2 wages). If Return D reports a decrease (or decreases) in wages 
included in determining W-2 wages from the amounts reported on Return 
C, then, in determining W-2 wages, the wages reported on Return C must 
be reduced by the decrease (or decreases) reflected on Return D.
    (C) Corrected return filed to correct a return that was filed later 
than 60 days after the due date. If an information return (Return F) is 
filed to correct an information return (Return E) that was not filed 
with SSA on or before the 60th day after the due date (including 
extensions) of Return E, then Return F (and any subsequent information 
returns filed with respect to Return E) will not be considered filed on 
or before the 60th day after the due date (including extensions) of 
Return F (or the subsequent corrected information return). Thus, if a 
Form W-2c is filed to correct a Form W-2 that was not filed with SSA on 
or before the 60th day after the due date (including extensions) of the 
Form W-2 (or to correct a Form W-2c relating to Form W-2 that had not 
been filed with SSA on or before the 60th day after the due date 
(including extensions) of the Form W-2), then this Form W-2c will not 
be considered to have been filed with SSA on or before the 60th day 
after the due date (including extensions) for this Form W-2c (or 
corrected Form W-2), regardless of when the Form W-2c is filed.
    (iv) Methods for calculating W-2 wages--(A) In general. The 
Secretary may provide for methods to be used in calculating W-2 wages, 
including W-2 wages for short taxable years by publication in the 
Internal Revenue Bulletin (see Sec.  601.601(d)(2)(ii)(b) of this 
chapter).
    (B) Acquisition or disposition of a trade or business--(1) In 
general. In the case of an acquisition or disposition of a trade or 
business, the major portion of a trade or business, or the major 
portion of a separate unit of a trade or business that causes more than 
one individual or entity to be an employer of the employees of the 
acquired or disposed of trade or business during the calendar year, the 
W-2 wages of the individual or entity for the calendar year of the 
acquisition or disposition are allocated between each individual or 
entity based on the period during which the employees of the acquired 
or disposed of trade or business were employed by the individual or 
entity, regardless of which permissible method is used for reporting 
predecessor and successor wages on Form W-2, ``Wage and Tax 
Statement.'' For this purpose, the period of employment is determined 
consistently with the principles for determining whether an individual 
is an employee described in paragraph (b) of this section.
    (2) Acquisition or disposition. For purposes of this paragraph 
(b)(2)(iv)(B), the term acquisition or disposition includes an 
incorporation, a formation, a liquidation, a reorganization, or a 
purchase or sale of assets.
    (C) Application in the case of a person with a short taxable year--
(1) In general. In the case of an individual or RPE with a short 
taxable year, subject to the rules of paragraph (b)(2) of this section, 
the W-2 wages of the individual or RPE for the short taxable year 
include only those wages paid during the short taxable year to 
employees of the individuals or RPE, only those elective deferrals 
(within the meaning of section 402(g)(3)) made during the short taxable 
year by employees of the individual or RPE and only compensation 
actually deferred under section 457 during the short taxable year with 
respect to employees of the individual or RPE.
    (2) Short taxable year that does not include December 31. If an 
individual or RPE has a short taxable year that does not contain a 
calendar year ending during such short taxable year, wages paid to 
employees for employment by such individual or RPE during the short 
taxable year are treated as W-2 wages for such short taxable year for 
purposes of paragraph (b) of this section (if the wages would otherwise 
meet the requirements to be W-2 wages under this section but for the 
requirement that a calendar year must end during the short taxable 
year).
    (D) Remuneration paid for services performed in the Commonwealth of 
Puerto Rico. In the case of an individual or RPE that conducts a trade 
or business in the Commonwealth of Puerto Rico, the determination of W-
2 wages of such individual or RPE will be made without regard to any 
exclusion under section 3401(a)(8) for remuneration paid for services 
performed in the Commonwealth of Puerto Rico. The individual or RPE 
must maintain sufficient documentation (for example, Forms 499R-2/W-
2PR) to substantiate the amount of remuneration paid for services 
performed in the Commonwealth of Puerto Rico that is used in 
determining the W-2 wages of such individual or RPE with respect to any 
trade or business conducted in the Commonwealth of Puerto Rico.
    (3) Allocation of wages to trades or businesses. After calculating 
total W-2 wages for a taxable year, each individual or RPE that 
directly conducts more than one trade or business must allocate those 
wages among its various trades or businesses. W-2 wages must be 
allocated to the trade or business that generated those wages. In the 
case of W-2 wages that are allocable to more than one trade or 
business, the portion of the W-2 wages allocable to each trade or 
business is determined in the same manner as the expenses associated 
with those wages are allocated among the trades or businesses under 
Sec.  1.199A-3(b)(5).
    (4) Allocation of wages to QBI. Once W-2 wages for each trade or 
business have been determined, each individual or RPE must identify the 
amount of W-2 wages properly allocable to QBI for each trade or 
business (or aggregated trade or business). W-2 wages are properly 
allocable to QBI if the associated wage expense is taken into account 
in computing QBI under Sec.  1.199A-3. In the case of an RPE, the wage 
expense must be allocated and reported to the partners or shareholders

[[Page 2998]]

of the RPE as required by the Code, including subchapters K and S of 
chapter 1 of subtitle A of the Code. The RPE must also identify and 
report the associated W-2 wages to its partners or shareholders.
    (5) Non-duplication rule. Amounts that are treated as W-2 wages for 
a taxable year under any method cannot be treated as W-2 wages of any 
other taxable year. Also, an amount cannot be treated as W-2 wages by 
more than one trade or business (or aggregated trade or business).
    (c) UBIA of qualified property--(1) Qualified property--(i) In 
general. The term qualified property means, with respect to any trade 
or business (or aggregated trade or business) of an individual or RPE 
for a taxable year, tangible property of a character subject to the 
allowance for depreciation under section 167(a)--
    (A) Which is held by, and available for use in, the trade or 
business (or aggregated trade or business) at the close of the taxable 
year;
    (B) Which is used at any point during the taxable year in the trade 
or business's (or aggregated trade or business's) production of QBI; 
and
    (C) The depreciable period for which has not ended before the close 
of the individual's or RPE's taxable year.
    (ii) Improvements to qualified property. In the case of any 
addition to, or improvement of, qualified property that has already 
been placed in service by the individual or RPE, such addition or 
improvement is treated as separate qualified property first placed in 
service on the date such addition or improvement is placed in service 
for purposes of paragraph (c)(2) of this section.
    (iii) Adjustments under sections 734(b) and 743(b). Excess section 
743(b) basis adjustments as defined in paragraph (a)(3)(iv)(B) of this 
section are treated as qualified property. Otherwise, basis adjustments 
under sections 734(b) and 743(b) are not treated as qualified property.
    (iv) Property acquired at end of year. Property is not qualified 
property if the property is acquired within 60 days of the end of the 
taxable year and disposed of within 120 days of acquisition without 
having been used in a trade or business for at least 45 days prior to 
disposition, unless the taxpayer demonstrates that the principal 
purpose of the acquisition and disposition was a purpose other than 
increasing the section 199A deduction.
    (2) Depreciable period--(i) In general. The term depreciable period 
means, with respect to qualified property of a trade or business, the 
period beginning on the date the property was first placed in service 
by the individual or RPE and ending on the later of--
    (A) The date that is 10 years after such date; or
    (B) The last day of the last full year in the applicable recovery 
period that would apply to the property under section 168(c), 
regardless of any application of section 168(g).
    (ii) Additional first-year depreciation under section 168. The 
additional first-year depreciation deduction allowable under section 
168 (for example, under section 168(k) or (m)) does not affect the 
applicable recovery period under this paragraph for the qualified 
property.
    (iii) Qualified property acquired in transactions subject to 
section 1031 or section 1033. Solely for purposes of paragraph 
(c)(2)(i) of this section, the following rules apply to qualified 
property acquired in a like-kind exchange or in an involuntary 
conversion (replacement property).
    (A) Replacement property received in a section 1031 or 1033 
transaction. The date on which replacement property that is of like-
kind to relinquished property or is similar or related in service or 
use to involuntarily converted property was first placed in service by 
the individual or RPE is determined as follows--
    (1) For the portion of the individual's or RPE's UBIA, as defined 
in paragraph (c)(3) of this section, in such replacement property that 
does not exceed the individual's or RPE's UBIA in the relinquished 
property or involuntarily converted property, the date such portion in 
the replacement property was first placed in service by the individual 
or RPE is the date on which the relinquished property or involuntarily 
converted property was first placed in service by the individual or 
RPE; and
    (2) For the portion of the individual's or RPE's UBIA, as defined 
in paragraph (c)(3) of this section, in such replacement property that 
exceeds the individual's or RPE's UBIA in the relinquished property or 
involuntarily converted property, such portion in the replacement 
property is treated as separate qualified property that the individual 
or RPE first placed in service on the date on which the replacement 
property was first placed in service by the individual or RPE.
    (B) Other property received in a section 1031 or 1033 transaction. 
Other property, as defined in paragraph (c)(3)(ii) or (iii) of this 
section, that is qualified property is treated as separate qualified 
property that the individual or RPE first placed in service on the date 
on which such other property was first placed in service by the 
individual or RPE.
    (iv) Qualified property acquired in transactions described in 
section 168(i)(7)(B). If an individual or RPE acquires qualified 
property in a transaction described in section 168(i)(7)(B) (pertaining 
to treatment of transferees in certain nonrecognition transactions), 
the individual or RPE must determine the date on which the qualified 
property was first placed in service solely for purposes of paragraph 
(c)(2)(i) of this section as follows--
    (A) For the portion of the transferee's UBIA in the qualified 
property that does not exceed the transferor's UBIA in such property, 
the date such portion was first placed in service by the transferee is 
the date on which the transferor first placed the qualified property in 
service; and
    (B) For the portion of the transferee's UBIA in the qualified 
property that exceeds the transferor's UBIA in such property, such 
portion is treated as separate qualified property that the transferee 
first placed in service on the date of the transfer.
    (v) Excess section 743(b) basis adjustment. Solely for purposes of 
paragraph (c)(2)(i) of this section, an excess section 743(b) basis 
adjustment with respect to an item of partnership property that is 
qualified property is treated as being placed in service when the 
transfer of the partnership interest occurs, and the recovery period 
for such property is determined under Sec.  1.743-1(j)(4)(i)(B) with 
respect to positive basis adjustments and Sec.  1.743-1(j)(4)(ii)(B) 
with respect to negative basis adjustments.
    (3) Unadjusted basis immediately after acquisition--(i) In general. 
Except as provided in paragraphs (c)(3)(ii) through (v) of this 
section, the term unadjusted basis immediately after acquisition (UBIA) 
means the basis on the placed in service date of the property as 
determined under section 1012 or other applicable sections of chapter 1 
of the Code, including the provisions of subchapters O (relating to 
gain or loss on dispositions of property), C (relating to corporate 
distributions and adjustments), K (relating to partners and 
partnerships), and P (relating to capital gains and losses). UBIA is 
determined without regard to any adjustments described in section 
1016(a)(2) or (3), to any adjustments for tax credits claimed by the 
individual or RPE (for example, under section 50(c)), or to any 
adjustments for any portion of the basis which the individual or RPE 
has elected to treat as an expense (for example, under sections 179, 
179B, or 179C). However, UBIA does reflect the reduction in basis for 
the percentage of

[[Page 2999]]

the individual's or RPE's use of property for the taxable year other 
than in the trade or business.
    (ii) Qualified property acquired in a like-kind exchange--(A) In 
general. Solely for purposes of this section, if property that is 
qualified property (replacement property) is acquired in a like-kind 
exchange that qualifies for deferral of gain or loss under section 
1031, then the UBIA of such property is the same as the UBIA of the 
qualified property exchanged (relinquished property), decreased by 
excess boot or increased by the amount of money paid or the fair market 
value of property not of a like kind to the relinquished property 
(other property) transferred by the taxpayer to acquire the replacement 
property. If the taxpayer acquires more than one piece of qualified 
property as replacement property that is of a like kind to the 
relinquished property in an exchange described in section 1031, UBIA is 
apportioned between or among the qualified replacement properties in 
proportion to their relative fair market values. Other property 
received by the taxpayer in a section 1031 transaction that is 
qualified property has a UBIA equal to the fair market value of such 
other property.
    (B) Excess boot. For purposes of paragraph (c)(3)(ii)(A) of this 
section, excess boot is the amount of any money or the fair market 
value of other property received by the taxpayer in the exchange over 
the amount of appreciation in the relinquished property. Appreciation 
for this purpose is the excess of the fair market value of the 
relinquished property on the date of the exchange over the fair market 
value of the relinquished property on the date of the acquisition by 
the taxpayer.
    (iii) Qualified property acquired pursuant to an involuntary 
conversion--(A) In general. Solely for purposes of this section, if 
qualified property is compulsorily or involuntarily converted 
(converted property) within the meaning of section 1033 and qualified 
replacement property is acquired in a transaction that qualifies for 
deferral of gain under section 1033, then the UBIA of the replacement 
property is the same as the UBIA of the converted property, decreased 
by excess boot or increased by the amount of money paid or the fair 
market value of property not similar or related in service or use to 
the converted property (other property) transferred by the taxpayer to 
acquire the replacement property. If the taxpayer acquires more than 
one piece of qualified replacement property that meets the similar or 
related in service or use requirements in section 1033, UBIA is 
apportioned between the qualified replacement properties in proportion 
to their relative fair market values. Other property acquired by the 
taxpayer with the proceeds of an involuntary conversion that is 
qualified property has a UBIA equal to the fair market value of such 
other property.
    (B) Excess boot. For purposes of paragraph (c)(3)(iii)(A) of this 
section, excess boot is the amount of any money or the fair market 
value of other property received by the taxpayer in the conversion over 
the amount of appreciation in the converted property. Appreciation for 
this purpose is the excess of the fair market value of the converted 
property on the date of the conversion over the fair market value of 
the converted property on the date of the acquisition by the taxpayer.
    (iv) Qualified property acquired in transactions described in 
section 168(i)(7)(B). Solely for purposes of this section, if qualified 
property is acquired in a transaction described in section 168(i)(7)(B) 
(pertaining to treatment of transferees in certain nonrecognition 
transactions), the transferee's UBIA in the qualified property shall be 
the same as the transferor's UBIA in the property, decreased by the 
amount of money received by the transferor in the transaction or 
increased by the amount of money paid by the transferee to acquire the 
property in the transaction.
    (v) Qualified property acquired from a decedent. In the case of 
qualified property acquired from a decedent and immediately placed in 
service, the UBIA of the property will generally be the fair market 
value at the date of the decedent's death under section 1014. See 
section 1014 and the regulations thereunder. Solely for purposes of 
paragraph (c)(2)(i) of this section, a new depreciable period for the 
property commences as of the date of the decedent's death.
    (vi) Property acquired in a nonrecognition transaction with 
principal purpose of increasing UBIA. If qualified property is acquired 
in a transaction described in section 1031, 1033, or 168(i)(7) with the 
principal purpose of increasing the UBIA of the qualified property, the 
UBIA of the acquired qualified property is its basis as determined 
under relevant Code sections and not under the rules described in 
paragraphs (c)(3)(i) through (iv) of this section. For example, in a 
section 1031 transaction undertaken with the principal purpose of 
increasing the UBIA of the replacement property, the UBIA of the 
replacement property is its basis as determined under section 1031(d).
    (4) Examples. The provisions of this paragraph (c) are illustrated 
by the following examples:

     (i) Example 1. (A) On January 5, 2012, A purchases Real 
Property X for $1 million and places it in service in A's trade or 
business. A's trade or business is not an SSTB. A's basis in Real 
Property X under section 1012 is $1 million. Real Property X is 
qualified property within the meaning of section 199A(b)(6). As of 
December 31, 2018, A's basis in Real Property X, as adjusted under 
section 1016(a)(2) for depreciation deductions under section 168(a), 
is $821,550.
    (B) 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, regardless of any later depreciation deductions under 
section 168(a) and resulting basis adjustments under section 
1016(a)(2).
     (ii) Example 2. (A) The facts are the same as in Example 1 of 
paragraph (c)(4)(i) of this section, except that on January 15, 
2019, A enters into a like-kind exchange under section 1031 in which 
A exchanges Real Property X for Real Property Y. Real Property Y has 
a value of $1 million. No cash or other property is involved in the 
exchange. As of January 15, 2019, A's basis in Real Property X, as 
adjusted under section 1016(a)(2) for depreciation deductions under 
section 168(a), is $820,482.
    (B) A's UBIA in Real Property Y is $1 million as determined 
under paragraph (c)(3)(ii) of this section. Pursuant to paragraph 
(c)(2)(iii)(A) of this section, Real Property Y is first placed in 
service by A on January 5, 2012, which is the date on which Real 
Property X was first placed in service by A.
     (iii) Example 3. (A) The facts are the same as in Example 1 of 
paragraph (c)(4)(i) of this section, except that on January 15, 
2019, A enters into a like-kind exchange under section 1031, in 
which A exchanges Real Property X for Real Property Y. Real Property 
X has appreciated in value to $1.3 million, and Real Property Y also 
has a value of $1.3 million. No cash or other property is involved 
in the exchange. As of January 15, 2019, A's basis in Real Property 
X, as adjusted under section 1016(a)(2), is $820,482.
    (B) A's UBIA in Real Property Y is $1 million as determined 
under paragraph (c)(3)(ii) of this section. Pursuant to paragraph 
(c)(2)(iii)(A) of this section, Real Property Y is first placed in 
service by A on January 5, 2012, which is the date on which Real 
Property X was first placed in service by A.
     (iv) Example 4. (A) The facts are the same as in Example 1 of 
paragraph (c)(4)(i) of this section, except that on January 15, 
2019, A enters into a like-kind exchange under section 1031, in 
which A exchanges Real Property X for Real Property Y. Real Property 
X has appreciated in value to $1.3 million, but Real Property Y has 
a value of $1.5 million. A therefore adds $200,000 in cash to the 
exchange of Real Property X for Real Property Y. On January 15, 
2019, A places Real Property Y in service. As of January 15, 2019, 
A's basis in Real Property X, as

[[Page 3000]]

adjusted under section 1016(a)(2), is $820,482.
    (B) A's UBIA in Real Property Y is $1.2 million as determined 
under paragraph (c)(3)(ii) of this section ($1 million in UBIA from 
Real Property X plus $200,000 cash paid by A to acquire Real 
Property Y). Because the UBIA of Real Property Y exceeds the UBIA of 
Real Property X, Real Property Y is treated as being two separate 
qualified properties for purposes of applying paragraph 
(c)(2)(iii)(A) of this section. One property has a UBIA of $1 
million (the portion of A's UBIA of $1.2 million in Real Property Y 
that does not exceed A's UBIA of $1 million in Real Property X) and 
it is first placed in service by A on January 5, 2012, which is the 
date on which Real Property X was first placed in service by A. The 
other property has a UBIA of $200,000 (the portion of A's UBIA of 
$1.2 million in Real Property Y that exceeds A's UBIA of $1 million 
in Real Property X) and it is first placed in service by A on 
January 15, 2019, which is the date on which Real Property Y was 
first placed in service by A.
     (v) Example 5. (A) The facts are the same as in Example 1 of 
paragraph (c)(4)(i) of this section, except that on January 15, 
2019, A enters into a like-kind exchange under section 1031, in 
which A exchanges Real Property X for Real Property Y. Real Property 
X has appreciated in value to $1.3 million. Real Property Y has a 
fair market value of $1 million. As of January 15, 2019, A's basis 
in Real Property X, as adjusted under section 1016(a)(2), is 
$820,482. Pursuant to the exchange, A receives Real Property Y and 
$300,000 in cash.
    (B) A's UBIA in Real Property Y is $1 million as determined 
under paragraph (c)(3)(ii) of this section ($1 million in UBIA from 
Real Property X, less $0 excess boot ($300,000 cash received in the 
exchange over $300,000 in appreciation in Property X, which is equal 
to the excess of the $1.3 million fair market value of Property X on 
the date of the exchange over $1 million fair market value of 
Property X on the date of acquisition by the taxpayer)). Pursuant to 
paragraph (c)(2)(iii)(A) of this section, Real Property Y is first 
placed in service by A on January 5, 2012, which is the date on 
which Real Property X was first placed in service by A.
     (vi) Example 6. (A) The facts are the same as in Example 1 of 
paragraph (c)(4)(i) of this section, except that on January 15, 
2019, A enters into a like-kind exchange under section 1031, in 
which A exchanges Real Property X for Real Property Y. Real Property 
X has appreciated in value to $1.3 million. Real Property Y has a 
fair market value of $900,000. Pursuant to the exchange, A receives 
Real Property Y and $400,000 in cash. As of January 15, 2019, A's 
basis in Real Property X, as adjusted under section 1016(a)(2), is 
$820,482.
    (B) A's UBIA in Real Property Y is $900,000 as determined under 
paragraph (c)(3)(ii) of this section ($1 million in UBIA from Real 
Property X less $100,000 excess boot ($400,000 in cash received in 
the exchange over $300,000 in appreciation in Property X, which is 
equal to the excess of the $1.3 million fair market value of 
Property X on the date of the exchange over the $1 million fair 
market value of Property X on the date of acquisition by the 
taxpayer)). Pursuant to paragraph (c)(2)(iii)(A) of this section, 
Real Property Y is first placed in service by A on January 5, 2012, 
which is the date on which Real Property X was first placed in 
service by A.
     (vii) Example 7. (A) The facts are the same as in Example 1 of 
paragraph (c)(4)(i) of this section, except that on January 15, 
2019, A enters into a like-kind exchange under section 1031, in 
which A exchanges Real Property X for Real Property Y. Real Property 
X has declined in value to $900,000, and Real Property Y also has a 
value of $900,000. No cash or other property is involved in the 
exchange. As of January 15, 2019, A's basis in Real Property X, as 
adjusted under section 1016(a)(2), is $820,482.
    (B) Even though Real Property Y is worth only $900,000, A's UBIA 
in Real Property Y is $1 million as determined under paragraph 
(c)(3)(ii) of this section because no cash or other property was 
involved in the exchange. Pursuant to paragraph (c)(2)(iii)(A) of 
this section, Real Property Y is first placed in service by A on 
January 5, 2012, which is the date on which Real Property X was 
first placed in service by A.
     (viii) Example 8. (A) C operates a trade or business that is 
not an SSTB as a sole proprietorship. On January 5, 2011, C 
purchases Machinery Y for $10,000 and places it in service in C's 
trade or business. C's basis in Machinery Y under section 1012 is 
$10,000. Machinery Y is qualified property within the meaning of 
section 199A(b)(6). Assume that Machinery Y's recovery period under 
section 168(c) is 10 years, and C depreciates Machinery Y under the 
general depreciation system by using the straight-line depreciation 
method, a 10-year recovery period, and the half-year convention. As 
of December 31, 2018, C's basis in Machinery Y, as adjusted under 
section 1016(a)(2) for depreciation deductions under section 168(a), 
is $2,500. On January 1, 2019, C incorporates the sole 
proprietorship and elects to treat the newly formed entity as an S 
corporation for Federal income tax purposes. C contributes Machinery 
Y and all other assets of the trade or business to the S corporation 
in a non-recognition transaction under section 351. The S 
corporation immediately places all the assets in service.
    (B) For purposes of section 199A(b)(2)(B)(ii) and this section, 
C's UBIA of Machinery Y from 2011 through 2018 is its $10,000 cost 
basis under section 1012, regardless of any later depreciation 
deductions under section 168(a) and resulting basis adjustments 
under section 1016(a)(2). The S corporation's basis of Machinery Y 
is $2,500, the basis of the property under section 362 at the time 
the S corporation places the property in service. Pursuant to 
paragraph (c)(3)(iv) of this section, S corporation's UBIA of 
Machinery Y is $10,000, which is C's UBIA of Machinery Y. Pursuant 
to paragraph (c)(2)(iv)(A) of this section, for purposes of 
determining the depreciable period of Machinery Y, the S 
corporation's placed in service date of Machinery Y will be January 
5, 2011, which is the date C originally placed the property in 
service in 2011. Therefore, Machinery Y may be qualified property of 
the S corporation (assuming it continues to be used in the business) 
for 2019 and 2020 and will not be qualified property of the S 
corporation after 2020, because its depreciable period will have 
expired.
     (ix) Example 9. (A) LLC, a partnership, operates a trade or 
business that is not an SSTB. On January 5, 2011, LLC purchases 
Machinery Z for $30,000 and places it in service in LLC's trade or 
business. LLC's basis in Machinery Z under section 1012 is $30,000. 
Machinery Z is qualified property within the meaning of section 
199A(b)(6). Assume that Machinery Z's recovery period under section 
168(c) is 10 years, and LLC depreciates Machinery Z under the 
general depreciation system by using the straight-line depreciation 
method, a 10-year recovery period, and the half-year convention. As 
of December 31, 2018, LLC's basis in Machinery Z, as adjusted under 
section 1016(a)(2) for depreciation deductions under section 168(a), 
is $7,500. On January 1, 2019, LLC distributes Machinery Z to 
Partner A in full liquidation of Partner A's interest in LLC. 
Partner A's outside basis in LLC is $35,000.
    (B) For purposes of section 199A(b)(2)(B)(ii) and this section, 
LLC's UBIA of Machinery Z from 2011 through 2018 is its $30,000 cost 
basis under section 1012, regardless of any later depreciation 
deductions under section 168(a) and resulting basis adjustments 
under section 1016(a)(2). Prior to the distribution to Partner A, 
LLC's basis of Machinery Z is $7,500. Under section 732(b), Partner 
A's basis in Machinery Z is $35,000. Pursuant to paragraph 
(c)(3)(iv) of this section, upon distribution of Machinery Z, 
Partner A's UBIA of Machinery Z is $30,000, which was LLC's UBIA of 
Machinery Z.

    (d) Applicability date--(1) General rule. Except as provided in 
paragraph (d)(2) of this section, the provisions of this section apply 
to taxable years ending after February 8, 2019.
    (2) Exceptions--(i) Anti-abuse rules. The provisions of paragraph 
(c)(1)(iv) of this section apply to taxable years ending after December 
22, 2017.
    (ii) Non-calendar year RPE. For purposes of determining QBI, W-2 
wages, UBIA of qualified property, and the aggregate amount of 
qualified REIT dividends and qualified PTP income if an individual 
receives any of these items from an RPE with a taxable year that begins 
before January 1, 2018, and ends after December 31, 2017, such items 
are treated as having been incurred by the individual during the 
individual's taxable year in which or with which such RPE taxable year 
ends.

0
Par. 5. Section 1.199A-3 is added to read as follows:


Sec.  1.199A-3  Qualified business income, qualified REIT dividends, 
and qualified PTP income.

    (a) In general. This section provides rules on the determination of 
a trade or

[[Page 3001]]

business's qualified business income (QBI), as well as the 
determination of qualified real estate investment trust (REIT) 
dividends and qualified publicly traded partnership (PTP) income. The 
provisions of this section apply solely for purposes of section 199A of 
the Internal Revenue Code (Code). Paragraph (b) of this section 
provides rules for the determination of QBI. Paragraph (c) of this 
section provides rules for the determination of qualified REIT 
dividends and qualified PTP income. QBI must be determined and reported 
for each trade or business by the individual or relevant passthrough 
entity (RPE) that directly conducts the trade or business before 
applying the aggregation rules of Sec.  1.199A-4.
    (b) Definition of qualified business income--(1) In general. For 
purposes of this section, the term qualified business income or QBI 
means, for any taxable year, the net amount of qualified items of 
income, gain, deduction, and loss with respect to any trade or business 
of the taxpayer as described in paragraph (b)(2) of this section, 
provided the other requirements of this section and section 199A are 
satisfied (including, for example, the exclusion of income not 
effectively connected with a United States trade or business).
    (i) Section 751 gain. With respect to a partnership, if section 
751(a) or (b) applies, then gain or loss attributable to assets of the 
partnership giving rise to ordinary income under section 751(a) or (b) 
is considered attributable to the trades or businesses conducted by the 
partnership, and is taken into account for purposes of computing QBI.
    (ii) Guaranteed payments for the use of capital. Income 
attributable to a guaranteed payment for the use of capital is not 
considered to be attributable to a trade or business, and thus is not 
taken into account for purposes of computing QBI except to the extent 
properly allocable to a trade or business of the recipient. The 
partnership's deduction associated with the guaranteed payment will be 
taken into account for purposes of computing QBI if such deduction is 
properly allocable to the trade or business and is otherwise deductible 
for Federal income tax purposes.
    (iii) Section 481 adjustments. Section 481 adjustments (whether 
positive or negative) are taken into account for purposes of computing 
QBI to the extent that the requirements of this section and section 
199A are otherwise satisfied, but only if the adjustment arises in 
taxable years ending after December 31, 2017.
    (iv) Previously disallowed losses. Generally, previously disallowed 
losses or deductions (including under sections 465, 469, 704(d), and 
1366(d)) allowed in the taxable year are taken into account for 
purposes of computing QBI. These losses shall be used, for purposes of 
section 199A and these regulations, in order from the oldest to the 
most recent on a first-in, first-out (FIFO) basis. However, losses or 
deductions that were disallowed, suspended, limited, or carried over 
from taxable years ending before January 1, 2018 (including under 
sections 465, 469, 704(d), and 1366(d)), are not taken into account in 
a later taxable year for purposes of computing QBI.
    (v) Net operating losses. Generally, a net operating loss deduction 
under section 172 is not considered with respect to a trade or business 
and therefore, is not taken into account in computing QBI. However, an 
excess business loss under section 461(l) is treated as a net operating 
loss carryover to the following taxable year and is taken into account 
for purposes of computing QBI in the subsequent taxable year in which 
it is deducted.
    (vi) Other deductions. Generally, deductions attributable to a 
trade or business are taken into account for purposes of computing QBI 
to the extent that the requirements of section 199A and this section 
are otherwise satisfied. For purposes of section 199A only, deductions 
such as the deductible portion of the tax on self-employment income 
under section 164(f), the self-employed health insurance deduction 
under section 162(l), and the deduction for contributions to qualified 
retirement plans under section 404 are considered attributable to a 
trade or business to the extent that the individual's gross income from 
the trade or business is taken into account in calculating the 
allowable deduction, on a proportionate basis to the gross income 
received from the trade or business.
    (2) Qualified items of income, gain, deduction, and loss--(i) In 
general. The term qualified items of income, gain, deduction, and loss 
means items of gross income, gain, deduction, and loss to the extent 
such items are--
    (A) Effectively connected with the conduct of a trade or business 
within the United States (within the meaning of section 864(c), 
determined by substituting ``trade or business (within the meaning of 
section 199A)'' for ``nonresident alien individual or a foreign 
corporation'' or for ``a foreign corporation'' each place it appears); 
and
    (B) Included or allowed in determining taxable income for the 
taxable year.
    (ii) Items not taken into account. Notwithstanding paragraph 
(b)(2)(i) of this section and in accordance with section 199A(c)(3)(B) 
and (c)(4), the following items are not taken into account as qualified 
items of income, gain, deduction, or loss and thus are not included in 
determining QBI:
    (A) Any item of short-term capital gain, short-term capital loss, 
long-term capital gain, or long-term capital loss, including any item 
treated as one of such items under any other provision of the Code. 
This provision does not apply to the extent an item is treated as 
anything other than short-term capital gain, short-term capital loss, 
long-term capital gain, or long-term capital loss.
    (B) Any dividend, income equivalent to a dividend, or payment in 
lieu of dividends 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 interest income which is 
properly allocable to a trade or business. For purposes of section 199A 
and this section, interest income attributable to an investment of 
working capital, reserves, or similar accounts is not properly 
allocable to a trade or business.
    (D) Any item of gain or loss described in section 954(c)(1)(C) 
(transactions in commodities) or section 954(c)(1)(D) (excess foreign 
currency gains) applied in each case by substituting ``trade or 
business (within the meaning of section 199A)'' for ``controlled 
foreign corporation.''
    (E) Any item of income, gain, deduction, or loss described in 
section 954(c)(1)(F) (income from notional principal contracts) 
determined without regard to section 954(c)(1)(F)(ii) and other than 
items attributable to notional principal contracts entered into in 
transactions qualifying under section 1221(a)(7).
    (F) Any amount received from an annuity which is not received in 
connection with the trade or business.
    (G) Any qualified REIT dividends as defined in paragraph (c)(2) of 
this section or qualified PTP income as defined in paragraph (c)(3) of 
this section.
    (H) Reasonable compensation received by a shareholder from an S 
corporation. However, the S corporation's deduction for such reasonable 
compensation will reduce QBI if such deduction is properly allocable to 
the trade or business and is otherwise deductible for Federal income 
tax purposes.
    (I) Any guaranteed payment described in section 707(c) received by 
a partner for services rendered with respect to the trade or business, 
regardless of whether the partner is an individual or an RPE. However, 
the partnership's deduction

[[Page 3002]]

for such guaranteed payment will reduce QBI if such deduction is 
properly allocable to the trade or business and is otherwise deductible 
for Federal income tax purposes.
    (J) Any payment described in section 707(a) received by a partner 
for services rendered with respect to the trade or business, regardless 
of whether the partner is an individual or an RPE. However, the 
partnership's deduction for such payment will reduce QBI if such 
deduction is properly allocable to the trade or business and is 
otherwise deductible for Federal income tax purposes.
    (3) Commonwealth of Puerto Rico. For the purposes of determining 
QBI, the term United States includes the Commonwealth of Puerto Rico in 
the case of any taxpayer with QBI for any taxable year from sources 
within the Commonwealth of Puerto Rico, if all of such receipts are 
taxable under section 1 for such taxable year. This paragraph (b)(3) 
only applies as provided in section 199A(f)(1)(C).
    (4) Wages. Expenses for all wages paid (or incurred in the case of 
an accrual method taxpayer) must be taken into account in computing QBI 
(if the requirements of this section and section 199A are satisfied) 
regardless of the application of the W-2 wage limitation described in 
Sec.  1.199A-1(d)(2)(iv).
    (5) Allocation of items among directly-conducted trades or 
businesses. If an individual or an RPE directly conducts multiple 
trades or businesses, and has items of QBI that are properly 
attributable to more than one trade or business, the individual or RPE 
must allocate those items among the several trades or businesses to 
which they are attributable using a reasonable method based on all the 
facts and circumstances. The individual or RPE may use a different 
reasonable method with respect to different items of income, gain, 
deduction, and loss. The chosen reasonable method for each item must be 
consistently applied from one taxable year to another and must clearly 
reflect the income and expenses of each trade or business. The overall 
combination of methods must also be reasonable based on all facts and 
circumstances. The books and records maintained for a trade or business 
must be consistent with any allocations under this paragraph (b)(5).
    (c) Qualified REIT Dividends and Qualified PTP Income--(1) In 
general. Qualified REIT dividends and qualified PTP income are the sum 
of qualified REIT dividends as defined in paragraph (c)(2) of this 
section earned directly or through an RPE and the net amount of 
qualified PTP income as defined in paragraph (c)(3) of this section 
earned directly or through an RPE.
    (2) Qualified REIT dividend--(i) The term qualified REIT dividend 
means any dividend from a REIT received during the taxable year which--
    (A) Is not a capital gain dividend, as defined in section 
857(b)(3); and
    (B) Is not qualified dividend income, as defined in section 
1(h)(11).
    (ii) The term qualified REIT dividend does not include any REIT 
dividend received with respect to any share of REIT stock--
    (A) That is held by the shareholder for 45 days or less (taking 
into account the principles of section 246(c)(3) and (4)) during the 
91-day period beginning on the date which is 45 days before the date on 
which such share becomes ex-dividend with respect to such dividend; or
    (B) To the extent that the shareholder is under an obligation 
(whether pursuant to a short sale or otherwise) to make related 
payments with respect to positions in substantially similar or related 
property.
    (3) Qualified PTP income--(i) In general. The term qualified PTP 
income means the sum of--
    (A) The net amount of such taxpayer's allocable share of income, 
gain, deduction, and loss from a PTP as defined in section 7704(b) that 
is not taxed as a corporation under section 7704(a); plus
    (B) Any gain or loss attributable to assets of the PTP giving rise 
to ordinary income under section 751(a) or (b) that is considered 
attributable to the trades or businesses conducted by the partnership.
    (ii) Special rules. The rules applicable to the determination of 
QBI described in paragraph (b) of this section also apply to the 
determination of a taxpayer's allocable share of income, gain, 
deduction, and loss from a PTP. An individual's allocable share of 
income from a PTP, and any section 751 gain or loss is qualified PTP 
income only to the extent the items meet the qualifications of section 
199A and this section, including the requirement that the item is 
included or allowed in determining taxable income for the taxable year, 
and the requirement that the item be effectively connected with the 
conduct of a trade or business within the United States. For example, 
if an individual owns an interest in a PTP, and for the taxable year is 
allocated a distributive share of net loss which is disallowed under 
the passive activity rules of section 469, such loss is not taken into 
account for purposes of section 199A. The specified service trade or 
business limitations described in Sec. Sec.  1.199A-1(d)(3) and 1.199A-
5 also apply to income earned from a PTP. Furthermore, each PTP is 
required to determine its qualified PTP income for each trade or 
business and report that information to its owners as described in 
Sec.  1.199A-6(b)(3).
    (d) [Reserved]
    (e) Applicability date--(1) General rule. Except as provided in 
paragraph (e)(2) of this section, the provisions of this section apply 
to taxable years ending after February 8, 2019.
    (2) Exceptions--(i) Anti-abuse rules. The provisions of paragraph 
(c)(2)(ii) of this section apply to taxable years ending after December 
22, 2017.
    (ii) Non-calendar year RPE. For purposes of determining QBI, W-2 
wages, UBIA of qualified property, and the aggregate amount of 
qualified REIT dividends and qualified PTP income if an individual 
receives any of these items from an RPE with a taxable year that begins 
before January 1, 2018, and ends after December 31, 2017, such items 
are treated as having been incurred by the individual during the 
individual's taxable year in which or with which such RPE taxable year 
ends.

0
Par. 6. Section 1.199A-4 is added to read as follows:


Sec.  1.199A-4   Aggregation.

    (a) Scope and purpose. An individual or RPE may be engaged in more 
than one trade or business. Except as provided in this section, each 
trade or business is a separate trade or business for purposes of 
applying the limitations described in Sec.  1.199A-1(d)(2)(iv). This 
section sets forth rules to allow individuals and RPEs to aggregate 
trades or businesses, treating the aggregate as a single trade or 
business for purposes of applying the limitations described in Sec.  
1.199A-1(d)(2)(iv). Trades or businesses may be aggregated only to the 
extent provided in this section, but aggregation by taxpayers is not 
required.
    (b) Aggregation rules--(1) General rule. Trades or businesses may 
be aggregated only if an individual or RPE can demonstrate that--
    (i) The same person or group of persons, directly or by attribution 
under sections 267(b) or 707(b), owns 50 percent or more of each trade 
or business to be aggregated, meaning in the case of such trades or 
businesses owned by an S corporation, 50 percent or more of the issued 
and outstanding shares of the corporation, or, in the case of such 
trades or businesses owned by a partnership, 50 percent or more of the 
capital or profits in the partnership;
    (ii) The ownership described in paragraph (b)(1)(i) of this section 
exists for a majority of the taxable year,

[[Page 3003]]

including the last day of the taxable year, in which the items 
attributable to each trade or business to be aggregated are included in 
income;
    (iii) All of the items attributable to each trade or business to be 
aggregated are reported on returns with the same taxable year, not 
taking into account short taxable years;
    (iv) None of the trades or businesses to be aggregated is a 
specified service trade or business (SSTB) as defined in Sec.  1.199A-
5; and
    (v) The trades or businesses to be aggregated satisfy at least two 
of the following factors (based on all of the facts and circumstances):
    (A) The trades or businesses provide products, property, or 
services that are the same or customarily offered together.
    (B) The trades or businesses share facilities or share significant 
centralized business elements, such as personnel, accounting, legal, 
manufacturing, purchasing, human resources, or information technology 
resources.
    (C) The trades or businesses are operated in coordination with, or 
reliance upon, one or more of the businesses in the aggregated group 
(for example, supply chain interdependencies).
    (2) Operating rules--(i) Individuals. An individual may aggregate 
trades or businesses operated directly or through an RPE to the extent 
an aggregation is not inconsistent with the aggregation of an RPE. If 
an individual aggregates multiple trades or businesses under paragraph 
(b)(1) of this section, QBI, W-2 wages, and UBIA of qualified property 
must be combined for the aggregated trades or businesses for purposes 
of applying the W-2 wage and UBIA of qualified property limitations 
described in Sec.  1.199A-1(d)(2)(iv). An individual may not subtract 
from the trades or businesses aggregated by an RPE but may aggregate 
additional trades or businesses with the RPE's aggregation if the rules 
of this section are otherwise satisfied.
    (ii) RPEs. An RPE may aggregate trades or businesses operated 
directly or through a lower-tier RPE to the extent an aggregation is 
not inconsistent with the aggregation of a lower-tier RPE. If an RPE 
itself does not aggregate, multiple owners of an RPE need not aggregate 
in the same manner. If an RPE aggregates multiple trades or businesses 
under paragraph (b)(1) of this section, the RPE must compute and report 
QBI, W-2 wages, and UBIA of qualified property for the aggregated trade 
or business under the rules described in Sec.  1.199A-6(b). An RPE may 
not subtract from the trades or businesses aggregated by a lower-tier 
RPE but may aggregate additional trades or businesses with a lower-tier 
RPE's aggregation if the rules of this section are otherwise satisfied.
    (c) Reporting and consistency requirements--(1) Individuals. Once 
an individual chooses to aggregate two or more trades or businesses, 
the individual must consistently report the aggregated trades or 
businesses in all subsequent taxable years. A failure to aggregate will 
not be considered to be an aggregation for purposes of this rule. An 
individual that fails to aggregate may not aggregate trades or 
businesses on an amended return (other than an amended return for the 
2018 taxable year). However, an individual may add a newly created or 
newly acquired (including through non-recognition transfers) trade or 
business to an existing aggregated trade or business (including the 
aggregated trade or business of an RPE) if the requirements of 
paragraph (b)(1) of this section are satisfied. In a subsequent year, 
if there is a significant change in facts and circumstances such that 
an individual's prior aggregation of trades or businesses no longer 
qualifies for aggregation under the rules of this section, then the 
trades or businesses will no longer be aggregated within the meaning of 
this section, and the individual must reapply the rules in paragraph 
(b)(1) of this section to determine a new permissible aggregation (if 
any). An individual also must report aggregated trades or businesses of 
an RPE in which the individual holds a direct or indirect interest.
    (2) Individual disclosure--(i) Required annual disclosure. For each 
taxable year, individuals must attach a statement to their returns 
identifying each trade or business aggregated under paragraph (b)(1) of 
this section. The statement must contain--
    (A) A description of each trade or business;
    (B) The name and EIN of each entity in which a trade or business is 
operated;
    (C) Information identifying any trade or business that was formed, 
ceased operations, was acquired, or was disposed of during the taxable 
year;
    (D) Information identifying any aggregated trade or business of an 
RPE in which the individual holds an ownership interest; and
    (E) Such other information as the Commissioner may require in 
forms, instructions, or other published guidance.
    (ii) Failure to disclose. If an individual fails to attach the 
statement required in paragraph (c)(2)(i) of this section, the 
Commissioner may disaggregate the individual's trades or businesses. 
The individual may not aggregate trades or businesses that are 
disaggregated by the Commissioner for the subsequent three taxable 
years.
    (3) RPEs. Once an RPE chooses to aggregate two or more trades or 
businesses, the RPE must consistently report the aggregated trades or 
businesses in all subsequent taxable years. A failure to aggregate will 
not be considered to be an aggregation for purposes of this rule. An 
RPE that fails to aggregate may not aggregate trades or businesses on 
an amended return (other than an amended return for the 2018 taxable 
year). However, an RPE may add a newly created or newly acquired 
(including through non-recognition transfers) trade or business to an 
existing aggregated trade or business (other than the aggregated trade 
or business of a lower-tier RPE) if the requirements of paragraph 
(b)(1) of this section are satisfied. In a subsequent year, if there is 
a significant change in facts and circumstances such that an RPE's 
prior aggregation of trades or businesses no longer qualifies for 
aggregation under the rules of this section, then the trades or 
businesses will no longer be aggregated within the meaning of this 
section, and the RPE must reapply the rules in paragraph (b)(1) of this 
section to determine a new permissible aggregation (if any). An RPE 
also must report aggregated trades or businesses of a lower-tier RPE in 
which the RPE holds a direct or indirect interest.
    (4) RPE disclosure--(i) Required annual disclosure. For each 
taxable year, RPEs (including each RPE in a tiered structure) must 
attach a statement to each owner's Schedule K-1 identifying each trade 
or business aggregated under paragraph (b)(1) of this section. The 
statement must contain--
    (A) A description of each trade or business;
    (B) The name and EIN of each entity in which a trade or business is 
operated;
    (C) Information identifying any trade or business that was formed, 
ceased operations, was acquired, or was disposed of during the taxable 
year;
    (D) Information identifying any aggregated trade or business of an 
RPE in which the RPE holds an ownership interest; and
    (E) Such other information as the Commissioner may require in 
forms, instructions, or other published guidance.
    (ii) Failure to disclose. If an RPE fails to attach the statement 
required in paragraph (c)(2)(i) of this section, the Commissioner may 
disaggregate the RPE's trades or businesses. The RPE may not aggregate 
trades or businesses

[[Page 3004]]

that are disaggregated by the Commissioner for the subsequent three 
taxable years.
    (d) Examples. The following examples illustrate the principles of 
this section. For purposes of these examples, assume the taxpayer is a 
United States citizen, all individuals and RPEs use a calendar taxable 
year, there are no ownership changes during the taxable year, all 
trades or businesses satisfy the requirements under section 162, all 
tax items are effectively connected to a trade or business within the 
United States within the meaning of section 864(c), and none of the 
trades or businesses is an SSTB within the meaning of Sec.  1.199A-5. 
Except as otherwise specified, a single capital letter denotes an 
individual taxpayer.

     (1) Example 1--(i) Facts. A wholly owns and operates a catering 
business and a restaurant through separate disregarded entities. The 
catering business and the restaurant share centralized purchasing to 
obtain volume discounts and a centralized accounting office that 
performs all of the bookkeeping, tracks and issues statements on all 
of the receivables, and prepares the payroll for each business. A 
maintains a website and print advertising materials that reference 
both the catering business and the restaurant. A uses the restaurant 
kitchen to prepare food for the catering business. The catering 
business employs its own staff and owns equipment and trucks that 
are not used or associated with the restaurant.
    (ii) Analysis. Because the restaurant and catering business are 
held in disregarded entities, A will be treated as operating each of 
these businesses directly and thereby satisfies paragraph (b)(1)(i) 
of this section. Under paragraph (b)(1)(v) of this section, A 
satisfies the following factors: Paragraph (b)(1)(v)(A) of this 
section is met as both businesses offer prepared food to customers; 
and paragraph (b)(1)(v)(B) of this section is met because the two 
businesses share the same kitchen facilities in addition to 
centralized purchasing, marketing, and accounting. Having satisfied 
paragraphs (b)(1)(i) through (v) of this section, A may treat the 
catering business and the restaurant as a single trade or business 
for purposes of applying Sec.  1.199A-1(d).
     (2) Example 2--(i) Facts. Assume the same facts as in Example 1 
of paragraph (d)(1) of this section, but the catering and restaurant 
businesses are owned in separate partnerships and A, B, C, and D 
each own a 25% interest in each of the two partnerships. A, B, C, 
and D are unrelated.
    (ii) Analysis. Because under paragraph (b)(1)(i) of this section 
A, B, C, and D together own more than 50% of each of the two 
partnerships, they may each treat the catering business and the 
restaurant as a single trade or business for purposes of applying 
Sec.  1.199A-1(d).
     (3) Example 3--(i) Facts. W owns a 75% interest in S1, an S 
corporation, and a 75% interest in PRS, a partnership. S1 
manufactures clothing and PRS is a retail pet food store. W manages 
S1 and PRS.
    (ii) Analysis. W owns more than 50% of the stock of S1 and more 
than 50% of PRS thereby satisfying paragraph (b)(1)(i) of this 
section. Although W manages both S1 and PRS, W is not able to 
satisfy the requirements of paragraph (b)(1)(v) of this section as 
the two businesses do not provide goods or services that are the 
same or customarily offered together; there are no significant 
centralized business elements; and no facts indicate that the 
businesses are operated in coordination with, or reliance upon, one 
another. W must treat S1 and PRS as separate trades or businesses 
for purposes of applying Sec.  1.199A-1(d).
     (4) Example 4--(i) Facts. E owns a 60% interest in each of four 
partnerships (PRS1, PRS2, PRS3, and PRS4). Each partnership operates 
a hardware store. A team of executives oversees the operations of 
all four of the businesses and controls the policy decisions 
involving the business as a whole. Human resources and accounting 
are centralized for the four businesses. E reports PRS1, PRS3, and 
PRS4 as an aggregated trade or business under paragraph (b)(1) of 
this section and reports PRS2 as a separate trade or business. Only 
PRS2 generates a net taxable loss.
    (ii) Analysis. E owns more than 50% of each partnership thereby 
satisfying paragraph (b)(1)(i) of this section. Under paragraph 
(b)(1)(v) of this section, the following factors are satisfied: 
Paragraph (b)(1)(v)(A) of this section because each partnership 
operates a hardware store; and paragraph (b)(1)(v)(B) of this 
section because the businesses share accounting and human resource 
functions. E's decision to aggregate only PRS1, PRS3, and PRS4 into 
a single trade or business for purposes of applying Sec.  1.199A-
1(d) is permissible. The loss from PRS2 will be netted against the 
aggregate profits of PRS1, PRS3, and PRS4 pursuant to Sec.  1.199A-
1(d)(2)(iii).
     (5) Example 5--(i) Facts. Assume the same facts as Example 4 of 
paragraph (d)(4) of this section, and that F owns a 10% interest in 
PRS1, PRS2, PRS3, and PRS4.
    (ii) Analysis. Because under paragraph (b)(1)(i) of this section 
E owns more than 50% of the four partnerships, F may aggregate PRS 
1, PRS2, PRS3, and PRS4 as a single trade or business for purposes 
of applying Sec.  1.199A-1(d), provided that F can demonstrate that 
the ownership test is met by E.
     (6) Example 6--(i) Facts. D owns 75% of the stock of S1, S2, 
and S3, each of which is an S corporation. Each S corporation 
operates a grocery store in a separate state. S1 and S2 share 
centralized purchasing functions to obtain volume discounts and a 
centralized accounting office that performs all of the bookkeeping, 
tracks and issues statements on all of the receivables, and prepares 
the payroll for each business. S3 is operated independently from the 
other businesses.
    (ii) Analysis. D owns more than 50% of the stock of each S 
corporation thereby satisfying paragraph (b)(1)(i) of this section. 
Under paragraph (b)(1)(v) of this section, the grocery stores 
satisfy paragraph (b)(1)(v)(A) of this section because they are in 
the same trade or business. Only S1 and S2 satisfy paragraph 
(b)(1)(v)(B) of this section because of their centralized purchasing 
and accounting offices. D is only able to show that the requirements 
of paragraph (b)(1)(v)(B) of this section are satisfied for S1 and 
S2; therefore, D only may aggregate S1 and S2 into a single trade or 
business for purposes of Sec.  1.199A-1(d). D must report S3 as a 
separate trade or business for purposes of applying Sec.  1.199A-
1(d).
     (7) Example 7--(i) Facts. Assume the same facts as Example 6 of 
paragraph (d)(6) of this section except each store is independently 
operated and S1 and S2 do not have centralized purchasing or 
accounting functions.
    (ii) Analysis. Although the stores provide the same products and 
services within the meaning of paragraph (b)(1)(v)(A) of this 
section, D cannot show that another factor under paragraph (b)(1)(v) 
of this section is present. Therefore, D must report S1, S2, and S3 
as separate trades or businesses for purposes of applying Sec.  
1.199A-1(d).
     (8) Example 8--(i) Facts. G owns 80% of the stock in S1, an S 
corporation and 80% of LLC1 and LLC2, each of which is a partnership 
for Federal tax purposes. LLC1 manufactures and supplies all of the 
widgets sold by LLC2. LLC2 operates a retail store that sells LLC1's 
widgets. S1 owns the real property leased to LLC1 and LLC2 for use 
by the factory and retail store. The entities share common 
advertising and management.
    (ii) Analysis. G owns more than 50% of the stock of S1 and more 
than 50% of LLC1 and LLC2 thus satisfying paragraph (b)(1)(i) of 
this section. LLC1, LLC2, and S1 share significant centralized 
business elements and are operated in coordination with, or in 
reliance upon, one or more of the businesses in the aggregated 
group. G can treat the business operations of LLC1 and LLC2 as a 
single trade or business for purposes of applying Sec.  1.199A-1(d). 
S1 is eligible to be included in the aggregated group because it 
leases property to a trade or business within the aggregated trade 
or business as described in Sec.  1.199A-1(b)(14) and meets the 
requirements of paragraph (b)(1) of this section.
     (9) Example 9--(i) Facts. Same facts as Example 8 of paragraph 
(d)(8) of this section, except G owns 80% of the stock in S1 and 20% 
of 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. B does 
not own an interest in S1 or LLC1, and M does not own an interest in 
S1 or LLC2.
    (ii) Analysis. Under the rules in paragraph (b)(1) of this 
section, B and M's interest in LLC2 and LLC1, respectively, are 
attributable to G and G is treated as owning a majority interest in 
LLC2 and LLC1; G thus satisfies paragraph (b)(1)(i) of this section. 
G may aggregate his interests in LLC1, LLC2, and S1 as a single 
trade or business for purposes of applying Sec.  1.199A-1(d). Under 
paragraph (b)(1) of this section, S1 is eligible to be included in 
the aggregated group because it leases property to a trade or 
business within the aggregated trade or business as described in 
Sec.  1.199A-1(b)(14) and meets the requirements of paragraph (b)(1) 
of this section.
     (10) Example 10--(i) Facts. F owns a 75% interest and G owns a 
5% interest in five

[[Page 3005]]

partnerships (PRS1-PRS5). H owns a 10% interest in PRS1 and PRS2. 
Each partnership operates a restaurant and each restaurant 
separately constitutes a trade or business for purposes of section 
162. G is the executive chef of all of the restaurants and as such 
he creates the menus and orders the food supplies.
    (ii) Analysis. F owns more than 50% of the partnerships thereby 
satisfying paragraph (b)(1)(i) of this section. Under paragraph 
(b)(1)(v) of this section, the restaurants satisfy paragraph 
(b)(1)(v)(A) of this section because they are in the same trade or 
business, and paragraph (b)(1)(v)(B) of this section is satisfied as 
G is the executive chef of all of the restaurants and the businesses 
share a centralized function for ordering food and supplies. F can 
show the requirements under paragraph (b)(1) of this section are 
satisfied as to all of the restaurants. Because F owns a majority 
interest in each of the partnerships, G can demonstrate that 
paragraph (b)(1)(i) of this section is satisfied. G can also 
aggregate all five restaurants into a single trade or business for 
purposes of applying Sec.  1.199A-1(d). H, however, only owns an 
interest in PRS1 and PRS2. Like G, H satisfies paragraph (b)(1)(i) 
of this section because F owns a majority interest. H can, 
therefore, aggregate PRS1 and PRS2 into a single trade or business 
for purposes of applying Sec.  1.199A-1(d).
     (11) Example 11--(i) Facts. H, J, K, and L own interests in 
PRS1 and PRS2, each a partnership, and S1 and S2, each an S 
corporation. H, J, K, and L also own interests in C, an entity 
taxable as a C corporation. H owns 30%, J owns 20%, K owns 5%, and L 
owns 45% of each of the five entities. All of the entities satisfy 2 
of the 3 factors under paragraph (b)(1)(v) of this section. For 
purposes of section 199A the taxpayers report the following 
aggregated trades or businesses: H aggregates PRS1 and S1 together 
and aggregates PRS2 and S2 together; J aggregates PRS1, S1 and S2 
together and reports PRS2 separately; K aggregates PRS1 and PRS2 
together and aggregates S1 and S2 together; and L aggregates S1, S2, 
and PRS2 together and reports PRS1 separately. C cannot be 
aggregated.
    (ii) Analysis. Under paragraph (b)(1)(i) of this section, 
because H, J, and K together own a majority interest in PRS1, PRS2, 
S1, and S2, H, J, K, and L are permitted to aggregate under 
paragraph (b)(1) of this section. Further, the aggregations reported 
by the taxpayers are permitted, but not required for each of H, J, 
K, and L. C's income is not eligible for the section 199A deduction 
and it cannot be aggregated for purposes of applying Sec.  1.199A-
1(d).
     (12) Example 12--(i) Facts. L owns 60% of PRS1, a partnership, 
a business that sells non-food items to grocery stores. L also owns 
55% of PRS2, a partnership, which owns and operates a distribution 
trucking business. The predominant portion of PRS2's business is 
transporting goods for PRS1.
    (ii) Analysis. L is able to meet paragraph (b)(1)(i) of this 
section as the majority owner of PRS1 and PRS2. Under paragraph 
(b)(1)(v) of this section, L is only able to show the operations of 
PRS1 and PRS2 are operated in reliance of one another under 
paragraph (b)(1)(v)(C) of this section. For purposes of applying 
Sec.  1.199A-1(d), L must treat PRS1 and PRS2 as separate trades or 
businesses.
     (13) Example 13--(i) Facts. C owns a majority interest in a 
sailboat racing team and also owns an interest in PRS1 which 
operates a marina. PRS1 is a trade or business under section 162, 
but the sailboat racing team is not a trade or business within the 
meaning of section 162.
    (ii) Analysis. C has only one trade or business for purposes of 
section 199A and, therefore, cannot aggregate the interest in the 
racing team with PRS1 under paragraph (b)(1) of this section.
     (14) Example 14--(i) Facts. Trust wholly owns LLC1, LLC2, and 
LLC3. LLC1 operates a trucking company that delivers lumber and 
other supplies sold by LLC2. LLC2 operates a lumber yard and 
supplies LLC3 with building materials. LLC3 operates a construction 
business. LLC1, LLC2, and LLC3 have a centralized human resources 
department, payroll, and accounting department.
    (ii) Analysis. Because Trust owns 100% of the interests in LLC1, 
LLC2, and LLC3, Trust satisfies paragraph (b)(1)(i) of this section. 
Trust can also show that it satisfies paragraph (b)(1)(v)(B) of this 
section as the trades or businesses have a centralized human 
resources department, payroll, and accounting department. Trust also 
can show is meets paragraph (b)(1)(v)(C) of this section as the 
trades or businesses are operated in coordination, or reliance upon, 
one or more in the aggregated group. Trust can aggregate LLC1, LLC2, 
and LLC3 for purposes of applying Sec.  1.199A-1(d).
     (15) Example 15--(i) Facts. PRS1, a partnership, directly 
operates a food service trade or business and owns 60% of PRS2, 
which directly operates a movie theater trade or business and a food 
service trade or business. PRS2's movie theater and food service 
businesses operate in coordination with, or reliance upon, one 
another and share a centralized human resources department, payroll, 
and accounting department. PRS1's and PRS2's food service businesses 
provide products and services that are the same and share 
centralized purchasing and shipping to obtain volume discounts.
    (ii) Analysis. PRS2 may aggregate its movie theater and food 
service businesses. Paragraph (b)(1)(v) of this section is satisfied 
because the businesses operate in coordination with one another and 
share centralized business elements. If PRS does aggregate the two 
businesses, PRS1 may not aggregate its food service business with 
PRS2's aggregated trades or businesses. Because PRS1 owns more than 
50% of PRS2, thereby satisfying paragraph (b)(1)(i) of this section, 
PRS1 may aggregate its food service businesses with PRS2's food 
service business if PRS2 has not aggregated its movie theater and 
food service businesses. Paragraph (b)(1)(v) of this section is 
satisfied because the businesses provide the same products and 
services and share centralized business elements. Under either 
alternative, PRS1's food service business and PRS2's movie theater 
cannot be aggregated because there are no factors in paragraph 
(b)(1)(v) of this section present between the businesses.
     (16) Example 16--(i) Facts. PRS1, a partnership, owns 60% of a 
commercial rental office building in state A, and 80% of a 
commercial rental office building in state B. Both commercial rental 
office building operations share centralized accounting, legal, and 
human resource functions. PRS1 treats the two commercial rental 
office buildings as an aggregated trade or business under paragraph 
(b)(1) of this section.
    (ii) Analysis. PRS1 owns more than 50% of each trade or business 
thereby satisfying paragraph (b)(1)(i) of this section. Under 
paragraph (b)(1)(v) of this section, PRS1 may aggregate its 
commercial rental office buildings because the businesses provide 
the same type of property and share accounting, legal, and human 
resource functions.
     (17) Example 17--(i) Facts. S, an S corporation owns 100% of 
the interests in a residential condominium building and 100% of the 
interests in a commercial rental office building. Both building 
operations share centralized accounting, legal, and human resource 
functions.
    (ii) Analysis. S owns more than 50% of each trade or business 
thereby satisfying paragraph (b)(1)(i) of this section. Although 
both businesses share significant centralized business elements, S 
cannot show that another factor under paragraph (b)(1)(v) of this 
section is present because the two building operations are not of 
the same type of property. S must treat the residential condominium 
building and the commercial rental office building as separate 
trades or businesses for purposes of applying Sec.  1.199A-1(d).
     (18) Example 18--(i) Facts. M owns 75% of a residential 
apartment building. M also owns 80% of PRS2. PRS2 owns 80% of the 
interests in a residential condominium building and 80% of the 
interests in a residential apartment building. PRS2's residential 
condominium building and residential apartment building operations 
share centralized back office functions and management. M's 
residential apartment building and PRS2's residential condominium 
and apartment building operate in coordination with each other in 
renting apartments to tenants.
    (ii) Analysis. PRS2 may aggregate its residential condominium 
and residential apartment building operations. PRS2 owns more than 
50% of each trade or business thereby satisfying paragraph (b)(1)(i) 
of this section. Paragraph (b)(1)(v) of this section is satisfied 
because the businesses are of the same type of property and share 
centralized back office functions and management. M may also add its 
residential apartment building operations to PRS2's aggregated 
residential condominium and apartment building operations. M owns 
more than 50% of each trade or business thereby satisfying paragraph 
(b)(1)(i) of this section. Paragraph (b)(1)(v) of this section is 
also satisfied because the businesses operate in coordination with 
each other.

    (e) Applicability date--(1) General rule. Except as provided in 
paragraph (e)(2) of this section, the provisions of this section apply 
to taxable years ending after February 8, 2019.

[[Page 3006]]

    (2) Exception for non-calendar year RPE. For purposes of 
determining QBI, W-2 wages, and UBIA of qualified property, and the 
aggregate amount of qualified REIT dividends and qualified PTP income, 
if an individual receives any of these items from an RPE with a taxable 
year that begins before January 1, 2018, and ends after December 31, 
2017, such items are treated as having been incurred by the individual 
during the individual's taxable year in which or with which such RPE 
taxable year ends.

0
Par. 7. Section 1.199A-5 is added to read as follows:


Sec.  1.199A-5  Specified service trades or businesses and the trade or 
business of performing services as an employee.

    (a) Scope and effect--(1) Scope. This section provides guidance on 
specified service trades or businesses (SSTBs) and the trade or 
business of performing services as an employee. This paragraph (a) 
describes the effect of a trade or business being an SSTB and the trade 
or business of performing services as an employee. Paragraph (b) of 
this section provides definitional guidance on SSTBs. Paragraph (c) of 
this section provides special rules related to SSTBs. Paragraph (d) of 
this section provides guidance on the trade or business of performing 
services as an employee. The provisions of this section apply solely 
for purposes of section 199A of the Internal Revenue Code (Code).
    (2) Effect of being an SSTB. If a trade or business is an SSTB, no 
qualified business income (QBI), W-2 wages, or unadjusted basis 
immediately after acquisition (UBIA) of qualified property from the 
SSTB may be taken into account by any individual whose taxable income 
exceeds the phase-in range as defined in Sec.  1.199A-1(b)(4), even if 
the item is derived from an activity that is not itself a specified 
service activity. The SSTB limitation also applies to income earned 
from a publicly traded partnership (PTP). If a trade or business 
conducted by a relevant passthrough entity (RPE) or PTP is an SSTB, 
this limitation applies to any direct or indirect individual owners of 
the business, regardless of whether the owner is passive or 
participated in any specified service activity. However, the SSTB 
limitation does not apply to individuals with taxable income below the 
threshold amount as defined in Sec.  1.199A-1(b)(12). A phase-in rule, 
provided in Sec.  1.199A-1(d)(2), applies to individuals with taxable 
income within the phase-in range, allowing them to take into account a 
certain ``applicable percentage'' of QBI, W-2 wages, and UBIA of 
qualified property from an SSTB. The phase-in rule also applies to 
income earned from a PTP. A direct or indirect owner of a trade or 
business engaged in the performance of a specified service is engaged 
in the performance of the specified service for purposes of section 
199A and this section, regardless of whether the owner is passive or 
participated in the specified service activity.
    (3) Trade or business of performing services as an employee. The 
trade or business of performing services as an employee is not a trade 
or business for purposes of section 199A and the regulations 
thereunder. Therefore, no items of income, gain, deduction, or loss 
from the trade or business of performing services as an employee 
constitute QBI within the meaning of section 199A and Sec.  1.199A-3. 
No taxpayer may claim a section 199A deduction for wage income, 
regardless of the amount of taxable income.
    (b) Definition of specified service trade or business. Except as 
provided in paragraph (c)(1) of this section, the term specified 
service trade or business (SSTB) means any of the following:
    (1) Listed SSTBs. Any trade or business involving the performance 
of services in one 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 paragraph (b)(2)(iv) of this 
section;
    (iv) Actuarial science as described in paragraph (b)(2)(v) of this 
section;
    (v) Performing arts as described in paragraph (b)(2)(vi) of this 
section;
    (vi) Consulting as described in paragraph (b)(2)(vii) of this 
section;
    (vii) Athletics as described in paragraph (b)(2)(viii) of this 
section;
    (viii) Financial services as described in paragraph (b)(2)(ix) of 
this section;
    (ix) Brokerage services as described in paragraph (b)(2)(x) of this 
section;
    (x) Investing and investment management 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 in section 475(c)(2)), 
partnership interests, or commodities (as defined in section 475(e)(2)) 
as described in paragraph (b)(2)(xiii) of this section; or
    (xiii) Any trade or business where the principal asset of such 
trade or business is the reputation or skill of one or more of its 
employees or owners as defined in paragraph (b)(2)(xiv) of this 
section.
    (2) Additional rules for applying section 199A(d)(2) and paragraph 
(b) of this section--(i) In general--(A) No effect on other tax rules. 
This paragraph (b)(2) provides additional rules for determining whether 
a business is an SSTB within the meaning of section 199A(d)(2) and 
paragraph (b) of this section only. The rules of this paragraph (b)(2) 
apply solely for purposes of section 199A and therefore may not be 
taken into account for purposes of applying any provision of law or 
regulation other than section 199A and the regulations thereunder, 
except to the extent such provision expressly refers to section 199A(d) 
or this section.
    (B) Hedging transactions. Income, deduction, gain or loss from a 
hedging transaction (as defined in Sec.  1.1221-2(b)) entered into by 
an individual or RPE in the normal course of the individual's or RPE's 
trade or business is treated as income, deduction, gain, or loss from 
that trade or business for purposes of this paragraph (b)(2). See also 
Sec.  1.446-4.
    (ii) Meaning of services performed in the field of health. For 
purposes of section 199A(d)(2) and paragraph (b)(1)(i) of this section 
only, the performance of services in the field of health means the 
provision of medical services by individuals such as physicians, 
pharmacists, nurses, dentists, veterinarians, physical therapists, 
psychologists, and other similar healthcare professionals performing 
services in their capacity as such. The performance of services in the 
field of health does not include the provision of services not directly 
related to a medical services field, even though the services provided 
may purportedly relate to the health of the service recipient. For 
example, the performance of services in the field of health does not 
include the operation of health clubs or health spas that provide 
physical exercise or conditioning to their customers, payment 
processing, or the research, testing, and manufacture and/or sales of 
pharmaceuticals or medical devices.
    (iii) Meaning of services performed in the field of law. For 
purposes of section 199A(d)(2) and paragraph (b)(1)(ii) of this section 
only, the performance of services in the field of law means the 
performance of legal services by individuals such as lawyers, 
paralegals, legal arbitrators, mediators, and similar professionals 
performing services in their capacity as such. The performance of 
services in the field of law does not include the provision of services 
that do not require skills unique to the field of law; for example, the 
provision of services in the field of law does not include the 
provision of services by printers, delivery services, or stenography 
services.

[[Page 3007]]

    (iv) Meaning of services performed in the field of accounting. For 
purposes of section 199A(d)(2) and paragraph (b)(1)(iii) of this 
section only, the performance of services in the field of accounting 
means the provision of services by individuals such as accountants, 
enrolled agents, return preparers, financial auditors, and similar 
professionals performing services in their capacity as such.
    (v) Meaning of services performed in the field of actuarial 
science. For purposes of section 199A(d)(2) and paragraph (b)(1)(iv) of 
this section only, the performance of services in the field of 
actuarial science means the provision of services by individuals such 
as actuaries and similar professionals performing services in their 
capacity as such.
    (vi) Meaning of services performed in the field of performing arts. 
For purposes of section 199A(d)(2) and paragraph (b)(1)(v) of this 
section only, the performance of services in the field of the 
performing arts means the performance of services by individuals who 
participate in the creation of performing arts, such as actors, 
singers, musicians, entertainers, directors, and similar professionals 
performing services in their capacity as such. The performance of 
services in the field of performing arts does not include the provision 
of services that do not require skills unique to the creation of 
performing arts, such as the maintenance and operation of equipment or 
facilities for use in the performing arts. Similarly, the performance 
of services in the field of the performing arts does not include the 
provision of services by persons who broadcast or otherwise disseminate 
video or audio of performing arts to the public.
    (vii) Meaning of services performed in the field of consulting. For 
purposes of section 199A(d)(2) and paragraph (b)(1)(vi) of this section 
only, the performance of services in the field of consulting means the 
provision of professional advice and counsel to clients to assist the 
client in achieving goals and solving problems. Consulting includes 
providing advice and counsel regarding advocacy with the intention of 
influencing decisions made by a government or governmental agency and 
all attempts to influence legislators and other government officials on 
behalf of a client by lobbyists and other similar professionals 
performing services in their capacity as such. The performance of 
services in the field of consulting does not include the performance of 
services other than advice and counsel, such as sales (or economically 
similar services) or the provision of training and educational courses. 
For purposes of the preceding sentence, the determination of whether a 
person's services are sales or economically similar services will be 
based on all the facts and circumstances of that person's business. 
Such facts and circumstances include, for example, the manner in which 
the taxpayer is compensated for the services provided. Performance of 
services in the field of consulting does not include the performance of 
consulting services embedded in, or ancillary to, the sale of goods or 
performance of services on behalf of a trade or business that is 
otherwise not an SSTB (such as typical services provided by a building 
contractor) if there is no separate payment for the consulting 
services. Services within the fields of architecture and engineering 
are not treated as consulting services.
    (viii) Meaning of services performed in the field of athletics. For 
purposes of section 199A(d)(2) and paragraph (b)(1)(vii) of this 
section only, the performance of services in the field of athletics 
means the performance of services by individuals who participate in 
athletic competition such as athletes, coaches, and team managers in 
sports such as baseball, basketball, football, soccer, hockey, martial 
arts, boxing, bowling, tennis, golf, skiing, snowboarding, track and 
field, billiards, and racing. The performance of services in the field 
of athletics does not include the provision of services that do not 
require skills unique to athletic competition, such as the maintenance 
and operation of equipment or facilities for use in athletic events. 
Similarly, the performance of services in the field of athletics does 
not include the provision of services by persons who broadcast or 
otherwise disseminate video or audio of athletic events to the public.
    (ix) Meaning of services performed in the field of financial 
services. For purposes of section 199A(d)(2) and paragraph (b)(1)(viii) 
of this section only, the performance of services in the field of 
financial services means the provision of financial services to clients 
including managing wealth, advising clients with respect to finances, 
developing retirement plans, developing wealth transition plans, the 
provision of advisory and other similar services regarding valuations, 
mergers, acquisitions, dispositions, restructurings (including in title 
11 of the Code or similar cases), and raising financial capital by 
underwriting, or acting as a client's agent in the issuance of 
securities and similar services. This includes services provided by 
financial advisors, investment bankers, wealth planners, retirement 
advisors, and other similar professionals performing services in their 
capacity as such. Solely for purposes of section 199A, the performance 
of services in the field of financial services does not include taking 
deposits or making loans, but does include arranging lending 
transactions between a lender and borrower.
    (x) Meaning of services performed in the field of brokerage 
services. For purposes of section 199A(d)(2) and paragraph (b)(1)(ix) 
of this section only, the performance of services in the field of 
brokerage services includes services in which a person arranges 
transactions between a buyer and a seller with respect to securities 
(as defined in section 475(c)(2)) for a commission or fee. This 
includes services provided by stock brokers and other similar 
professionals, but does not include services provided by real estate 
agents and brokers, or insurance agents and brokers.
    (xi) Meaning of the provision of services in investing and 
investment management. For purposes of section 199A(d)(2) and paragraph 
(b)(1)(x) of this section only, the performance of services that 
consist of investing and investment management refers to a trade or 
business involving the receipt of fees for providing investing, asset 
management, or investment management services, including providing 
advice with respect to buying and selling investments. The performance 
of services of investing and investment management does not include 
directly managing real property.
    (xii) Meaning of the provision of services in trading. For purposes 
of section 199A(d)(2) and paragraph (b)(1)(xi) of this section only, 
the performance of services that consist of trading means a trade or 
business of trading in securities (as defined in section 475(c)(2)), 
commodities (as defined in section 475(e)(2)), or partnership 
interests. Whether a person is a trader in securities, commodities, or 
partnership interests is determined by taking into account all relevant 
facts and circumstances, including the source and type of profit that 
is associated with engaging in the activity regardless of whether that 
person trades for the person's own account, for the account of others, 
or any combination thereof.
    (xiii) Meaning of the provision of services in dealing--(A) Dealing 
in securities. For purposes of section 199A(d)(2) and paragraph 
(b)(1)(xii) of this section only, the performance of services that 
consist of dealing in securities (as defined in section 475(c)(2)) 
means regularly purchasing

[[Page 3008]]

securities from and selling securities to customers in the ordinary 
course of a trade or business or regularly offering to enter into, 
assume, offset, assign, or otherwise terminate positions in securities 
with customers in the ordinary course of a trade or business. Solely 
for purposes of the preceding sentence, the performance of services to 
originate a loan is not treated as the purchase of a security from the 
borrower in determining whether the lender is dealing in securities.
    (B) Dealing in commodities. For purposes of section 199A(d)(2) and 
paragraph (b)(1)(xii) of this section only, the performance of services 
that consist of dealing in commodities (as defined in section 
475(e)(2)) means regularly purchasing commodities from and selling 
commodities to customers in the ordinary course of a trade or business 
or regularly offering to enter into, assume, offset, assign, or 
otherwise terminate positions in commodities with customers in the 
ordinary course of a trade or business. Solely for purposes of the 
preceding sentence, gains and losses from qualified active sales as 
defined in paragraph (b)(2)(xiii)(B)(1) of this section are not taken 
into account in determining whether a person is engaged in the trade or 
business of dealing in commodities.
    (1) Qualified active sale. The term qualified active sale means the 
sale of commodities in the active conduct of a commodities business as 
a producer, processor, merchant, or handler of commodities if the trade 
or business is as an active producer, processor, merchant or handler of 
commodities. A hedging transaction described in paragraph (b)(2)(i)(B) 
of this section is treated as a qualified active sale. The sale of 
commodities held by a trade or business other than in its capacity as 
an active producer, processor, merchant, or handler of commodities is 
not a qualified active sale. For example, the sale by a trade or 
business of commodities that were held for investment or speculation 
would not be a qualified active sale.
    (2) Active conduct of a commodities business. For purposes of 
paragraph (b)(2)(xiii)(B)(1) of this section, a trade or business is 
engaged in the active conduct of a commodities business as a producer, 
processor, merchant, or handler of commodities only with respect to 
commodities for which each of the conditions described in paragraphs 
(b)(2)(xiii)(B)(3) through (5) of this section are satisfied.
    (3) Directly holds commodities as inventory or similar property. 
The commodities trade or business holds the commodities directly, and 
not through an agent or independent contractor, as inventory or similar 
property. The term inventory or similar property means property that is 
stock in trade of the trade or business or other property of a kind 
that would properly be included in the inventory of the trade or 
business if on hand at the close of the taxable year, or property held 
by the trade or business primarily for sale to customers in the 
ordinary course of its trade or business.
    (4) Directly incurs substantial expenses in the ordinary course. 
The commodities trade or business incurs substantial expenses in the 
ordinary course of the commodities trade or business from engaging in 
one or more of the following activities directly, and not through an 
agent or independent contractor--
    (i) Substantial activities in the production of the commodities, 
including planting, tending or harvesting crops, raising or 
slaughtering livestock, or extracting minerals;
    (ii) Substantial processing activities prior to the sale of the 
commodities, including the blending and drying of agricultural 
commodities, or the concentrating, refining, mixing, crushing, aerating 
or milling of commodities; or
    (iii) Significant activities as described in paragraph 
(b)(2)(xiii)(B)(5) of this section.
    (5) Significant activities for purposes of paragraph 
(b)(2)(xiii)(B)(4)(iii) of this section. The commodities trade or 
business performs significant activities with respect to the 
commodities that consists of--
    (i) The physical movement, handling and storage of the commodities, 
including preparation of contracts and invoices, arranging 
transportation, insurance and credit, arranging for receipt, transfer 
or negotiation of shipping documents, arranging storage or warehousing, 
and dealing with quality claims;
    (ii) Owning and operating facilities for storage or warehousing; or
    (iii) Owning, chartering, or leasing vessels or vehicles for the 
transportation of the commodities.
    (C) Dealing in partnership interests. For purposes of section 
199A(d)(2) and paragraph (b)(1)(xii) of this section only, the 
performance of services that consist of dealing in partnership 
interests means regularly purchasing partnership interests from and 
selling partnership interests to customers in the ordinary course of a 
trade or business or regularly offering to enter into, assume, offset, 
assign, or otherwise terminate positions in partnership interests with 
customers in the ordinary course of a trade or business.
    (xiv) Meaning of trade or business where the principal asset of 
such trade or business is the reputation or skill of one or more 
employees or owners. For purposes of section 199A(d)(2) and paragraph 
(b)(1)(xiii) of this section only, the term any trade or business where 
the principal asset of such trade or business is the reputation or 
skill of one or more of its employees or owners means any trade or 
business that consists of any of the following (or any combination 
thereof):
    (A) A trade or business in which a person receives fees, 
compensation, or other income for endorsing products or services;
    (B) A trade or business in which a person licenses or receives 
fees, compensation, or other income for the use of an individual's 
image, likeness, name, signature, voice, trademark, or any other 
symbols associated with the individual's identity; or
    (C) Receiving fees, compensation, or other income for appearing at 
an event or on radio, television, or another media format.
    (D) For purposes of paragraphs (b)(2)(xiv)(A) through (C) of this 
section, the term fees, compensation, or other income includes the 
receipt of a partnership interest and the corresponding distributive 
share of income, deduction, gain, or loss from the partnership, or the 
receipt of stock of an S corporation and the corresponding income, 
deduction, gain, or loss from the S corporation stock.
    (3) Examples. The following examples illustrate the rules in 
paragraphs (a) and (b) of this section. The examples do not address all 
types of services that may or may not qualify as specified services. 
Unless otherwise provided, the individual in each example has taxable 
income in excess of the threshold amount.

     (i) Example 1. B is a board-certified pharmacist who contracts 
as an independent contractor with X, a small medical facility in a 
rural area. X employs one full time pharmacist, but contracts with B 
when X's needs exceed the capacity of its full-time staff. When 
engaged by X, B is responsible for receiving and reviewing orders 
from physicians providing medical care at the facility; making 
recommendations on dosing and alternatives to the ordering 
physician; performing inoculations, checking for drug interactions, 
and filling pharmaceutical orders for patients receiving care at X. 
B is engaged in the performance of services in the field of health 
within the meaning of section 199A(d)(2) and paragraphs (b)(1)(i) 
and (b)(2)(ii) of this section.
     (ii) Example 2. X is the operator of a residential facility 
that provides a variety of services to senior citizens who reside on 
campus. For residents, X offers standard

[[Page 3009]]

domestic services including housing management and maintenance, 
meals, laundry, entertainment, and other similar services. In 
addition, X contracts with local professional healthcare 
organizations to offer residents a range of medical and health 
services provided at the facility, including skilled nursing care, 
physical and occupational therapy, speech-language pathology 
services, medical social services, medications, medical supplies and 
equipment used in the facility, ambulance transportation to the 
nearest supplier of needed services, and dietary counseling. X 
receives all of its income from residents for the costs associated 
with residing at the facility. Any health and medical services are 
billed directly by the healthcare providers to the senior citizens 
for those professional healthcare services even though those 
services are provided at the facility. X does not perform services 
in the field of health within the meaning of section 199A(d)(2) and 
paragraphs (b)(1)(i) and (b)(2)(ii) of this section.
     (iii) Example 3. Y operates specialty surgical centers that 
provide outpatient medical procedures that do not require the 
patient to remain overnight for recovery or observation following 
the procedure. Y is a private organization that owns a number of 
facilities throughout the country. For each facility, Y ensures 
compliance with state and Federal laws for medical facilities and 
manages the facility's operations and performs all administrative 
functions. Y does not employ physicians, nurses, and medical 
assistants, but enters into agreements with other professional 
medical organizations or directly with the medical professionals to 
perform the procedures and provide all medical care. Patients are 
billed by Y for the facility costs relating to their procedure and 
by the healthcare professional or their affiliated organization for 
the actual costs of the procedure conducted by the physician and 
medical support team. Y does not perform services in the field of 
health within the meaning of section 199A(d)(2) and paragraphs 
(b)(1)(i) and (b)(2)(ii) of this section.
     (iv) Example 4. Z is the developer and the only provider of a 
patented test used to detect a particular medical condition. Z 
accepts test orders only from health care professionals (Z's 
clients), does not have contact with patients, and Z's employees do 
not diagnose, treat, or manage any aspect of patient care. A, who 
manages Z's testing operations, is the only employee with an 
advanced medical degree. All other employees are technical support 
staff and not healthcare professionals. Z's workers are highly 
educated, but the skills the workers bring to the job are not often 
useful for Z's testing methods. In order to perform the duties 
required by Z, employees receive more than a year of specialized 
training for working with Z's test, which is of no use to other 
employers. Upon completion of an ordered test, Z analyses the 
results and provides its clients a report summarizing the findings. 
Z does not discuss the report's results, or the patient's diagnosis 
or treatment with any health care provider or the patient. Z is not 
informed by the healthcare provider as to the healthcare provider's 
diagnosis or treatment. Z is not providing services in the field of 
health within the meaning of section 199A(d)(2) and paragraphs 
(b)(1)(i) and (b)(2)(ii) of this section or where the principal 
asset of the trade or business is the reputation or skill of one or 
more of its employees within the meaning of paragraphs (b)(1)(xiii) 
and (b)(2)(xiv) of this section.
     (v) Example 5. A, a singer and songwriter, writes and records a 
song. A is paid a mechanical royalty when the song is licensed or 
streamed. A is also paid a performance royalty when the recorded 
song is played publicly. A is engaged in the performance of services 
in an SSTB in the field of performing arts within the meaning of 
section 199A(d)(2) or paragraphs (b)(1)(v) and (b)(2)(vi) of this 
section. The royalties that A receives for the song are not eligible 
for a deduction under section 199A.
     (vi) Example 6. B is a partner in Movie LLC, a partnership. 
Movie LLC is a film production company. Movie LLC plans and 
coordinates film production. Movie LLC shares in the profits of the 
films that it produces. Therefore, Movie LLC is engaged in the 
performance of services in an SSTB in the field of performing arts 
within the meaning of section 199A(d)(2) or paragraphs (b)(1)(v) and 
(b)(2)(vi) of this section. B is a passive owner in Movie LLC and 
does not provide any services with respect to Movie LLC. However, 
because Movie LLC is engaged in an SSTB in the field of performing 
arts, B's distributive share of the income, gain, deduction, and 
loss with respect to Movie LLC is not eligible for a deduction under 
section 199A.
     (vii) Example 7. C is a partner in Partnership, which solely 
owns and operates a professional sports team. Partnership employs 
athletes and sells tickets and broadcast rights for games in which 
the sports team competes. Partnership sells the broadcast rights to 
Broadcast LLC, a separate trade or business. Broadcast LLC solely 
broadcasts the games. Partnership is engaged in the performance of 
services in an SSTB in the field of athletics within the meaning of 
section 199A(d)(2) or paragraphs (b)(1)(vii) and (b)(2)(viii) of 
this section. The tickets sales and the sale of the broadcast rights 
are both the performance of services in the field of athletics. C is 
a passive owner in Partnership and C does not provide any services 
with respect to Partnership or the sports team. However, because 
Partnership is engaged in an SSTB in the field of athletics, C's 
distributive share of the income, gain, deduction, and loss with 
respect to Partnership is not eligible for a deduction under section 
199A. Broadcast LLC is not engaged in the performance of services in 
an SSTB in the field of athletics.
     (viii) Example 8. D is in the business of providing services 
that assist unrelated entities in making their personnel structures 
more efficient. D studies its client's organization and structure 
and compares it to peers in its industry. D then makes 
recommendations and provides advice to its client regarding possible 
changes in the client's personnel structure, including the use of 
temporary workers. D does not provide any temporary workers to its 
clients and D's compensation and fees are not affected by whether 
D's clients used temporary workers. D is engaged in the performance 
of services in an SSTB in the field of consulting within the meaning 
of section 199A(d)(2) or paragraphs (b)(1)(vi) and (b)(2)(vii) of 
this section.
     (ix) Example 9. E is an individual who owns and operates a 
temporary worker staffing firm primarily focused on the software 
consulting industry. Business clients hire E to provide temporary 
workers that have the necessary technical skills and experience with 
a variety of business software to provide consulting and advice 
regarding the proper selection and operation of software most 
appropriate for the business they are advising. E does not have a 
technical software engineering background and does not provide 
software consulting advice herself. E reviews resumes and refers 
candidates to the client when the client indicates a need for 
temporary workers. E does not evaluate her clients' needs about 
whether the client needs workers and does not evaluate the clients' 
consulting contracts to determine the type of expertise needed. 
Rather, the client provides E with a job description indicating the 
required skills for the upcoming consulting project. E is paid a 
fixed fee for each temporary worker actually hired by the client and 
receives a bonus if that worker is hired permanently within a year 
of referral. E's fee is not contingent on the profits of its 
clients. E is not considered to be engaged in the performance of 
services in the field of consulting within the meaning of section 
199A(d)(2) or (b)(1)(vi) and (b)(2)(vii) of this section.
     (x) Example 10. F is in the business of licensing software to 
customers. F discusses and evaluates the customer's software needs 
with the customer. The taxpayer advises the customer on the 
particular software products it licenses. F is paid a flat price for 
the software license. After the customer licenses the software, F 
helps to implement the software. F is engaged in the trade or 
business of licensing software and not engaged in an SSTB in the 
field of consulting within the meaning of section 199A(d)(2) or 
paragraphs (b)(1)(vi) and (b)(2)(vii) of this section.
     (xi) Example 11. G is in the business of providing services to 
assist clients with their finances. G will study a particular 
client's financial situation, including, the client's present 
income, savings, and investments, and anticipated future economic 
and financial needs. Based on this study, G will then assist the 
client in making decisions and plans regarding the client's 
financial activities. Such financial planning includes the design of 
a personal budget to assist the client in monitoring the client's 
financial situation, the adoption of investment strategies tailored 
to the client's needs, and other similar services. G is engaged in 
the performance of services in an SSTB in the field of financial 
services within the meaning of section 199A(d)(2) or paragraphs 
(b)(1)(viii) and (b)(2)(ix) of this section.
     (xii) Example 12. H is in the business of franchising a brand 
of personal financial planning offices, which generally provide 
personal wealth management, retirement

[[Page 3010]]

planning, and other financial advice services to customers for a 
fee. H does not provide financial planning services itself. H 
licenses the right to use the business tradename, other branding 
intellectual property, and a marketing plan to third-party financial 
planner franchisees that operate the franchised locations and 
provide all services to customers. In exchange, the franchisees 
compensate H based on a fee structure, which includes a one-time fee 
to acquire the franchise. H is not engaged in the performance of 
services in the field of financial services within the meaning of 
section 199A(d)(2) or paragraphs (b)(1)(viii) and (b)(2)(ix) of this 
section.
     (xiii) Example 13. J is in the business of executing 
transactions for customers involving various types of securities or 
commodities generally traded through organized exchanges or other 
similar networks. Customers place orders with J to trade securities 
or commodities based on the taxpayer's recommendations. J's 
compensation for its services typically is based on completion of 
the trade orders. J is engaged in an SSTB in the field of brokerage 
services within the meaning of section 199A(d)(2) or paragraphs 
(b)(1)(ix) and (b)(2)(x) of this section.
     (xiv) Example 14. K owns 100% of Corp, an S corporation, which 
operates a bicycle sales and repair business. Corp has 8 employees, 
including K. Half of Corp's net income is generated from sales of 
new and used bicycles and related goods, such as helmets, and 
bicycle-related equipment. The other half of Corp's net income is 
generated from bicycle repair services performed by K and Corp's 
other employees. Corp's assets consist of inventory, fixtures, 
bicycle repair equipment, and a leasehold on its retail location. 
Several of the employees and G have worked in the bicycle business 
for many years, and have acquired substantial skill and reputation 
in the field. Customers often consult with the employees on the best 
bicycle for purchase. K is in the business of sales and repairs of 
bicycles and is not engaged in an SSTB within the meaning of section 
199A(d)(2) or paragraphs (b)(1)(xiii) and (b)(2)(xiv) of this 
section.
     (xv) Example 15. L is a well-known chef and the sole owner of 
multiple restaurants each of which is owned in a disregarded entity. 
Due to L's skill and reputation as a chef, L receives an endorsement 
fee of $500,000 for the use of L's name on a line of cooking 
utensils and cookware. L is in the trade or business of being a chef 
and owning restaurants and such trade or business is not an SSTB. 
However, L is also in the trade or business of receiving endorsement 
income. L's trade or business consisting of the receipt of the 
endorsement fee for L's skill and/or reputation is an SSTB within 
the meaning of section 199A(d)(2) or paragraphs (b)(1)(xiii) and 
(b)(2)(xiv) of this section.
     (xvi) Example 16. M is a well-known actor. M entered into a 
partnership with Shoe Company, in which M contributed her likeness 
and the use of her name to the partnership in exchange for a 50% 
interest in the partnership and a guaranteed payment. M's trade or 
business consisting of the receipt of the partnership interest and 
the corresponding distributive share with respect to the partnership 
interest for M's likeness and the use of her name is an SSTB within 
the meaning of section 199A(d)(2) or paragraphs (b)(1)(xiii) and 
(b)(2)(xiv) of this section.

    (c) Special rules--(1) De minimis rule--(i) Gross receipts of $25 
million or less. For a trade or business with gross receipts of $25 
million or less for the taxable year, a trade or business is not an 
SSTB if less than 10 percent of the gross receipts of the trade or 
business are attributable to the performance of services in a field 
described in paragraph (b) of this section. For purposes of determining 
whether this 10 percent test is satisfied, the performance of any 
activity incident to the actual performance of services in the field is 
considered the performance of services in that field.
    (ii) Gross receipts of greater than $25 million. For a trade or 
business with gross receipts of greater than $25 million for the 
taxable year, the rules of paragraph (c)(1)(i) of this section are 
applied by substituting ``5 percent'' for ``10 percent'' each place it 
appears.
    (iii) Examples. The following examples illustrate the provisions of 
paragraph (c)(1) of this section.

     (A) Example 1. Landscape LLC sells lawn care and landscaping 
equipment and also provides advice and counsel on landscape design 
for large office parks and residential buildings. The landscape 
design services include advice on the selection and placement of 
trees, shrubs, and flowers and are considered to be the performance 
of services in the field of consulting under paragraphs (b)(1)(vi) 
and (b)(2)(vii) of this section. Landscape LLC separately invoices 
for its landscape design services and does not sell the trees, 
shrubs, or flowers it recommends for use in the landscape design. 
Landscape LLC maintains one set of books and records and treats the 
equipment sales and design services as a single trade or business 
for purposes of sections 162 and 199A. Landscape LLC has gross 
receipts of $2 million. $250,000 of the gross receipts is 
attributable to the landscape design services, an SSTB. Because the 
gross receipts from the consulting services exceed 10 percent of 
Landscape LLC's total gross receipts, the entirety of Landscape 
LLC's trade or business is considered an SSTB.
     (B) Example 2. Animal Care LLC provides veterinarian services 
performed by licensed staff and also develops and sells its own line 
of organic dog food at its veterinarian clinic and online. The 
veterinarian services are considered to be the performance of 
services in the field of health under paragraphs (b)(1)(i) and 
(b)(2)(ii) of this section. Animal Care LLC separately invoices for 
its veterinarian services and the sale of its organic dog food. 
Animal Care LLC maintains separate books and records for its 
veterinarian clinic and its development and sale of its dog food. 
Animal Care LLC also has separate employees who are unaffiliated 
with the veterinary clinic and who only work on the formulation, 
marketing, sales, and distribution of the organic dog food products. 
Animal Care LLC treats its veterinary practice and the dog food 
development and sales as separate trades or businesses for purposes 
of section 162 and 199A. Animal Care LLC has gross receipts of 
$3,000,000. $1,000,000 of the gross receipts is attributable to the 
veterinary services, an SSTB. Although the gross receipts from the 
services in the field of health exceed 10 percent of Animal Care 
LLC's total gross receipts, the dog food development and sales 
business is not considered an SSTB due to the fact that the 
veterinary practice and the dog food development and sales are 
separate trades or businesses under section 162.

    (2) Services or property provided to an SSTB--(i) In general. If a 
trade or business provides property or services to an SSTB within the 
meaning of this section and there is 50 percent or more common 
ownership of the trades or businesses, that portion of the trade or 
business of providing property or services to the 50 percent or more 
commonly-owned SSTB will be treated as a separate SSTB with respect to 
the related parties.
    (ii) 50 percent or more common ownership. For purposes of paragraph 
(c)(2)(i) and (ii) of this section, 50 percent or more common ownership 
includes direct or indirect ownership by related parties within the 
meaning of sections 267(b) or 707(b).
    (iii) Examples. The following examples illustrate the provisions of 
paragraph (c)(2) of this section.

     (A) Example 1. Law Firm is a partnership that provides legal 
services to clients, owns its own office building and employs its 
own administrative staff. Law Firm divides into three partnerships. 
Partnership 1 performs legal services to clients. Partnership 2 owns 
the office building and rents the entire building to Partnership 1. 
Partnership 3 employs the administrative staff and through a 
contract with Partnership 1 provides administrative services to 
Partnership 1 in exchange for fees. All three of the partnerships 
are owned by the same people (the original owners of Law Firm). 
Because Partnership 2 provides all of its property to Partnership 1, 
and Partnership 3 provides all of its services to Partnership 1, 
Partnerships 2 and 3 will each be treated as an SSTB under paragraph 
(c)(2) of this section.
     (B) Example 2. Assume the same facts as in Example 1 of this 
paragraph (c)(2), except that Partnership 2, which owns the office 
building, rents 50 percent of the building to Partnership 1, which 
provides legal services, and the other 50 percent to various 
unrelated third party tenants. Because Partnership 2 is owned by the 
same people as Partnership 1, the portion of Partnership 2's leasing 
activity related to the lease of the building to Partnership 1 will 
be treated as a separate SSTB. The remaining 50 percent of 
Partnership 2's leasing activity will not be treated as an SSTB.


[[Page 3011]]


    (d) Trade or business of performing services as an employee--(1) In 
general. The trade or business of performing services as an employee is 
not a trade or business for purposes of section 199A and the 
regulations thereunder. Therefore, no items of income, gain, deduction, 
and loss from the trade or business of performing services as an 
employee constitute QBI within the meaning of section 199A and Sec.  
1.199A-3. Except as provided in paragraph (d)(3) of this section, 
income from the trade or business of performing services as an employee 
refers to all wages (within the meaning of section 3401(a)) and other 
income earned in a capacity as an employee, including payments 
described in Sec.  1.6041-2(a)(1) (other than payments to individuals 
described in section 3121(d)(3)) and Sec.  1.6041-2(b)(1).
    (2) Employer's Federal employment tax classification of employee 
immaterial. For purposes of determining whether wages are earned in a 
capacity as an employee as provided in paragraph (d)(1) of this 
section, the treatment of an employee by an employer as anything other 
than an employee for Federal employment tax purposes is immaterial. 
Thus, if a worker should be properly classified as an employee, it is 
of no consequence that the employee is treated as a non-employee by the 
employer for Federal employment tax purposes.
    (3) Presumption that former employees are still employees--(i) 
Presumption. Solely for purposes of section 199A(d)(1)(B) and paragraph 
(d)(1) of this section, an individual that was properly treated as an 
employee for Federal employment tax purposes by the person to which he 
or she provided services and who is subsequently treated as other than 
an employee by such person with regard to the provision of 
substantially the same services directly or indirectly to the person 
(or a related person), is presumed, for three years after ceasing to be 
treated as an employee for Federal employment tax purposes, to be in 
the trade or business of performing services as an employee with regard 
to such services. As provided in paragraph (d)(3)(ii) of this section, 
this presumption may be rebutted upon a showing by the individual that, 
under Federal tax law, regulations, and principles (including common-
law employee classification rules), the individual is performing 
services in a capacity other than as an employee. This presumption 
applies regardless of whether the individual provides services directly 
or indirectly through an entity or entities.
    (ii) Rebuttal of presumption. Upon notice from the IRS, an 
individual rebuts the presumption in paragraph (d)(3)(i) of this 
section by providing records, such as contracts or partnership 
agreements, that provide sufficient evidence to corroborate the 
individual's status as a non-employee.
    (iii) Examples. The following examples illustrate the provision of 
paragraph (d)(3) of this section. Unless otherwise provided, the 
individual in each example has taxable income in excess of the 
threshold amount.

     (A) Example 1. A is employed by PRS, a partnership for Federal 
tax purposes, as a fulltime employee and is treated as such for 
Federal employment tax purposes. A quits his job for PRS and enters 
into a contract with PRS under which A provides substantially the 
same services that A previously provided to PRS in A's capacity as 
an employee. Because A was treated as an employee for services he 
provided to PRS, and now is no longer treated as an employee with 
regard to such services, A is presumed (solely for purposes of 
section 199A(d)(1)(B) and paragraphs (a)(3) and (d) of this section) 
to be in the trade or business of performing services as an employee 
with regard to his services performed for PRS. Unless the 
presumption is rebutted with a showing that, under Federal tax law, 
regulations, and principles (including the common-law employee 
classification rules), A is not an employee, any amounts paid by PRS 
to A with respect to such services will not be QBI for purposes of 
section 199A. The presumption would apply even if, instead of 
contracting directly with PRS, A formed a disregarded entity, or a 
passthrough entity, and the entity entered into the contract with 
PRS.
     (B) Example 2. C is an attorney employed as an associate in a 
law firm (Law Firm 1) and was treated as such for Federal employment 
tax purposes. C and the other associates in Law Firm 1 have taxable 
income below the threshold amount. Law Firm 1 terminates its 
employment relationship with C and its other associates. C and the 
other former associates form a new partnership, Law Firm 2, which 
contracts to perform legal services for Law Firm 1. Therefore, in 
form, C is now a partner in Law Firm 2 which earns income from 
providing legal services to Law Firm 1. C continues to provide 
substantially the same legal services to Law Firm 1 and its clients. 
Because C was previously treated as an employee for services she 
provided to Law Firm 1, and now is no longer treated as an employee 
with regard to such services, C is presumed (solely for purposes of 
section 199A(d)(1)(B) and paragraphs (a)(3) and (d) of this section) 
to be in the trade or business of performing services as an employee 
with respect to the services C provides to Law Firm 1 indirectly 
through Law Firm 2. Unless the presumption is rebutted with a 
showing that, under Federal tax law, regulations, and principles 
(including common-law employee classification rules), C's 
distributive share of Law Firm 2 income (including any guaranteed 
payments) will not be QBI for purposes of section 199A. The results 
in this example would not change if, instead of contracting with Law 
Firm 1, Law Firm 2 was instead admitted as a partner in Law Firm 1.
     (C) Example 3. E is an engineer employed as a senior project 
engineer in an engineering firm, Engineering Firm. Engineering Firm 
is a partnership for Federal tax purposes and structured such that 
after 10 years, senior project engineers are considered for partner 
if certain career milestones are met. After 10 years, E meets those 
career milestones and is admitted as a partner in Engineering Firm. 
As a partner in Engineering Firm, E shares in the net profits of 
Engineering Firm, and also otherwise satisfies the requirements 
under Federal tax law, regulations, and principles (including 
common-law employee classification rules) to be respected as a 
partner. E is presumed (solely for purposes of section 199A(d)(1)(B) 
and paragraphs (a)(3) and (d) of this section) to be in the trade or 
business of performing services as an employee with respect to the 
services E provides to Engineering Firm. However, E is able to rebut 
the presumption by showing that E became a partner in Engineering 
Firm as a career milestone, shares in the overall net profits in 
Engineering Firm, and otherwise satisfies the requirements under 
Federal tax law, regulations, and principles (including common-law 
employee classification rules) to be respected as a partner.
     (D) Example 4. F is a financial advisor employed by a financial 
advisory firm, Advisory Firm, a partnership for Federal tax 
purposes, as a fulltime employee and is treated as such for Federal 
employment tax purposes. F has taxable income below the threshold 
amount. Advisory Firm is a partnership and offers F the opportunity 
to be admitted as a partner. F elects to be admitted as a partner to 
Advisory Firm and is admitted as a partner to Advisory Firm. As a 
partner in Advisory Firm, F shares in the net profits of Advisory 
Firm, is obligated to Advisory Firm in ways that F was not 
previously obligated as an employee, is no longer entitled to 
certain benefits available only to employees of Advisory Firm, and 
has materially modified his relationship with Advisory Firm. F's 
share of net profits is not subject to a floor or capped at a dollar 
amount. F is presumed (solely for purposes of section 199A(d)(1)(B) 
and paragraphs (a)(3) and (d) of this section) to be in the trade or 
business of performing services as an employee with respect to the 
services F provides to Advisory Firm. However, F is able to rebut 
the presumption by showing that F became a partner in Advisory Firm 
by sharing in the profits of Advisory Firm, materially modifying F's 
relationship with Advisory Firm, and otherwise satisfying the 
requirements under Federal tax law, regulations, and principles 
(including common-law employee classification rules) to be respected 
as a partner.

    (e) Applicability date--(1) General rule. Except as provided in 
paragraph (e)(2) of this section, the provisions of this section apply 
to taxable years ending after February 8, 2019.
    (2) Exceptions-(i) Anti-abuse rules. The provisions of paragraphs 
(c)(2) and

[[Page 3012]]

(d)(3) of this section apply to taxable years ending after December 22, 
2017.
    (ii) Non-calendar year RPE. For purposes of determining QBI, W-2 
wages, UBIA of qualified property, and the aggregate amount of 
qualified REIT dividends and qualified PTP income, if an individual 
receives any of these items from an RPE with a taxable year that begins 
before January 1, 2018, and ends after December 31, 2017, such items 
are treated as having been incurred by the individual during the 
individual's taxable year in which or with which such RPE taxable year 
ends.

0
Par. 8. Section 1.199A-6 is added to read as follows:


Sec.  1.199A-6   Relevant passthrough entities (RPEs), publicly traded 
partnerships (PTPs), trusts, and estates.

    (a) Overview. This section provides special rules for RPEs, PTPs, 
trusts, and estates necessary for the computation of the section 199A 
deduction of their owners or beneficiaries. Paragraph (b) of this 
section provides computational and reporting rules for RPEs necessary 
for individuals who own interests in RPEs to calculate their section 
199A deduction. Paragraph (c) of this section provides computational 
and reporting rules for PTPs necessary for individuals who own 
interests in PTPs to calculate their section 199A deduction. Paragraph 
(d) of this section provides computational and reporting rules for 
trusts (other than grantor trusts) and estates necessary for their 
beneficiaries to calculate their section 199A deduction.
    (b) Computational and reporting rules for RPEs--(1) In general. An 
RPE must determine and report information attributable to any trades or 
businesses it is engaged in necessary for its owners to determine their 
section 199A deduction.
    (2) Computational rules. Using the following four rules, an RPE 
must determine the items necessary for individuals who own interests in 
the RPE to calculate their section 199A deduction under Sec.  1.199A-
1(c) or (d). An RPE that chooses to aggregate trades or businesses 
under the rules of Sec.  1.199A-4 may determine these items for the 
aggregated trade or business.
    (i) First, the RPE must determine if it is engaged in one or more 
trades or businesses. The RPE must also determine whether any of its 
trades or businesses is an SSTB under the rules of Sec.  1.199A-5.
    (ii) Second, the RPE must apply the rules in Sec.  1.199A-3 to 
determine the QBI for each trade or business engaged in directly.
    (iii) Third, the RPE must apply the rules in Sec.  1.199A-2 to 
determine the W-2 wages and UBIA of qualified property for each trade 
or business engaged in directly.
    (iv) Fourth, the RPE must determine whether it has any qualified 
REIT dividends as defined in Sec.  1.199A-3(c)(1) earned directly or 
through another RPE. The RPE must also determine the amount of 
qualified PTP income as defined in Sec.  1.199A-3(c)(2) earned directly 
or indirectly through investments in PTPs.
    (3) Reporting rules for RPEs--(i) Trade or business directly 
engaged in. An RPE must separately identify and report on the Schedule 
K-1 issued to its owners for any trade or business (including an 
aggregated trade or business) engaged in directly by the RPE--
    (A) Each owner's allocable share of QBI, W-2 wages, and UBIA of 
qualified property attributable to each such trade or business; and
    (B) Whether any of the trades or businesses described in paragraph 
(b)(3)(i) of this section is an SSTB.
    (ii) Other items. An RPE must also report on an attachment to the 
Schedule K-1, any QBI, W-2 wages, UBIA of qualified property, or SSTB 
determinations, reported to it by any RPE in which the RPE owns a 
direct or indirect interest. The RPE must also report each owner's 
allocated share of any qualified REIT dividends received by the RPE 
(including through another RPE) as well as any qualified PTP income or 
loss received by the RPE for each PTP in which the RPE holds an 
interest (including through another RPE). Such information can be 
reported on an amended or late filed return to the extent that the 
period of limitations remains open.
    (iii) Failure to report information. If an RPE fails to separately 
identify or report on the Schedule K-1 (or any attachments thereto) 
issued to an owner an item described in paragraph (b)(3)(i) of this 
section, the owner's share (and the share of any upper-tier indirect 
owner) of each unreported item of positive QBI, W-2 wages, or UBIA of 
qualified property attributable to trades or businesses engaged in by 
that RPE will be presumed to be zero.
    (c) Computational and reporting rules for PTPs--(1) Computational 
rules. Each PTP must determine its QBI under the rules of Sec.  1.199A-
3 for each trade or business in which the PTP is engaged in directly. 
The PTP must also determine whether any of the trades or businesses it 
is engaged in directly is an SSTB.
    (2) Reporting rules. Each PTP is required to separately identify 
and report the information described in paragraph (c)(1) of this 
section on Schedules K-1 issued to its partners. Each PTP must also 
determine and report any qualified REIT dividends or qualified PTP 
income or loss received by the PTP including through an RPE, a REIT, or 
another PTP. A PTP is not required to determine or report W-2 wages or 
the UBIA of qualified property attributable to trades or businesses it 
is engaged in directly.
    (d) Application to trusts, estates, and beneficiaries--(1) In 
general. A trust or estate computes its section 199A deduction based on 
the QBI, W-2 wages, UBIA of qualified property, qualified REIT 
dividends, and qualified PTP income that are allocated to the trust or 
estate. An individual beneficiary of a trust or estate takes into 
account any QBI, W-2 wages, UBIA of qualified property, qualified REIT 
dividends, and qualified PTP income allocated from a trust or estate in 
calculating the beneficiary's section 199A deduction, in the same 
manner as though the items had been allocated from an RPE. For purposes 
of this section and Sec. Sec.  1.199A-1 through 1.199A-5, a trust or 
estate is treated as an RPE to the extent it allocates QBI and other 
items to its beneficiaries, and is treated as an individual to the 
extent it retains the QBI and other items.
    (2) Grantor trusts. To the extent that the grantor or another 
person is treated as owning all or part of a trust under sections 671 
through 679, such person computes its section 199A deduction as if that 
person directly conducted the activities of the trust with respect to 
the portion of the trust treated as owned by the grantor or other 
person.
    (3) Non-grantor trusts and estates--(i) Calculation at entity 
level. A trust or estate must calculate its QBI, W-2 wages, UBIA of 
qualified property, qualified REIT dividends, and qualified PTP income. 
The QBI of a trust or estate must be computed by allocating qualified 
items of deduction described in section 199A(c)(3) in accordance with 
the classification of those deductions under Sec.  1.652(b)-3(a), and 
deductions not directly attributable within the meaning of Sec.  
1.652(b)-3(b) (other deductions) are allocated in a manner consistent 
with the rules in Sec.  1.652(b)-3(b). Any depletion and depreciation 
deductions described in section 642(e) and any amortization deductions 
described in section 642(f) that otherwise are properly included in the 
computation of QBI are included in the computation of QBI of the trust 
or estate, regardless of how those deductions may otherwise be 
allocated between the trust or estate and its

[[Page 3013]]

beneficiaries for other purposes of the Code.
    (ii) Allocation among trust or estate and beneficiaries. The QBI 
(including any amounts that may be less than zero as calculated at the 
trust or estate level), W-2 wages, UBIA of qualified property, 
qualified REIT dividends, and qualified PTP income of a trust or estate 
are allocated to each beneficiary and to the trust or estate based on 
the relative proportion of the trust's or estate's distributable net 
income (DNI), as defined by section 643(a), for the taxable year that 
is distributed or required to be distributed to the beneficiary or is 
retained by the trust or estate. For this purpose, the trust's or 
estate's DNI is determined with regard to the separate share rule of 
section 663(c), but without regard to section 199A. If the trust or 
estate has no DNI for the taxable year, any QBI, W-2 wages, UBIA of 
qualified property, qualified REIT dividends, and qualified PTP income 
are allocated entirely to the trust or estate.
    (iii) [Reserved]
    (iv) Threshold amount. The threshold amount applicable to a trust 
or estate is $157,500 for any taxable year beginning before 2019. For 
taxable years beginning after 2018, the threshold amount shall be 
$157,500 increased by the cost-of-living adjustment as outlined in 
Sec.  1.199A-1(b)(12). For purposes of determining whether a trust or 
estate has taxable income in excess of the threshold amount, the 
taxable income of the trust or estate is determined after taking into 
account any distribution deduction under sections 651 or 661.
    (v) [Reserved]
    (vi) Electing small business trusts. An electing small business 
trust (ESBT) is entitled to the deduction under section 199A. Any 
section 199A deduction attributable to the assets in the S portion of 
the ESBT is to be taken into account by the S portion. The S portion of 
the ESBT must take into account the QBI and other items from any S 
corporation owned by the ESBT, the grantor portion of the ESBT must 
take into account the QBI and other items from any assets treated as 
owned by a grantor or another person (owned portion) of a trust under 
sections 671 through 679, and the non-S portion of the ESBT must take 
into account any QBI and other items from any other entities or assets 
owned by the ESBT. For purposes of determining whether the taxable 
income of an ESBT exceeds the threshold amount, the S portion and the 
non-S portion of an ESBT are treated as a single trust. See Sec.  
1.641(c)-1.
    (vii) Anti-abuse rule for creation of a trust to avoid exceeding 
the threshold amount. A trust formed or funded with a principal purpose 
of avoiding, or of using more than one, threshold amount for purposes 
of calculating the deduction under section 199A will not be respected 
as a separate trust entity for purposes of determining the threshold 
amount for purposes of section 199A. See also Sec.  1.643(f)-1 of the 
regulations.
    (viii) Example. The following example illustrates the application 
of paragraph (d) of this section.

     (A) Example--(1) Computation of DNI and inclusion and deduction 
amounts--(i) Trust's distributive share of partnership items. Trust, 
an irrevocable testamentary complex trust, is a 25% partner in PRS, 
a family partnership that operates a restaurant that generates QBI 
and W-2 wages. A and B, Trust's beneficiaries, own the remaining 75% 
of PRS directly. In 2018, PRS properly allocates gross income from 
the restaurant of $55,000, and expenses directly allocable to the 
restaurant of $45,000 (including W-2 wages of $25,000, and 
miscellaneous expenses of $20,000) to Trust. These items are 
properly included in Trust's DNI. PRS distributes $10,000 of cash to 
Trust in 2018.
    (ii) Trust's activities. In addition to its interest in PRS, 
Trust also operates a family bakery conducted through an LLC wholly-
owned by the Trust that is treated as a disregarded entity. In 2018, 
the bakery produces $100,000 of gross income and $155,000 of 
expenses directly allocable to operation of the bakery (including W-
2 wages of $50,000, rental expense of $75,000, miscellaneous 
expenses of $25,000, and depreciation deductions of $5,000). (The 
net loss from the bakery operations is not subject to any loss 
disallowance provisions outside of section 199A.) Trust maintains a 
reserve of $5,000 for depreciation. Trust also has $125,000 of UBIA 
of qualified property in the bakery. For purposes of computing its 
section 199A deduction, Trust and its beneficiaries have properly 
chosen to aggregate the family restaurant conducted through PRS with 
the bakery conducted directly by Trust under Sec.  1.199A-4. Trust 
also owns various investment assets that produce portfolio-type 
income consisting of dividends ($25,000), interest ($15,000), and 
tax-exempt interest ($15,000). Accordingly, Trust has the following 
items which are properly included in Trust's DNI:

               Table 1 to Paragraph (d)(3)(viii)(A)(1)(ii)
------------------------------------------------------------------------
 
------------------------------------------------------------------------
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
------------------------------------------------------------------------

    (iii) Allocation of deductions under Sec.  1.652(b)-3 (Directly 
attributable expenses). In computing Trust's DNI for the taxable 
year, the distributive share of expenses of PRS are directly 
attributable under Sec.  1.652(b)-3(a) to the distributive share of 
income of PRS. Accordingly, Trust has gross business income of 
$155,000 ($55,000 from PRS and $100,000 from the bakery) and direct 
business expenses of $200,000 ($45,000 from PRS and $155,000 from 
the bakery). In addition, $1,000 of the trustee commissions and 
$1,000 of state and local taxes are directly attributable under 
Sec.  1.652(b)-3(a) to Trust's business income. Accordingly, Trust 
has excess business deductions of $47,000. Pursuant to its authority 
recognized under Sec.  1.652(b)-3(d), Trust allocates the $47,000 
excess business deductions as follows: $15,000 to the interest 
income, resulting in $0 interest income, $25,000 to the dividends, 
resulting in $0 dividend income, and $7,000 to the tax exempt 
interest.
    (iv) Allocation of deductions under Sec.  1.652(b)-3 (Non-
directly attributable expenses). The trustee must allocate the sum 
of the balance of the trustee commissions ($2,000) and state and 
local taxes ($4,000) to Trust's remaining tax-exempt interest 
income, resulting in $2,000 of tax exempt interest.
    (v) Amounts included in taxable income. For 2018, Trust has DNI 
of $2,000. Pursuant to Trust's governing instrument, Trustee 
distributes 50%, or $1,000, of that DNI to A, an individual who is a 
discretionary beneficiary of Trust. In addition, Trustee is required 
to distribute 25%, or $500, of that DNI to B, a current income 
beneficiary of Trust. Trust retains the remaining 25% of DNI. 
Consequently, with respect to the $1,000 distribution A receives 
from Trust, A properly excludes $1,000 of tax-exempt interest income 
under section 662(b). With respect to the $500 distribution B 
receives from Trust, B properly excludes $500 of tax exempt interest 
income under section 662(b). Because the DNI consists entirely of 
tax-exempt income, Trust deducts $0 under section 661 with respect 
to the distributions to A and B.
    (2) Section 199A deduction--(i) Trust's W-2 wages and QBI. For 
the 2018 taxable year, prior to allocating the beneficiaries' shares 
of the section 199A items, Trust has $75,000 ($25,000 from PRS + 
$50,000 of Trust) of W-2 wages. Trust also has $125,000 of UBIA of 
qualified property. Trust has negative QBI of ($47,000) ($155,000 
gross income from aggregated businesses less the sum of $200,000 
direct expenses from aggregated businesses and $2,000 directly 
attributable business expenses from Trust under the rules of Sec.  
1.652(b)-3(a)).
    (ii) A's Section 199A deduction computation. Because the $1,000 
Trust distribution to A equals one-half of Trust's DNI, A has W-2 
wages from Trust of $37,500. A also has W-2 wages of $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 Sec.  
1.199A-4 with the Trust's trade or businesses (the family's 
restaurant and bakery), for a total of $40,000 of W-2 wages from the 
aggregate trade or businesses. A also has $62,500 of UBIA from Trust 
and $25,000 of UBIA of qualified property from the trade or business 
outside of Trust for $87,500 of total UBIA of qualified property. A 
has $100,000 of QBI from the non-Trust trade or businesses in which 
A owns an interest.

[[Page 3014]]

Because the $1,000 Trust distribution to A equals one-half of 
Trust's DNI, 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 of 
QBI. Assume that A's taxable income is $357,500, which exceeds A's 
applicable threshold amount for 2018 by $200,000. A's tentative 
deductible amount is $15,300 (20% x $76,500 of QBI), limited to the 
greater of (i) $20,000 (50% x $40,000 of W-2 wages), or (ii) 
$12,187.50 ($10,000, 25% x $40,000 of W-2 wages, plus $2,187.50, 
2.5% x $87,500 of UBIA of qualified property). A's section 199A 
deduction is equal to the lesser of $15,300, or $71,500 (20% x 
$357,500 of taxable income). Accordingly, A's section 199A deduction 
for 2018 is $15,300.
    (iii) B's Section 199A deduction computation. For 2018, B's 
taxable income is below the threshold amount so B is not subject to 
the W-2 wage limitation. Because the $500 Trust distribution to B 
equals one-quarter of Trust's DNI, B has a total of ($11,750) of 
QBI. B also 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 
loss from a qualified business in the hands of B pursuant to section 
199A(c)(2).
    (iv) Trust's Section 199A deduction computation. For 2018, 
Trust's taxable income is below the threshold amount so it is not 
subject to the W-2 wage limitation. Because Trust retained 25% of 
Trust's DNI, Trust is allocated 25% of its QBI, which is ($11,750). 
Trust's section 199A deduction for 2018 is zero. The ($11,750) of 
QBI is carried over to 2019 as a loss from a qualified business in 
the hands of Trust pursuant to section 199A(c)(2).

    (B) [Reserved]
    (e) Applicability date--(1) General rule. Except as provided in 
paragraph (e)(2) of this section, the provisions of this section apply 
to taxable years ending after February 8, 2019.
    (2) Exceptions--(i) Anti-abuse rules. The provisions of paragraph 
(d)(3)(vii) of this section apply to taxable years ending after 
December 22, 2017.
    (ii) Non-calendar year RPE. For purposes of determining QBI, W-2 
wages, UBIA of qualified property, and the aggregate amount of 
qualified REIT dividends and qualified PTP income, if an individual 
receives any of these items from an RPE with a taxable year that begins 
before January 1, 2018, and ends after December 31, 2017, such items 
are treated as having been incurred by the individual during the 
individual's taxable year in which or with which such RPE taxable year 
ends.

0
Par. 9. Section 1.643(f)-1 is added to read as follows:


Sec.  1.643(f)-1  Treatment of multiple trusts.

    (a) General rule. For purposes of subchapter J of chapter 1 of 
subtitle A of Title 26 of the United States Code, two or more trusts 
will be aggregated and treated as a single trust if such trusts have 
substantially the same grantor or grantors and substantially the same 
primary beneficiary or beneficiaries, and if a principal purpose for 
establishing one or more of such trusts or for contributing additional 
cash or other property to such trusts is the avoidance of Federal 
income tax. For purposes of applying this rule, spouses will be treated 
as one person.
    (b) Applicability date. The provisions of this section apply to 
taxable years ending after August 16, 2018.

Kirsten Wielobob,
Deputy Commissioner for Services and Enforcement.

    Approved: December 20, 2018.
David J. Kautter,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2019-01025 Filed 2-4-19; 4:15 pm]
 BILLING CODE 4830-01-P