[Federal Register Volume 85, Number 123 (Thursday, June 25, 2020)]
[Rules and Regulations]
[Pages 38060-38068]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-11832]



[[Page 38060]]

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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9899]
RIN 1545-BP12


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 (QBI) under section 199A of the 
Internal Revenue Code (Code). The regulations will affect certain 
individuals, partnerships, S corporations, trusts, and estates. The 
regulations provide guidance on the treatment of previously suspended 
losses included in qualified business income. The regulations also 
provide guidance on the determination of the section 199A deduction for 
taxpayers that hold interests in regulated investment companies, split-
interest trusts, and charitable remainder trusts.

DATES: 
    Effective Date: These regulations are effective on August 24, 2020.
    Applicability Dates: These regulations apply to taxable years 
beginning after August 24, 2020. Pursuant to section 7805(b)(7), 
taxpayers may choose to apply the amendments to Sec. Sec.  1.199A-3 and 
1.199A-6 set forth in this Treasury decision to taxable years beginning 
on or before August 24, 2020. Alternatively, taxpayers who chose to 
rely on the February 2019 Proposed Regulations for taxable years 
beginning on or before August 24, 2020 may continue to do so for such 
years. However, taxpayers who choose to apply any section of these 
regulations or continue to rely on any section of the February 2019 
Proposed Regulations for taxable years beginning on or before August 
24, 2020 must follow the rules of the applicable section in a 
consistent manner for each such year.

FOR FURTHER INFORMATION CONTACT: Concerning Sec.  1.199A-3(d), Michael 
Y. Chin or Steven Harrison at (202) 317-6842; concerning Sec. Sec.  
1.199A-3(b) and 1.199A-6, Vishal R. Amin or Sonia Kothari at (202) 317-
6850 or Robert D. Alinsky or Margaret Burow at (202) 317-5279.

SUPPLEMENTARY INFORMATION:

Background

    This document contains amendments to the Income Tax Regulations (26 
CFR part 1) under section 199A of the Code.
    Section 199A was enacted on December 22, 2017, by section 11011 of 
Public Law 115-97, 131 Stat. 2054, commonly referred to as the Tax Cuts 
and Jobs Act (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, 132 Stat. 348 (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 QBI from a 
U.S. trade or business operated as a sole proprietorship or through a 
partnership, S corporation, trust, or estate (section 199A deduction). 
The section 199A deduction may be taken by individuals and by some 
trusts and estates. A section 199A deduction is not available for wage 
income or for income earned by a C corporation (as defined in section 
1361(a)(2)). If the taxpayer's taxable income exceeds the statutorily 
defined amount in section 199A(e)(2) (threshold amount), the taxpayer's 
section 199A deduction may be limited based on (i) the type of trade or 
business conducted, (ii) the amount of W-2 wages paid with respect to 
the trade or business (W-2 wages), and/or (iii) the unadjusted basis 
immediately after acquisition (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 in section 199A(b)(3)(B) 
based upon taxable income above the threshold amount (phase-in rules).
    Section 199A also provides individuals and some trusts and estates, 
but not corporations, a deduction of up to 20 percent of their combined 
qualified real estate investment trust (REIT) dividends and qualified 
publicly traded partnership (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.
    Overall, the section 199A deduction is the lesser of (1) the sum of 
the combined QBI and qualified REIT and PTP components described in the 
prior two paragraphs or (2) an amount equal to 20 percent of the excess 
(if any) of the taxpayer's taxable income for the taxable year over the 
taxpayer's net capital gain for the taxable year.
    Additionally, section 199A(g) 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 statute expressly grants the Secretary of the Treasury or his 
delegate (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 
certain issues including: 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)).
    The Department of the Treasury (Treasury Department) and the IRS 
published final regulations (TD 9847) interpreting section 199A on 
February 8, 2019 (February 2019 Final Regulations) in the Federal 
Register (84 FR 2952). Along with the publication of the February 2019 
Final Regulations, the Treasury Department and the IRS published a 
notice of proposed rulemaking (REG 134652-18) in the Federal Register 
(84 FR 3015) providing additional guidance under section 199A relating 
to the treatment of previously suspended losses included in qualified 
business income and determining the section 199A deduction for 
taxpayers that hold interests in regulated investment companies, split-
interest trusts, and charitable remainder trusts (February 2019 
Proposed Regulations). No public hearing on the February 2019 Proposed 
Regulations was requested or held. After full consideration of the 
comments received on the February 2019 Proposed Regulations, this 
Treasury decision adopts the proposed regulations with clarifying 
changes and additional modifications in response to comments as 
described in the Summary of Comments and Explanation of Revisions. 
Comments on issues related to the February 2019 Proposed Regulations 
that are beyond the scope of these final regulations are not discussed

[[Page 38061]]

in this preamble, but may be addressed in future guidance.
    The Treasury Department and the IRS also received comments on the 
February 2019 Final Regulations. The Treasury Department and the IRS 
continue to study the issues raised in those comments and may address 
them in future guidance.

Summary of Comments and Explanation of Revisions

    These final regulations contain amendments to two substantive 
sections of the February 2019 Final Regulations, Sec. Sec.  1.199A-3 
and 1.199A-6, each of which provides rules relevant to the calculation 
of the section 199A deduction. The amendments to Sec.  1.199A-
3(b)(1)(iv) provide additional rules and clarification on the treatment 
of suspended losses. Section 1.199A-3(d) provides guidance that allows 
a shareholder in a regulated investment company (RIC) within the 
meaning of section 851(a) to take a section 199A deduction with respect 
to certain income of, or distributions from, the RIC. The amendments to 
Sec.  1.199A-6(d) include additional rules related to trusts and 
estates under section 663 of the Code. This Summary of Comments and 
Explanation of Revisions describes each of the final rules contained in 
this document in turn.

I. Treatment of Previously Suspended Losses Included in QBI

    Section 1.199A-3(b)(1)(iv) of the February 2019 Final Regulations 
provides that previously disallowed losses or deductions (including 
under sections 465, 469, 704(d), and 1366(d)) allowed in the taxable 
year are generally taken into account for purposes of computing QBI, 
except to the extent the losses or deductions were disallowed, 
suspended, limited, or carried over from taxable years ending before 
January 1, 2018. These losses are used, for purposes of section 199A, 
in order from the oldest to the most recent on a first-in, first-out 
(FIFO) basis. The February 2019 Proposed Regulations expanded this rule 
to provide that previously disallowed losses or deductions are treated 
as losses from a separate trade or business in the year they are taken 
into account in determining taxable income. Further, the attributes of 
the previously disallowed losses or deductions, including whether they 
are attributable to a trade or business and whether they would 
otherwise be included in QBI, are determined in the year the loss or 
deduction is incurred.
    The Treasury Department and the IRS are aware that taxpayers and 
practitioners have questioned whether the exclusion of section 461(l) 
from the list of loss disallowance and suspension provisions in Sec.  
1.199A-3(b)(1)(iv) means that losses disallowed under section 461(l) 
are not considered QBI in the year the losses are taken into account in 
determining taxable income. Generally, for taxable years beginning 
after December 31, 2020, and before January 1, 2026, section 461(l) 
disallows an excess business loss for taxpayers other than C 
corporations. See section 2304(a) of the Coronavirus Aid, Relief, and 
Economic Security Act (CARES Act), Public Law 116-136, 134 Stat. 281 
(2020). Any disallowed excess business loss is treated as a net 
operating loss carryover for the taxable year for purposes of 
determining any net operating loss carryover under section 172(b) in 
subsequent taxable years. See section 172(b) as amended by section 
2304(b) of the CARES Act.
    The list of loss disallowance and suspension provisions in Sec.  
1.199A-3(b)(1)(iv) is not exhaustive. If a loss or deduction that would 
otherwise be included in QBI under the rules of Sec.  1.199A-3 is 
disallowed or suspended under any provision of the Code, such loss or 
deduction is generally taken into account for purposes of computing QBI 
in the year it is taken into account in determining taxable income. 
These final regulations clarify this point by amending Sec.  1.199A-
3(b)(1)(iv)(A) to specifically reference excess business losses 
disallowed by section 461(l) and treated as a net operating loss 
carryover for the taxable year for purposes of determining any net 
operating loss carryover under section 172(b) in subsequent taxable 
years.
    The Treasury Department and the IRS are also aware that taxpayers 
and practitioners have questioned how the phase-in rules apply when a 
taxpayer has a suspended or disallowed loss or deduction from a 
Specified Service Trade or Business (SSTB). Whether an individual has 
taxable income at or below the threshold amount, within the phase-in 
range, or in excess of the phase-in range, the determination of whether 
a suspended or disallowed loss or deduction attributable to an SSTB is 
from a qualified trade or business is made in the year the loss or 
deduction is incurred. If the individual's taxable income is at or 
below the threshold amount in the year the loss or deduction is 
incurred, and such loss would otherwise be QBI, the entire disallowed 
loss or deduction is treated as QBI from a separate trade or business 
in the subsequent taxable year in which the loss is allowed. If the 
individual's taxable income is within the phase-in range, then only the 
applicable percentage of the disallowed loss or deduction is taken into 
account in the subsequent taxable year. If the individual's taxable 
income exceeds the phase-in range, none of the disallowed loss or 
deduction will be taken into account in the subsequent taxable year. 
These final regulations clarify this treatment and provide an example 
of a taxpayer with taxable income in the phase-in range and a suspended 
loss from an SSTB.
    The Treasury Department and the IRS received one comment requesting 
further clarification of the FIFO ordering rule. The commenter 
questioned whether the FIFO ordering rule should continue to apply for 
losses incurred in taxable years beginning on or after January 1, 2018. 
The commenter also asked for clarification regarding whether the rule 
applied on an annual basis such that each year is tracked separately 
and FIFO is applied for losses that are incurred each year or whether 
FIFO applies such that there is a single bucket of losses no matter the 
year incurred. The commenter recommended additional supporting 
worksheets or other forms to assist in the calculation, particularly if 
every year must be tracked individually.
    The Treasury Department and the IRS have determined that in order 
to properly calculate the deduction, it is necessary for the FIFO rule 
to apply for losses incurred in taxable years beginning on or after 
January 1, 2018, and that the rule must be applied on an annual basis 
by category (i.e., sections 465, 469, etc.). Accordingly, these final 
regulations retain the FIFO rule as proposed. The Treasury Department 
and the IRS continue to consider whether new worksheets or forms are 
necessary to assist in the calculation.
    The February 2019 Proposed Regulations also provide that if a loss 
or deduction is partially disallowed, QBI in the year of disallowance 
must be reduced proportionately. These final regulations retain this 
rule, but with slight modifications, and provide examples.

II. RICs With Interests in REITs and PTPs

    If a RIC has certain items of income or gain, subchapter M of 
chapter 1 of the Code provides rules under which a RIC may pay 
dividends that a shareholder in the RIC may treat in the same manner 
(or a similar manner) as the shareholder would treat the underlying 
item of income or gain if the shareholder realized it directly. Like 
the preamble to the February 2019 Proposed Regulations, this preamble 
refers to this treatment as ``conduit treatment.'' The

[[Page 38062]]

February 2019 Proposed Regulations include rules providing conduit 
treatment for qualified REIT dividends earned by a RIC. The Treasury 
Department and the IRS received one comment requesting that the 
proposed rules providing this treatment be finalized. These final 
regulations adopt those proposed rules.
    The February 2019 Proposed Regulations do not provide conduit 
treatment for qualified PTP income earned by a RIC. Instead, the 
preamble to the February 2019 Proposed Regulations requested comments 
on issues relating to whether and how to provide conduit treatment for 
qualified PTP income, including the treatment of items attributable to 
an SSTB of a PTP allocated to a RIC and the treatment of losses of a 
PTP allocated to a RIC. The Treasury Department and the IRS received 
several comments addressing conduit treatment for qualified PTP income 
earned by a RIC. Two commenters recommended that conduit treatment be 
extended to qualified PTP income earned by RICs, excluding any items 
attributable to SSTBs. Both commenters suggested that any losses 
allocated to RICs from PTPs could be carried forward by the RIC for 
purposes of section 199A. Another commenter suggested methods by which 
RICs could track, and pay dividends attributable to, an SSTB of a PTP.
    Another commenter suggested that RICs, particularly business 
development companies that conduct lending activities, be allowed to 
pay ``QBI dividends'' to their shareholders in cases where the RIC had 
income from an activity that would generate QBI if conducted by a 
partnership or an S corporation.
    The Treasury Department and the IRS continue to consider those 
comments and evaluate whether it is appropriate and practicable to 
provide conduit treatment for qualified PTP income or other income of a 
RIC to further the purposes of section 199A(b)(1)(B).

III. Special Rules for Trusts and Estates

    Section 1.199A-6 provides guidance that certain specified entities 
(including trusts and estates) might need to compute the section 199A 
deduction of the entity and/or passthrough information to each of its 
owners or beneficiaries, so they may compute their section 199A 
deduction. Section 1.199A-6(d) contains special rules for applying 
section 199A to trusts and decedents' estates.
    Under Sec.  1.199A-6(d)(3)(ii), the QBI, 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) for the taxable year that is distributed 
or required to be distributed to the beneficiary or is retained by the 
trust or estate. Proposed Sec.  1.199A-6(d)(3)(iii) further provides 
that a trust described in section 663(c) with substantially separate 
and independent shares for multiple beneficiaries will be treated as a 
single trust for purposes of determining whether the taxable income of 
the trust exceeds the threshold amount.
    The Treasury Department and the IRS received comments requesting 
guidance on the interaction between section 199A and the separate share 
rule in section 663(c). In particular, the commenters requested 
guidance on the allocation of QBI, W-2 wages, UBIA of qualified 
property, qualified REIT dividends, and qualified PTP income of a trust 
or estate to beneficiaries and the trust or estate based on DNI. The 
commenters noted differences in the allocation of overall DNI to 
beneficiaries of a trust or estate under sections 643(a) and 663(c) and 
asked about the allocation of these items in circumstances involving 
tax-exempt income and charitable deductions, as well as situations in 
which no DNI is allocated to a beneficiary. The commenters asserted 
that under Sec.  1.663(c)-2(b)(5), deductions, including the section 
199A deduction, attributable solely to one share are not available to 
any other separate share of the trust or estate. The commenters 
recommended that the allocation of QBI, W-2 wages, UBIA of qualified 
property, qualified REIT dividends, and qualified PTP income of a trust 
or estate should be based on the portion of such items that are 
attributable to the income of each separate share. In addition, the 
commenters recommended that Sec.  1.663(c)-2(b) be amended to clarify 
how gross income not included in accounting income is allocated among 
separate shares.
    After considering the comments and studying the separate share rule 
in more depth, the Treasury Department and the IRS have clarified the 
separate share rule in these final regulations to provide that, in the 
case of a trust or estate described in section 663(c) with 
substantially separate and independent shares for multiple 
beneficiaries, the trust or estate will be treated as a single trust or 
estate not only for purposes of determining whether the taxable income 
of the trust or estate exceeds the threshold amount but also in 
determining taxable income, net capital gain, net QBI, W-2 wages, UBIA 
of qualified property, qualified REIT dividends, and qualified PTP 
income for each trade or business of the trust or estate, and computing 
the W-2 wage and UBIA of qualified property limitations. Further 
clarification of the separate share rule under section 663 is beyond 
the scope of these final regulations, but the Treasury Department and 
the IRS intend to continue to study the issues raised by the 
commenters. Accordingly, these final regulations provide that the 
allocation of these items to the separate shares of a trust or estate 
described in section 663(c) will be governed by the rules under section 
663(e) and such guidance as may be published in the Internal Revenue 
Bulletin (see Sec.  601.601(d)(2)(ii)(b)).
    Section 1.199A-6(d)(3)(v) of the February 2019 Proposed Regulations 
provides rules under which the taxable recipient of a unitrust or 
annuity amount from a charitable remainder trust described in section 
664 can take into account QBI, qualified REIT dividends, or qualified 
PTP income for purpose of determining the recipient's section 199A 
deduction. The Treasury Department and the IRS received no comments on 
these rules and these final regulations adopt these rules as proposed.

Special Analyses

I. Regulatory Planning and Review--Economic Analysis

    Executive Orders 13771, 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, 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 by the Office of 
Management and Budget's (OMB) Office of Information and Regulatory 
Affairs (OIRA) as subject to review under Executive Order 12866 
pursuant to the Memorandum of Agreement (April 11, 2018) between the 
Treasury Department and 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, OIRA has 
reviewed these final regulations. For purposes of

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Executive Order 13771 this rule is regulatory.
A. Background and Need for Final Regulations
    Section 199A of the TCJA provides taxpayers other than corporations 
a deduction of up to 20 percent of QBI from domestic businesses plus up 
to 20 percent of their combined qualified REIT dividends and qualified 
publicly traded partnership income. Because the section 199A deduction 
had not previously been available, regulations are necessary to provide 
taxpayers with computational and definitional guidance regarding the 
application of section 199A.
    The Treasury Department and the IRS previously issued the February 
2019 Final Regulations regarding various items related to the 
calculation of the section 199A deduction. However, the February 2019 
Final Regulations did not address treatment of REIT dividends received 
by RICs. Because RICs are taxed as C corporations, dividends paid by 
RICs are generally ineligible for the section 199A deduction under the 
statute, which excludes C corporation income from the definition of 
QBI. However, the statute also directs the Secretary to prescribe such 
regulations as are necessary to carry out the purposes of section 199A, 
including regulations for its application in the case of tiered 
entities. These final regulations establish rules under which RIC 
dividends associated with qualified REIT dividends may be eligible for 
a section 199A deduction.
    In addition, these final regulations establish rules for the 
treatment of previously suspended losses in calculation of QBI and 
rules for applying section 199A to trusts and decedents' estates.
B. Economic Analysis
1. Baseline
    The analysis in this section compares these final regulations 
(these regulations) to a no-action baseline reflecting anticipated 
Federal income tax-related behavior in the absence of these 
regulations.
2. Summary of Economic Effects
    To assess the economic effects of these regulations, the Treasury 
Department and the IRS considered the economic effects of (i) rules for 
the treatment of previously suspended losses in calculation of QBI; 
(ii) rules providing conduit treatment for qualified REIT dividends 
earned by a RIC; and (iii) rules for applying section 199A to trusts 
and decedents' estates.
    Regarding items (i) and (iii): These regulations provide certainty 
and clarity to taxpayers regarding terms and calculations necessary for 
taxpayers to determine their section 199A deduction. In the absence of 
this clarity, the likelihood would be exacerbated that different 
taxpayers would hold different interpretations of the tax treatment of 
previously suspended losses or the application of section 199A to 
trusts and decedents' estates. These regulations help taxpayers to hold 
more similar interpretations of the tax treatment of these items. In 
general, overall economic performance is enhanced when individuals and 
businesses face more uniform signals about tax treatment. Certainty and 
clarity over tax treatment also reduce compliance costs for taxpayers.
    The Treasury Department and the IRS do not project meaningful 
changes in economic activity as a result of these provisions, relative 
to the no-action baseline.
    Regarding item (ii): These regulations provide that an individual 
who is a shareholder of a RIC that has an ownership interest in a REIT 
may, for section 199A purposes, treat certain dividends received from a 
RIC in the same way the shareholder would treat dividends received 
directly from the REIT. Specifically, under these regulations RIC 
shareholders are generally eligible for the section 199A deduction on 
their section 199A dividends. In the absence of these regulations, 
dividends received from a RIC that has an ownership interest in a REIT 
would not qualify for the section 199A deduction while dividends 
received directly from that REIT would generally qualify for the 
deduction. Thus, in the absence of these regulations, direct ownership 
of REITs is tax-advantaged relative to indirect ownership of REITs 
through RICs even though the underlying economic activity is similar.
    As a general principle, overall economic performance is improved to 
the extent that the tax consequences of investment through a financial 
intermediary (such as a RIC) are equivalent to the tax consequences of 
direct investment. In the absence of these regulations, a tax incentive 
would arise for individuals to invest directly in REITs rather than 
through RIC intermediaries. This would distort investment allocation 
relative to a tax-neutral treatment of financial intermediaries, 
leading investors to make decisions based on differential tax treatment 
rather than purely based on the value of investments. In particular, it 
would likely cause investors to hold less diversified portfolios.\1\ 
The Treasury Department and the IRS therefore project that, under these 
regulations, individual investors seeking to invest in real estate 
would in general hold more diversified portfolios relative to the no-
action baseline.
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    \1\ RICs include mutual funds, which facilitate the 
diversification of an individual investor's financial portfolio.
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    Another economic loss that would likely arise in the absence of 
these regulations is due to the costs of acquiring information. RICs, 
including mutual funds and exchange-traded funds, simplify decision-
making for investors by finding, indexing, and vetting REITs. This is 
an efficient market organization due to economies of scale in gathering 
relevant information. In the absence of these regulations, individual 
investors face substantial incentives to invest directly in REITs due 
to asymmetric tax treatment, and face larger time costs to evaluate 
REIT investment options than RICs. The same level of investment can be 
achieved with substantially less resource use if research costs are 
incurred by RICs rather than individual investors, and therefore this 
rule will lead to more efficient resource use in making aggregate 
investment decisions.
    On the basis of these effects, the Treasury Department and the IRS 
also project that these regulations will lead investors, on average, to 
hold more real estate in their portfolios (relative to the no-action 
baseline) and thus hold a smaller share of investment in other 
industries.
    The Treasury Department and the IRS project that the economic 
effects of these regulations will exceed $100 million per year relative 
to the no-action baseline. The compliance costs alone are estimated to 
be approximately $149 million (excluding any compliance cost savings), 
as described in the Paperwork Reduction Act section of these analyses. 
These compliance costs arise because the regulations require a RIC to 
compute and report section 199A dividends to its shareholders in order 
for them to benefit from the section 199A deduction on qualified REIT 
dividends earned by the RIC. In some sense, these costs are optional 
since RICs that do not pay section 199A dividends, either because they 
do not receive qualified REIT dividends or because they choose not to 
take on the additional record-keeping, avoid these compliance costs 
entirely. Nonetheless, we expect that many RICs will choose to incur 
the compliance costs to facilitate their shareholders' section 199A 
deductions.

[[Page 38064]]

    Though many RICs keep detailed records of their investment 
portfolios, these regulations nonetheless create non-trivial 
administrative costs for any RICs that wish to provide section 199A 
dividends to their shareholders. However, this increase in compliance 
costs may be accompanied by a decrease in compliance costs for REITs 
who would otherwise see an influx of individual investors holding 
direct interest in REITs. The Treasury Department and the IRS have not 
estimated this compliance cost savings.
    Beyond any potential compliance cost reduction, several other 
economic benefits result from these regulations, including those 
flowing from enhanced financial diversification and reduced 
information-gathering costs. While we have not attempted to quantify 
the economic benefits of these effects, we project that they are likely 
to be substantial as well. We estimate that up to $6.0 billion in REIT 
dividends accrued to individual taxpayers through RICs in taxable year 
2018. Of this, $5.6 billion went to taxpayers with positive taxable 
income, who thus could potentially use section 199A deductions. This 
corresponds to aggregate potential deductions of up to $1.1 billion (20 
percent of $5.6 billion). Under an assumption that the effective tax 
rate for these investors was 30 percent, then under the no-action 
baseline taxpayers would theoretically be willing to incur up to $336 
million in economic costs in order to receive the section 199A 
deduction on their income derived from REITs that currently flows 
through RICs. Thus, relative to the no-action baseline, these 
regulations provide up to $336 million in annual benefits by allowing 
investors to avoid these costs.
    Another way of gauging the potential economic benefits from these 
regulations is to consider them relative to the investment returns 
currently flowing to REIT investors through RICs. If RIC intermediaries 
provide economic benefits (relative to direct ownership of REITs) equal 
to five percent of investment returns, then the benefits of these 
regulations relative to the no-action baseline would be up to $280 
million (five percent of $5.6 billion), assuming the same levels of 
economic activity as in taxable year 2018.
    The Treasury Department and the IRS project that more taxpayers 
will claim the section 199A deduction under these regulations, reducing 
government revenue relative to the no-action baseline. On its own, this 
reduction in revenue itself would affect the United States economy. 
Either the deficit would increase or other taxes would need to be 
raised. This effect should be weighed against the enhanced efficiency 
arising from the regulations. We have not attempted to quantify these 
effects. Similarly, we have not attempted to quantify the efficiency 
effects of the shift in investment away from other industries and 
toward real estate that may result from these regulations, relative to 
the no-action baseline.
3. Number of Affected Taxpayers
    The Treasury Department and the IRS estimate that the rules 
regarding RICs as financial intermediaries for REIT investors will 
affect up to 2,500 RICs and up to 4.8 million individual tax units. 
These estimates are derived from the universe of taxable year 2018 
administrative tax records. For taxable year 2018, taxpayers were able 
to rely on the February 2019 Proposed Regulations, which meant that 
RICs could provide conduit treatment for REIT dividends for section 
199A purposes (as in these regulations). Accordingly, 2,500 entities 
that did not file Form 1120-REIT issued at least one Form 1099-DIV with 
section 199A dividends. For comparison, approximately 1,400 REITs 
issued at least one Form 1099-DIV with section 199A dividends. 
Approximately 5.2 million tax units received at least one Form 1099-DIV 
with section 199A dividends from the 2,500 non-REIT entities. Among 
these tax units, roughly 4.8 million had positive taxable income and 
therefore could have potentially benefited from the section 199A 
deduction.\2\
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    \2\ For this analysis, entities are proxied by Employer 
Identification Numbers (EINs). EINs are tax identification numbers 
that do not perfectly align with the relevant entity concept. In 
particular, it is possible that one REIT may operate using multiple 
EINs, one to file its Form 1120-REIT and one to issue its Form 1099-
DIVs. In this case, we will misclassify the 1099-issuing EIN as a 
non-REIT. Therefore the estimates for the number of RICs, and the 
individuals receiving section 199A dividends from RICs, are upper 
bounds.
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II. Paperwork Reduction Act (PRA)

    The collection of information contained in these regulations will 
be reviewed by the Office of Management and Budget in accordance with 
the Paperwork Reduction Act of 1995 (44 U.S.C. 3507(d)) under control 
number 1545-0110. The collection of information required by this 
regulation is in Sec.  1.199A-3. The collection of information in Sec.  
1.199A-3 is required for RICs that choose to report information 
regarding qualified REIT dividends to their shareholders. It is 
necessary to report the information to the IRS and relevant taxpayers 
to ensure that taxpayers properly report in accordance with the rules 
of these regulations the correct amount of deduction under section 
199A. The collection of information in Sec.  1.199A-3 is satisfied by 
providing information about section 199A dividends as Form 1099-DIV 
(OMB control number 1545-0110) and its instructions may prescribe.
    For purposes of the PRA, the reporting burden associated with Sec.  
1.199A-3 will be reflected in the next revision to Form 1099-DIV. The 
burden associated with the information collection in the regulation 
represents 1.567 million hours and $149 million (2018 dollars) annually 
to comply with the information collection requirement in the 
regulation. These estimates capture both changes made by the TCJA and 
those that arise out of these regulations. The burden hours estimate 
was derived from IRS's legacy burden model and is discussed in further 
detail on Form 1099-DIV. The hourly rate is derived from the IRS's 
office of Research, Applied Analytics, and Statistics Business Taxpayer 
Burden model that relates time and out-of-pocket costs of business tax 
preparation, derived from survey data, to assets and receipts of 
affected taxpayers along with other relevant variables, and converted 
by the Treasury Department to $2017. The Treasury Department and the 
IRS request comment on all aspects of information collection burdens 
related to these regulations. Proposed revisions (if any) to these 
forms that reflect the information collections contained in these 
regulations will be made available for public comment at www.irs.gov/draftforms and will not be finalized until after the forms have been 
approved by OMB under the PRA.
    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 
OMB control number.

III. Regulatory Flexibility Act

    In accordance with the Regulatory Flexibility Act (5 U.S.C. chapter 
6), it is hereby certified that this final rule will not have a 
significant economic impact on a substantial number of small entities.
    The final rule is not likely to affect a substantial number of 
small entities. Section 1.199A-3 applies to RICs that pay section 199A 
dividends. Congress created RICs to give small investors access to the 
professional management and asset diversification that are available 
only with very large investment portfolios. To insure appropriate non-
tax regulation of these substantial investment portfolios,

[[Page 38065]]

subchapter M of chapter 1 of the Code requires that such RICs must be 
eligible for registration, and must actually be registered with the 
Securities and Exchange Commission under the Investment Company Act of 
1940. There are some small businesses that are publicly traded, but 
most publicly traded businesses are not small entities as defined by 
the Regulatory Flexibility Act. Thus, the Treasury Department and IRS 
expect that most RICs are not small entities for purposes of the 
Regulatory Flexibility Act. Accordingly, the Treasury Department and 
the IRS have determined that this Treasury decision will not affect a 
substantial number of small entities. Finally, no comments regarding 
the economic impact of these regulations on small entities were 
received.
    Pursuant to section 7805(f) of the Code, the notice of proposed 
rulemaking preceding these regulations was submitted to the Chief 
Counsel for Advocacy of the Small Business Administration for comment 
on its impact on small business and no comments were received.

Drafting Information

    The principal authors of these regulations are Michael Y. Chin and 
Steven Harrison, Office of the Associate Chief Counsel (Financial 
Institutions and Products) and Robert Alinsky, Vishal Amin, Margaret 
Burow, and Sonia Kothari, 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 continues to read in 
part as follows:

    Authority: 26 U.S.C. 7805 * * *.
    Section 1.199A-3 also issued under 26 U.S.C. 199A(c)(4)(C) and 
(f)(4).
* * * * *
    Section 1.199A-6 also issued under 26 U.S.C. 199A(f)(1)(B) and 
(f)(4).
* * * * *

0
Par. 2. Section 1.199A-0 is amended by:
0
1. Adding entries for Sec.  1.199A-3(b)(1)(iv)(A) through (C), 
(b)(1)(iv)(C)(1) and (2), (b)(1)(iv)(D), (d), (d)(1) and (2), (d)(2)(i) 
through (iii), (d)(2)(iii)(A) and (B), (d)(3), (d)(3)(i) through (v), 
(d)(4), (d)(4)(i) and (ii), (d)(5), and (e)(2)(iii) and (iv).
0
2. Adding entries for Sec.  1.199A-6(d)(3)(iii) and (v) and (e)(2)(iii) 
and (iv).
    The additions read as follows:


Sec.  1.199A-0  Table of contents.

* * * * *
Sec.  1.199A-3 Qualified business income, qualified REIT dividends, 
and qualified PTP income.
* * * * *
    (b) * * *
    (1) * * *
    (iv) * * *
    (A) In general.
    (B) Partial allowance.
    (C) Attributes of disallowed loss determined in year loss is 
incurred.
    (1) In general.
    (2) Specified service trades or businesses.
    (D) Examples.
* * * * *
    (d) Section 199A dividends paid by a regulated investment 
company.
    (1) In general.
    (2) Definition of section 199A dividend.
    (i) In general.
    (ii) Reduction in the case of excess reported amounts.
    (iii) Allocation of excess reported amount.
    (A) In general.
    (B) Special rule for noncalendar-year RICs.
    (3) Definitions.
    (i) Reported section 199A dividend amount.
    (ii) Excess reported amount.
    (iii) Aggregate reported amount.
    (iv) Post-December reported amount.
    (v) Qualified REIT dividend income.
    (4) Treatment of section 199A dividends by shareholders.
    (i) In general.
    (ii) Holding period.
    (5) Example.
    (e) * * *
    (2) * * *
    (iii) Previously disallowed losses.
    (iv) Section 199A dividends.
* * * * *
Sec.  1.199A-6 Relevant passthrough entities (RPEs), publicly traded 
partnerships (PTPs), trusts, and estates.
* * * * *
    (d) * * *
    (3) * * *
    (iii) Separate shares.
* * * * *
    (v) Charitable remainder trusts.
* * * * *
    (e) * * *
    (2) * * *
    (iii) Separate shares.
    (iv) Charitable remainder trusts.

0
Par. 3. Section 1.199A-3 is amended by revising paragraph (b)(1)(iv) 
and adding paragraphs (d) and (e)(2)(iii) and (iv) to read as follows:


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

* * * * *
    (b) * * *
    (1) * * *
    (iv) Previously disallowed losses--(A) In general. Previously 
disallowed losses or deductions allowed in the taxable year generally 
are taken into account for purposes of computing QBI to the extent the 
disallowed loss or deduction is otherwise allowed by section 199A. 
These previously disallowed losses include, but are not limited to 
losses disallowed under sections 461(l), 465, 469, 704(d), and 1366(d). 
These losses are used for purposes of section 199A and this section in 
order from the oldest to the most recent on a first-in, first-out 
(FIFO) basis and are treated as losses from a separate trade or 
business. To the extent such losses relate to a PTP, they must be 
treated as a loss from a separate PTP in the taxable year the losses 
are taken into account. 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 subsequent 
taxable year for purposes of computing QBI.
    (B) Partial allowance. If a loss or deduction attributable to a 
trade or business is only partially allowed during the taxable year in 
which incurred, only the portion of the allowed loss or deduction that 
is attributable to QBI will be considered in determining QBI from the 
trade or business in the year the loss or deduction is incurred. The 
portion of the allowed loss or deduction attributable to QBI is 
determined by multiplying the total amount of the allowed loss by a 
fraction, the numerator of which is the portion of the total loss 
incurred during the taxable year that is attributable to QBI and the 
denominator of which is the amount of the total loss incurred during 
the taxable year.
    (C) Attributes of disallowed loss or deduction determined in year 
loss is incurred--(1) In general. Whether a disallowed loss or 
deduction is attributable to a trade or business, and otherwise meets 
the requirements of this section, is determined in the year the loss is 
incurred.
    (2) Specified service trades or businesses. If a disallowed loss or 
deduction is attributable to a specified service trade or business 
(SSTB), whether an individual has taxable income at or below the 
threshold amount as defined in Sec.  1.199A-1(b)(12), within the phase-
in range as defined in

[[Page 38066]]

Sec.  1.199A-1(b)(4), or in excess of the phase-in range is determined 
in the year the loss or deduction is incurred. If the individual's 
taxable income is at or below the threshold amount in the year the loss 
or deduction is incurred, the entire disallowed loss or deduction must 
be taken into account when applying paragraph (b)(1)(iv)(A) of this 
section. If the individual's taxable income is within the phase-in 
range, then only the applicable percentage, as defined in Sec.  1.199A-
1(b)(2), of the disallowed loss or deduction is taken into account when 
applying paragraph (b)(1)(iv)(A) of this section. If the individual's 
taxable income exceeds the phase-in range, none of the disallowed loss 
or deduction will be taken into account in applying paragraph 
(b)(1)(iv)(A) of this section.
    (D) Examples. The following examples illustrate the provisions of 
this paragraph (b)(1)(iv).

    (1) Example 1. A is an unmarried individual and a 50% owner of 
LLC, an entity classified as a partnership for Federal income tax 
purposes. In 2018, A's allocable share of loss from LLC is $100,000 
of which $80,000 is negative QBI. Under section 465, $60,000 of the 
allocable loss is allowed in determining A's taxable income. A has 
no other previously disallowed losses under section 465 or any other 
provision of the Code for 2018 or prior years. Because 80% of A's 
allocable loss is attributable to QBI ($80,000/$100,000), A will 
reduce the amount A takes into account in determining QBI 
proportionately. Thus, A will include $48,000 of the allowed loss in 
negative QBI (80% of $60,000) in determining A's section 199A 
deduction in 2018. The remaining $32,000 of negative QBI is treated 
as negative QBI from a separate trade or business for purposes of 
computing the section 199A deduction in the year the loss is taken 
into account in determining taxable income as described in Sec.  
1.199A-1(d)(2)(iii).
    (2) Example 2. B is an unmarried individual and a 50% owner of 
LLC, an entity classified as a partnership for Federal income tax 
purposes. After allowable deductions other than the section 199A 
deduction, B's taxable income for 2018 is $177,500. In 2018, LLC has 
a single trade or business that is an SSTB. B's allocable share of 
loss is $100,000, all of which is suspended under section 465. B's 
allocable share of negative QBI is also $100,000. B has no other 
previously disallowed losses under section 465 or any other 
provision of the Code for 2018 or prior years. Because the entire 
loss is suspended, none of the negative QBI is taken into account in 
determining B's section 199A deduction for 2018. Further, because 
the negative QBI is from an SSTB and B's taxable income before the 
section 199A deduction is within the phase-in range, B must 
determine the applicable percentage of the negative QBI that must be 
taken into account in the year that the loss is taken into account 
in determining taxable income. B's applicable percentage is 100% 
reduced by 40% (the percentage equal to the amount that B's taxable 
income for the taxable year exceeds B's threshold amount ($20,000 = 
$177,500-$157,500) over $50,000). Thus, B's applicable percentage is 
60%. Therefore, B will have $60,000 (60% of $100,000) of negative 
QBI from a separate trade or business to be applied proportionately 
to QBI in the year(s) the loss is taken into account in determining 
taxable income, regardless of the amount of taxable income and how 
rules under Sec.  1.199A-5 apply in the year the loss is taken into 
account in determining taxable income.
* * * * *
    (d) Section 199A dividends paid by a regulated investment company--
(1) In general. If section 852(b) applies to a regulated investment 
company (RIC) for a taxable year, the RIC may pay section 199A 
dividends, as defined in this paragraph (d).
    (2) Definition of section 199A dividend--(i) In general. Except as 
provided in paragraph (d)(2)(ii) of this section, a section 199A 
dividend is any dividend or part of such a dividend that a RIC pays to 
its shareholders and reports as a section 199A dividend in written 
statements furnished to its shareholders.
    (ii) Reduction in the case of excess reported amounts. If the 
aggregate reported amount with respect to the RIC for any taxable year 
exceeds the RIC's qualified REIT dividend income for the taxable year, 
then a section 199A dividend is equal to--
    (A) The reported section 199A dividend amount; reduced by
    (B) The excess reported amount that is allocable to that reported 
section 199A dividend amount.
    (iii) Allocation of excess reported amount--(A) In general. Except 
as provided in paragraph (d)(2)(iii)(B) of this section, the excess 
reported amount (if any) that is allocable to the reported section 199A 
dividend amount is that portion of the excess reported amount that 
bears the same ratio to the excess reported amount as the reported 
section 199A dividend amount bears to the aggregate reported amount.
    (B) Special rule for noncalendar-year RICs. In the case of any 
taxable year that does not begin and end in the same calendar year, if 
the post-December reported amount equals or exceeds the excess reported 
amount for that taxable year, paragraph (d)(2)(iii)(A) of this section 
is applied by substituting ``post-December reported amount'' for 
``aggregate reported amount,'' and no excess reported amount is 
allocated to any dividend paid on or before December 31 of that taxable 
year.
    (3) Definitions. For purposes of paragraph (d) of this section--
    (i) Reported section 199A dividend amount. The term reported 
section 199A dividend amount means the amount of a dividend 
distribution reported to the RIC's shareholders under paragraph 
(d)(2)(i) of this section as a section 199A dividend.
    (ii) Excess reported amount. The term excess reported amount means 
the excess of the aggregate reported amount over the RIC's qualified 
REIT dividend income for the taxable year.
    (iii) Aggregate reported amount. The term aggregate reported amount 
means the aggregate amount of dividends reported by the RIC under 
paragraph (d)(2)(i) of this section as section 199A dividends for the 
taxable year (including section 199A dividends paid after the close of 
the taxable year and described in section 855).
    (iv) Post-December reported amount. The term post-December reported 
amount means the aggregate reported amount determined by taking into 
account only dividends paid after December 31 of the taxable year.
    (v) Qualified REIT dividend income. The term qualified REIT 
dividend income means, with respect to a taxable year of a RIC, the 
excess of the amount of qualified REIT dividends, as defined in 
paragraph (c)(2) of this section, includible in the RIC's taxable 
income for the taxable year over the amount of the RIC's deductions 
that are properly allocable to such income.
    (4) Treatment of section 199A dividends by shareholders--(i) In 
general. For purposes of section 199A, and Sec. Sec.  1.199A-1 through 
1.199A-6, a section 199A dividend is treated by a taxpayer that 
receives the section 199A dividend as a qualified REIT dividend.
    (ii) Holding period. Paragraph (d)(4)(i) of this section does not 
apply to any dividend received with respect to a share of RIC 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 the 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.
    (5) Example. The following example illustrates the provisions of 
this paragraph (d).

    (i) X is a corporation that has elected to be a RIC. For its 
taxable year ending March 31, 2021, X has $25,000x of net long-term 
capital gain, $60,000x of qualified dividend income,

[[Page 38067]]

$25,000x of taxable interest income, $15,000x of net short-term 
capital gain, and $25,000x of qualified REIT dividends. X has 
$15,000x of deductible expenses, of which $3,000x is allocable to 
the qualified REIT dividends. On December 31, 2020, X pays a single 
dividend of $100,000x, and reports $20,000x of the dividend as a 
section 199A dividend in written statements to its shareholders. On 
March 31, 2021, X pays a dividend of $35,000x, and reports $5,000x 
of the dividend as a section 199A dividend in written statements to 
its shareholders.
    (ii) X's qualified REIT dividend income under paragraph 
(d)(3)(v) of this section is $22,000x, which is the excess of X's 
$25,000x of qualified REIT dividends over $3,000x in allocable 
expenses. The reported section 199A dividend amounts for the 
December 31, 2020, and March 31, 2021, distributions are $20,000x 
and $5,000x, respectively. For the taxable year ending March 31, 
2021, the aggregate reported amount of section 199A dividends is 
$25,000x, and the excess reported amount under paragraph (d)(3)(ii) 
of this section is $3,000x. Because X is a noncalendar-year RIC and 
the post-December reported amount of $5,000x exceeds the excess 
reported amount of $3,000x, the entire excess reported amount is 
allocated under paragraphs (d)(2)(iii)(A) and (B) of this section to 
the reported section 199A dividend amount for the March 31, 2021, 
distribution. No portion of the excess reported amount is allocated 
to the reported section 199A dividend amount for the December 31, 
2020, distribution. Thus, the section 199A dividend on March 31, 
2021, is $2,000x, which is the reported section 199A dividend amount 
of $5,000x reduced by the $3,000x of allocable excess reported 
amount. The section 199A dividend on December 31, 2020, is the 
$20,000x that X reports as a section 199A dividend.
    (iii) Shareholder A, a United States person, receives a dividend 
from X of $100x on December 31, 2020, of which $20x is reported as a 
section 199A dividend. If A meets the holding period requirements in 
paragraph (d)(4)(ii) of this section with respect to the stock of X, 
A treats $20x of the dividend from X as a qualified REIT dividend 
for purposes of section 199A for A's 2020 taxable year.
    (iv) A receives a dividend from X of $35x on March 31, 2021, of 
which $5x is reported as a section 199A dividend. Only $2x of the 
dividend is a section 199A dividend. If A meets the holding period 
requirements in paragraph (d)(4)(ii) of this section with respect to 
the stock of X, A may treat the $2x section 199A dividend as a 
qualified REIT dividend for A's 2021 taxable year.

    (e) * * *
    (2) * * *
    (iii) Previously disallowed losses. The provisions of paragraph 
(b)(1)(iv) of this section apply to taxable years beginning after 
August 24, 2020. Taxpayers may choose to apply the rules in paragraph 
(b)(1)(iv) of this section for taxable years beginning on or before 
August 24, 2020, so long as the taxpayers consistently apply the rules 
in paragraph (b)(1)(iv) of this section for each such year.
    (iv) Section 199A dividends. The provisions of paragraph (d) of 
this section apply to taxable years beginning after August 24, 2020. 
Taxpayers may choose to apply the rules in paragraph (d) of this 
section for taxable years beginning on or before August 24, 2020, so 
long as the taxpayers consistently apply the rules in paragraph (d) of 
this section for each such year.

0
Par. 4. Section 1.199A-6 is amended by adding paragraphs (d)(3)(iii) 
and (v) and (e)(2)(iii) and (iv) to read as follows:


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

* * * * *
    (d) * * *
    (3) * * *
    (iii) Separate shares. In the case of a trust or estate described 
in section 663(c) with substantially separate and independent shares 
for multiple beneficiaries, such trust or estate will be treated as a 
single trust or estate for purposes of determining whether the taxable 
income of the trust or estate exceeds the threshold amount; determining 
taxable income, net capital gain, net QBI, W-2 wages, UBIA of qualified 
property, qualified REIT dividends, and qualified PTP income for each 
trade or business of the trust and estate; and computing the W-2 wage 
and UBIA of qualified property limitations. The allocation of these 
items to the separate shares of a trust or estate will be governed by 
the rules under Sec. Sec.  1.663(c)-1 through 1.663(c)-5, as they may 
be adjusted or clarified by publication in the Internal Revenue 
Bulletin (see Sec.  601.601(d)(2)(ii)(b) of this chapter).
* * * * *
    (v) Charitable remainder trusts. A charitable remainder trust 
described in section 664 is not entitled to and does not calculate a 
section 199A deduction, and the threshold amount described in section 
199A(e)(2) does not apply to the trust. However, any taxable recipient 
of a unitrust or annuity amount from the trust must determine and apply 
the recipient's own threshold amount for purposes of section 199A 
taking into account any annuity or unitrust amounts received from the 
trust. A recipient of a unitrust or annuity amount from a trust may 
take into account QBI, qualified REIT dividends, or qualified PTP 
income for purposes of determining the recipient's section 199A 
deduction for the taxable year to the extent that the unitrust or 
annuity amount distributed to such recipient consists of such section 
199A items under Sec.  1.664-1(d). For example, if a charitable 
remainder trust has investment income of $500, qualified dividend 
income of $200, and qualified REIT dividends of $1,000, and distributes 
$1,000 to the recipient, the trust would be treated as having income in 
two classes within the category of income, described in Sec.  1.664-
1(d)(1)(i)(a)(1), for purposes of Sec.  1.664-1(d)(1)(ii)(b). Because 
the annuity amount first carries out income in the class subject to the 
highest income tax rate, the entire annuity payment comes from the 
class with the investment income and qualified REIT dividends. Thus, 
the charitable remainder trust would be treated as distributing a 
proportionate amount of the investment income ($500 / (1,000 + 500) * 
1,000 = $333) and qualified REIT dividends ($1000 / (1,000 + 500) * 
1000 = $667) because the investment income and qualified REIT dividends 
are taxed at the same rate and within the same class, which is higher 
than the rate of tax for the qualified dividend income in a separate 
class. The charitable remainder trust in this example would not be 
treated as distributing any of the qualified dividend income until it 
distributed all the investment income and qualified REIT dividends 
(more than $1,500 in total) to the recipient. To the extent that a 
trust is treated as distributing QBI, qualified REIT dividends, or 
qualified PTP income to more than one unitrust or annuity recipient in 
the taxable year, the distribution of such income will be treated as 
made to the recipients proportionately, based on their respective 
shares of total QBI, qualified REIT dividends, or qualified PTP income 
distributed for that year. The trust allocates and reports any W-2 
wages or UBIA of qualified property to the taxable recipient of the 
annuity or unitrust interest based on each recipient's share of the 
trust's total QBI (whether or not distributed) for that taxable year. 
Accordingly, if 10 percent of the QBI of a charitable remainder trust 
is distributed to the recipient and 90 percent of the QBI is retained 
by the trust, 10 percent of the W-2 wages and UBIA of qualified 
property is allocated and reported to the recipient and 90 percent of 
the W-2 wages and UBIA of qualified property is treated as retained by 
the trust. However, any W-2 wages retained by the trust cannot be used 
to compute W-2 wages in a subsequent taxable year for section 199A 
purposes. Any QBI, qualified REIT dividends, or qualified PTP income of 
the trust that is unrelated business taxable income is subject to 
excise tax and that tax must

[[Page 38068]]

be allocated to the corpus of the trust under Sec.  1.664-1(c).
* * * * *
    (e) * * *
    (2) * * *
    (iii) Separate shares. The provisions of paragraph (d)(3)(iii) of 
this section apply to taxable years beginning after August 24, 2020. 
Taxpayers may choose to apply the rules in paragraph (d)(3)(iii) of 
this section for taxable years beginning on or before August 24, 2020, 
so long as the taxpayers consistently apply the rules in paragraph 
(d)(3)(iii) of this section for each such year.
    (iv) Charitable remainder trusts. The provisions of paragraph 
(d)(3)(v) of this section apply to taxable years beginning after August 
24, 2020. Taxpayers may choose to apply the rules in paragraph (d) of 
this section for taxable years beginning on or before August 24, 2020, 
so long as the taxpayers consistently apply the rules in paragraph 
(d)(3)(v) of this section for each such year.

Sunita Lough,
Deputy Commissioner for Services and Enforcement.

    Approved: May 12, 2020.
David J. Kautter,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2020-11832 Filed 6-24-20; 8:45 am]
BILLING CODE 4830-01-P