[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]]
=======================================================================
-----------------------------------------------------------------------
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.
-----------------------------------------------------------------------
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
[[Page 38063]]
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.
---------------------------------------------------------------------------
\1\ RICs include mutual funds, which facilitate the
diversification of an individual investor's financial portfolio.
---------------------------------------------------------------------------
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\
---------------------------------------------------------------------------
\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.
---------------------------------------------------------------------------
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