Monthly Archives: February 2019

The Final Section 199A Regulations Eliminate Anti-Abuse Rule from the Proposed Regulations

The proposed Section 199A regulations provide anti-abuse rules to limit the ability of taxpayers to separate a specified service trade or business (“SSTB”) from a non-SSTB. One of those rules provides that if a non-SSTB has both 50 percent or more common ownership with an SSTB and shared expenses with the SSTB, then the non-SSTB will be considered incidental to, and part of, the SSTB if the gross receipts of the non-SSTB represent 5 percent or less of the total combined gross receipts of the non-SSTB and SSTB.

The proposed regulations provide an example of this rule where a dermatologist provides medical services to patients and also sells skin care products to patients. The same employees and office space are used for the medical services and the sale of skin care products. The gross receipts of the skin care product sales do not exceed 5% of the combined gross receipts. Under the rule, the sale of the skin care products (which is not an SSTB) will be treated as incident to, and part of, the medical service SSTB. Therefore, the qualified business income, W-2 wages, and any unadjusted basis of qualified property attributable to the skin care products business will not be eligible for Section 199A purposes unless the dermatologist is under the taxable income thresholds specified in Section 199A.

Treasury received numerous comments, including from Williams Parker, critical of this rule for various reasons, including uncertainty as to the meaning of shared expenses and how to allocate gross receipts, and also the negative impact to owners of SSTB’s that create start-up businesses that are non-SSTBs. Thankfully, in response to these comments, Treasury eliminated this so-called “incidental rule” from the final Section 199A regulations.

View the final regulations.

This post is one in a series of posts on the 199A regulations. 

Michael J. Wilson
mwilson@williamsparker.com
941-536-2043

Final Section 199A Regulations Provide Little Guidance for Skilled Nursing and Assisted Living Facilities

The final Section 199A regulations, which were promulgated on January 18, 2019, make several clarifications to the rules regarding specified service trades or businesses (“SSTB”). Over certain taxable income thresholds, SSTBs are not eligible for the Section 199A deduction. The performance of services in the field of health is an SSTB and is defined in Section 1.199A-5(b)(2) of the final regulations as “the provision of medical services by individuals, such as physicians, pharmacists, nurses, dentists, veterinarians, physical therapists, psychologists, another similar healthcare professionals performing services in their capacity as such.” The operation of health clubs or health spas, payment processing, or the research, testing, manufacture and sales of pharmaceuticals or medical devices are not within the field of health.

Many commentators to the proposed regulations, including Williams Parker, noted that many of the services provided by skilled nursing facilities and assisted living facilities are unrelated to health care, including housing, meals, laundry, security, and socialization activities. Unfortunately, Treasury declined to issue specific guidance as to whether the owners of skilled nursing, assisted living, and similar facilities are performing services within the field of health, and noted that the issue “requires a facts and circumstances inquiry that is beyond the scope of these final regulations.”

However, the final regulations added an example in Section 1.199A-5(b)(3)(ii) of a senior housing facility that is not engaged in the field of health. In the example, the senior housing facility provides its residents with standard domestic services (including housing management and maintenance, meals, laundry, and entertainment), but all medical and health services (including skilled nursing, physical and occupational therapy, speech-language pathology, medications, medical supplies and equipment, and ambulance transportation) are provided through separate professional healthcare organizations. All of the health and medical services are billed directly by the healthcare providers to the senior citizens even though the services are provided at the facility. Unfortunately, the final regulations do not address a scenario where the facility invoices the senior citizens for the health and medical services on behalf of the healthcare providers.

View the final regulations.

This post is one in a series of posts on the 199A regulations. 

Michael J. Wilson
mwilson@williamsparker.com
941-536-2043

Safe Harbor Created for Rental Real Estate Activities and Section 199A Deduction, but Triple Net Leases are Excluded

Section 199A generally provides a 20 percent deduction for qualified business income of a trade or business. Many comments made with respect to the proposed Section 199A regulations focused on when rental real estate activities will constitute a trade or business, and thus be eligible for the Section 199A deduction. The final regulations generally define a trade or business by referencing Section 162, and the IRS acknowledged there is uncertainty regarding when rental real estate activities constitute a trade or business for purposes of Section 162. In connection with issuing the final Section 199A regulations on January 18, 2019, IRS issued notice 2019-07, which provides notice of a proposed revenue procedure detailing a proposed safe harbor under which rental real estate activities may be treated as a trade or business solely for purposes of Section 199A.

The notice provides that a “rental real estate enterprise” will qualify for the safe harbor if:

(a) Separate books and records are maintained to reflect income and expenses for each rental real estate enterprise;

(b) For taxable years beginning prior to January 1, 2023, 250 or more hours of rental services are performed per year with respect to the rental enterprise. For taxable years beginning after December 31, 2022, in any three of the five consecutive taxable years that end with the taxable year (or in each year for an enterprise held for less than five years), 250 or more hours of rental services are performed per year with respect to the real estate rental enterprise; and

(c) The taxpayer maintains contemporaneous records, including time reports, logs, or similar documents, regarding (i) the hours of all services performed, (ii) a description of all services performed, (iii) dates on which such services are performed, and (iv) who performed the services. This contemporaneous records requirement will not apply to taxable years beginning prior to January 1, 2019.

The notice defines a rental real estate enterprise as an interest in real property (or multiple properties) held for the production of rents. The interest must be held directly or through an entity disregarded for income tax purposes. Commercial and residential real estate may not be part of the same enterprise. Real estate used by the taxpayer (including an owner or beneficiary of an owner of a pass-through entity that owns the real estate) as a residence for any part of the year under Section 280A is not eligible for the safe harbor.

Importantly, real estate leased under a triple net lease is also not eligible for the safe harbor. The notice provides that a triple net lease includes a lease arrangement that requires the tenant to pay taxes, fees, and insurance, and to be responsible for maintenance activities in addition to rent and utilities.

Rental services may be performed by the owner, employees, agents, and/or independent contractors of the owner. Rental services include (a) advertising to rent the real estate; (b) negotiating and executing leases; (c) verifying information contained in prospective tenant applications; (d) daily operation, maintenance, and repair of the property; (e) management of the real estate; (f) purchase of material; and (g) supervision of employees and independent contractors. Rental services do not include financial or investment management activities, such as arranging financing; procuring property; studying and reviewing financial statements or operation reports; planning, managing, or constructing long-term capital improvements; or hours spent traveling to and from the real estate.

In order to apply the safe harbor, the taxpayer claiming the Section 199A deduction must attach a signed statement (described in the notice) to its income tax return.

If a rental real estate activity fails to satisfy the safe harbor, it may still be treated as a trade or business for purposes of Section 199A if the activity otherwise qualifies as a trade or business under Section 162.

This post is one in a series of posts on the 199A regulations. 

Michael J. Wilson
mwilson@williamsparker.com
941-536-2043

The Final Section 199A Regulations Eliminate the “80 Percent Cliff” for Property or Services Provided to a Commonly-Controlled SSTB

We previously blogged about the final Section 199A regulations confirming “cliff” treatment for the de minimis aggregation rule. However, the final regulations did delete a different cliff in the rules designed to defeat the so-called “crack and pack” strategy of segregating various activities of a specified service trade or business (“SSTB”) into SSTB and non-SSTB elements. Since the enactment of Section 199A as part of the Tax Cut and Jobs Act late in 2017, tax practitioners have been devising ways to take an SSTB, such as a physician group, and segregate the parts of the business that are a specified service trade or business from the parts that are not. For example, there has been speculation as to whether an S corporation operating a physician group that provides medical services (an SSTB), owns its building, and employs administrative and billing staff could be divided into three S corporations. S corporation 1 would provide medical services to patients, S corporation 2 would own the medical office building and lease it to S corporation 1, and S corporation 3 would employ the administrative and billing staff and provide its services to S corporation 1 in exchange for fees. The hope would be that the common owners of the three S corporations would be eligible for a 199A deduction with respect to S corporation 2 and S corporation 3 (they would generally not be eligible for a 199A deduction if all of the components of the physician group were contained within one entity).

The proposed regulations address this issue by providing that an SSTB includes any trade or business that provides 80% or more of its property or services to a specified service trade or business if there is 50% or more common ownership of the two trades or businesses. If a trade or business provides less than 80% of its property or services to a specified service trade or business that has 50% or more common ownership, then the portion of the trade or business providing property or services to the commonly-controlled business will be treated as part of the specified service trade or business. For example, if a dentist owns a dental practice and a building used in the practice in separate entities, and 40% of the real estate is leased to the dental practice and 60% of the real estate is leased to an unrelated tenant, then 40% of the real estate business will be treated as part of the dental SSTB, but the remaining 60% of the real estate business will not be treated as an SSTB. But, if 85% of the real estate was leased to the dental practice, then all of the real estate business (including the 15% leased to the unrelated tenant) would be treated as part of the dental SSTB. Thus, this rule creates an “80% cliff” for the unrelated portion of the real estate business.

In response to criticism of this 80% cliff, Treasury removed the 80 percent rule in Section 1.199A-5(c)(2) of the final regulations. Therefore, if a non-SSTB provides property or services to a 50 percent or more commonly controlled SSTB, the portion provided to the SSTB would be treated as a separate SSTB, and the remaining portion will be treated as a non-SSTB. Using the example above, if 85% of the real estate was leased to the dental practice, then only 85% of the real estate activity would be treated as an SSTB, and the other 15% of the real estate activity would be treated as a non-SSTB.

View the  final regulations.

This post is one in a series of posts on the 199A regulations. 

Michael J. Wilson
mwilson@williamsparker.com
941-536-2043

Final Section 199A Regulations Confirm Controversial “Cliff” Treatment in De Minimis Aggregation Rule but There Is a Parachute

The proposed Section 199A regulations provide a de minimis rule for trades or businesses with small amounts of gross receipts attributable to a specified service trade or business (“SSTB”). Specifically, the proposed regulations provide that if a non-SSTB has some relatively small elements that are SSTB services, then the SSTB services will not taint the treatment of the overall business. Specifically, the rule provides that for a trade or business with gross receipts of $25M or less for a taxable year, the trade or business will not be treated as an SSTB if less than 10 percent of its gross receipts are attributable to an SSTB. If the gross receipts of the trade or business are more than $25M, then the 10 percent threshold is dropped to 5 percent. For example, if an eye glass store had $10 million of total gross receipts, and $9.5 million of such gross receipts were attributable to the sale of eye glasses, and $0.5 million of the gross receipts were attributable to eye examinations performed by ophthalmologists, then the entire trade or business would be considered a non-SSTB for purposes of the Section 199A deduction.

We previously blogged that the proposed regulations did not address a scenario where, for example, $2 million of the gross receipts were attributable to eye examinations. In that scenario, we questioned whether the entire $10 million business would be treated as an SSTB, which would be a harsh result, especially for a taxpayer that is just over the de minimis threshold. A better answer, which commentators to the proposed regulations (including Williams Parker) proposed to IRS, would be that the eye glass and eye exam activities are treated as two separate trades or business for Section 199A purposes.

The final Section 199A regulations, which were promulgated on January 18, 2019, adopt both approaches. The example in Section 1.199A-5(c)(1)(iii)(A) of the final regulations confirms that the 5/10 percent de minimis threshold acts as a “cliff,” such that once the de minimis threshold is exceeded, all the income is considered income of an SSTB. However, the example in Section 1.199A-5(c)(1)(iii)(B) of the final regulations provides a parachute if the taxpayer can establish that its non-SSTB and SSTB operations are two separate trades or businesses (with separate books and records, invoicing, and employees). In that case, the non-SSTB trade or business would be eligible for the Section 199A deduction.

View the final regulations.

This post is one in a series of posts on the 199A regulations. 

Michael J. Wilson
mwilson@williamsparker.com
941-536-2043

2019 Florida Annual Uniform Business Reports

The deadline to file a 2019 Florida Annual Uniform Business Report for your Corporation, Limited Liability Company, Limited Partnership, or Limited Liability Limited Partnership to maintain its active status with the State of Florida is May 1, 2019.

In the coming days, you should receive an official email from the Florida Secretary of State reminding you to go online and file your entity’s annual report at www.sunbiz.org.

Unfortunately, this year there are also a number of private companies that are sending official looking letters and emails to entities in an effort to mislead people into believing that they are filing their entity’s annual report with the Florida Secretary of State.  These companies are not affiliated with the Florida Secretary of State and in some cases are charging $100 or more above the fees charged if you go directly to www.sunbiz.org to file your entity’s annual report.

Among the misleading letters and emails to be on the look out for and disregard are a letter from Workplace Compliance Services titled “2019-Annual Report Instruction Form” and an email from Florida Business Filings Co. titled “2019-Annual Report Reminder.”

If you have specific questions regarding filing your annual report, you can speak to someone with the Florida Secretary of State’s Division of Corporations by calling 850-245-6000, or visit their website for answers to a number of commonly asked questions.

Please let us know if there is anything we can do to assist you in filing your entity’s annual report.

James-Allen McPheeters
jamcpheeters@williamsparker.com
941-329-6623