The final Section 199A regulations, which were promulgated on January 18, 2019, clarified and changed a number of rules in the proposed regulations regarding when two or more trades or businesses may be aggregated.Under the aggregation rules in Treasury Regulation section 1.199A-4(b)(1), trades or business may generally be aggregated for purposes of Code section 199A if:
(i) there is 50 percent or more common ownership, directly or by attribution,
(ii) such ownership exists for a majority of the taxable year, including the last day of the taxable year,
(iii) items attributable to each trade or business is reported on returns with the same taxable year (ignoring short taxable years), and
(iv) the trades or businesses must satisfy at least two of the following (a) provide products, property, or services that are the same or customarily offered together, (b) share facilities or share significant centralized business elements, and (c) are operated in coordination with, or reliance upon, one or more of the businesses in the aggregated group (supply chain interdependencies, for example).
For purposes of determining 50 percent or more common ownership pursuant to (i) above, the proposed regulations created their own set of family attribution rules rather than relying upon existing family attribution rules in the Code. The final regulations follow the advice from several commentators, including Williams Parker, that the existing family attribution rules in Code section 267(b) should be used for determining common ownership.
The final regulations clarified the requirement that 50 percent or more common ownership must exist not only for a majority of the taxable year, but also on the last day of the taxable year.
For requirement (iv)(a) above, the proposed regulations require that the trades or businesses provide products and services that are the same or customarily offered together. As indicated in the preamble to the final regulations, Treasury changed this requirement based upon a comment from Williams Parker that the requirement should be changed to products or services. In addition, products or services was expanded to products, property (which includes real estate), or services.
The final regulations clarify that a specified service trade or business (“SSTB”) with de minims gross receipts below the thresholds described in section 1.199A-5(c)(1) is not treated as an SSTB, and therefore may be aggregated with non-SSTB trades or businesses under the aggregation rules.
Finally, the final regulations permit relevant pass-through entities (“RPEs”), not just individuals, to aggregate trades or business. RPEs can aggregate trades or businesses they operate directly or that are operated by lower-tier RPEs. The resulting aggregation must be reported by the RPE and all owners of the RPE. An individual or upper-tier RPE may not disaggregate the aggregated trades or businesses of a lower-tier RPE, but must instead maintain the lower-tier RPE’s aggregation, An individual or upper-tier RPE may aggregate additional trades or businesses with the lower-tier RPE’s aggregation if the aggregation rules are otherwise satisfied.
A link to the final regulations is here: https://www.irs.gov/pub/irs-drop/td-reg-107892-18.pdf.
This post is one in a series of posts regarding the final 199A Regulations. In case you missed them, catch up on our prior posts which explain some of the changes and review the UBIA rule.
Michael J. Wilson