Tag Archives: and proposed regulations.

Final Section 199A Regulations Make Key Changes to Aggregation Rules

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
mwilson@williamsparker.com
941-536-2043

Final 199A Regulations Provide Favorable UBIA Rule for Section 721 and 351 Transactions

In calculating the Section 199A deduction, taxpayers must also determine the unadjusted basis immediately after acquisition (“UBIA”) of all qualified property of the trade or business. The UBIA serves as a limit on a taxpayer’s 20 percent Section 199A deduction. The proposed 199A regulations, promulgated in August 2018, provide that the UBIA of qualified property means the basis of that property on the placed in service date by the relevant pass-through entity (this is the tax partnership or S corporation conducting the qualified trade or business, which the regulations refer to as an “RPE”). Therefore, under the proposed regulations, the UBIA of qualified property contributed to a tax partnership in a Code section 721 transaction or to an S corporation in a Code section 351 transaction, would generally equal the contributor’s basis in the property at the time of contribution, rather than the contributor’s original basis in the property. Consequently, this treatment could result in a step-down in the UBIA of qualified property used in a trade or business at the time of contribution due only to a change in entity structure.

Commentators on the proposed regulations, including Williams Parker, urged Treasury to revise this regulation so that the UBIA of qualified property contributed to a tax partnership pursuant to Code section 721 or an S corporation pursuant to Code section 351 would be determined as of the date it was first placed in service by the contributing partner or shareholder. Fortunately, Treasury followed these suggestions and promulgated such a rule in Section 1.199A-2(c)(3)(iv) of the final Section 199A regulations, which were issued on January 18, 2019.

View the final regulations.

This post is one in a series of posts regarding the final 199A Regulations. In case you missed it, view our previous post explaining some of the changes. 

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