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.
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.