The IRS has resolved some of the issues left open under proposed passthrough deduction regulations issued last year. Final regulations under Sec. 199A provide guidance on the treatment of previously suspended losses included in qualified business income (QBI) and on the determination of QBI for taxpayers that hold interests in regulated investment companies (RICs), split-interest trusts, and charitable remainder trusts. Proposed rules were issued in early 2019, and the final rules make a few changes to the earlier version.
Suspended Business Losses
As the proposed regulations explained, losses or deductions that were previously suspended or disallowed are used in computing QBI in the tax year the losses or deductions become available to use. The final regulations clarify that disallowed excess business losses are included under this rule.
The final regulations also address 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). 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. Also, the thresholds for the QBI deduction and phase-out ranges will be applied to suspended and disallowed losses based on the taxpayer’s qualifications for the year they are incurred.
The final regulations will treat as a single entity any trust or estate that has separate and independent shares for multiple beneficiaries, not only for purposes of applying the QBI deduction thresholds, but also in determining taxable income, net capital gain, net QBI, W-2 wages, unadjusted basis of qualified property, qualified REIT dividends, and qualified PTP income for each trade or business of the trust or estate. This rule prevents split-interest trusts from dividing assets among multiple trusts to circumvent the QBI income threshold.
The final rules allow a shareholder in a RIC to take a Sec. 199A deduction for qualified REIT dividends received by the RIC. This “conduit” rule treats REIT dividends paid out to RIC shareholders the same way they would be treated if the shareholder received them directly. Despite receiving requests to provide similar conduit treatment for publicly traded partnership (PTP) income earned by a RIC, the IRS did not do so, but indicated in the final rules that it is still considering the issue and will address PTP income in future guidance.
While the final regulations clear up several points on the QBI deduction, more guidance will be needed on issues put aside by the IRS.