Category: Pass-Through Deduction

Treasury Releases Highly Anticipated Final Regulations on New Pass-Through Deduction

Posted on by Trey Jackson

The Treasury Department on Jan. 18 issued final regulations and new guidance on the 20 percent deduction for qualified pass-through business income (under Internal Revenue Code section 199A).

The Treasury Department on Jan. 18 issued  final regulations  and new guidance on the 20 percent deduction for qualified pass-through business income (under Internal Revenue Code section 199A).

  • The new 20% deduction for pass-through business income is one of the most important – and complex – elements of the 2017 tax overhaul law.  The deduction was designed to provide relief to the 30 million businesses in the United States that are not C corporations, and thus don’t benefit from the corporate tax cut. 
  • The proposal was a key topic of Roundtable President and CEO Jeffrey DeBoer’s testimony before the Senate Finance Committee shortly before lawmakers released the first version of their tax overhaul in the fall of 2017, and The Roundtable was closely involved in the legislative development of the provision.  (Roundtable Weekly, Sept. 22, 2017) 
  • The final regulations are largely positive, addressing several concerns highlighted in Roundtable comments that could have limited taxpayers’ ability to apply the deduction against real estate rental income. 
    • For example, Treasury agreed with The Roundtable and reversed its prior position on how non-recognition transactions, such as a like-kind exchange or a contribution of property to a partnership, affect the pass-through deduction.  The proposed regulations effectively would have penalized taxpayers for engaging in non-recognition transactions. 
    • Treasury adopted the Roundtable request to allow for aggregation of trades or businesses at the “entity” level, not just the individual level.  Treasury also adopted the Roundtable request to allocate the basis of a property to partners based on “book” depreciation rules, not tax depreciation rules. 
  • In certain areas, the final rules did not adopt specific recommendations offered in Roundtable comments, but nonetheless set forth helpful guidance. 

    The proposal was a key topic of Roundtable President and CEO Jeffrey DeBoer’s testimony before the Senate Finance Committee shortly before lawmakers released the first version of their tax overhaul in the fall of 2017.  ( Roundtable Weekly, Sept. 22, 2017) 

    • The Roundtable had asked Treasury to clarify that all real estate rental income would be considered income from a trade or business—a requirement of the statute.  Treasury declined to go this far, but did issue a proposed revenue procedure (IRS Not. 2019-07) that would establish a safe harbor for real estate rental income earned by taxpayers who spend 250 hours, directly or indirectly, on the activity. 
    • The Roundtable had encouraged Treasury to allow taxpayers to aggregate all real estate rental activities, including those conducted in separate entities, at the individual level.  While Treasury did not adopt this simplification, it did offer helpful new examples to clarify when real estate activities are sufficiently similar to permit aggregation by individuals.
  • In addition, proposed regulations issued alongside the final rules ensure that investors who receive REIT dividends indirectly through an interest in a mutual fund are eligible for the pass-through deduction—a priority for The Roundtable, Nareit, and others. 
  • TPAC will discuss issues related to the Section 199A regulations during its next meeting on Jan. 30 in Washington, held in conjunction with The Roundtable’s State of the Industry (SOI) Meeting.  

House Ways and Means Committee Chairman Richard Neal will also participate in the SOI meeting.  Neal – the long-standing co-chair of the House Real Estate Caucus – will discuss prospects for tax policy legislation with Roundtable Board Member John Fish (Chairman and CEO, SUFFOLK) on Jan. 29. 

Roundtable Comment Letter Urges Treasury to Simplify, Streamline New Pass-Through Deduction Regulations

Posted on by Trey Jackson

The Real Estate Roundtable on Monday submitted detailed recommendations to the Treasury Department on simplifying and streamlining  the new 20 percent tax deduction for pass-through businesses. (Roundtable letter, Oct. 1)

The   Real Estate Roundtable on Monday submitted detailed recommendations to the Treasury Department on simplifying and streamlining  the new 20 percent tax deduction for pass-through businesses. (Roundtable letter, Oct. 1)

  • Passed as part of last year’s tax overhaul, the deduction can reduce the top tax rate on qualifying pass-through income, including rental income, to 29.6 percent.  Once it is fully implemented, section 199A will be a powerful incentive for capital investment and job growth.
  • The comment letter from Roundtable President and CEO Jeffrey DeBoer suggests four major simplifications that would provide greater certainty, lessen the need for wasteful restructuring, and reduce taxpayer-government controversies.   

 Trade or business definition  
The final regulations should clarify that rental income from real property held for the production of rents will be considered a trade or business for purposes of section 199A;

Aggregation  
The final regulations should allow taxpayers to treat all qualifying real estate rental activities, whether held directly or through a pass-through entity, as if held in a single “trade or business” for purposes of section 199A;

Non-recognition transactions 
When assets with associated unadjusted basis immediately after acquisition (UBIA) are transferred in a non-recognition transaction (such as a like-kind exchange or the contribution or distribution of assets involving a partnership or S corporation), the general rule should be that the UBIA of an asset (and its duration) carries over; and

Separating trades and businesses 
The final regulations should provide rules to help taxpayers ascertain when multiple activities (including multiple activities conducted in a single entity) constitute discrete trades or businesses.

  • With a few exceptions, last year’s Tax Cuts and Jobs Act limited the pass-through deduction to businesses with employees or capital-intensive businesses that invest in long-lived (i.e., depreciable) assets, including real estate.  This so-called wage/capital limitation applies to partnerships, S corporations, and sole proprietorships, but does not apply to ordinary REIT dividends and income from publicly traded partnerships.
  • During the tax reform debate, The Roundtable’s Tax Policy Advisory Committee (TPAC) formed a task force to review the regulations, analyze their impact on real estate investment and jobs, and craft specific recommendations for policymakers. 
  • The pass-through deduction (section 199A) was a key element of Roundtable President and CEO Jeffrey DeBoer’s testimony before the Senate Finance Committee shortly before lawmakers released the first version of the proposal in the fall of 2017.   (Roundtable Weekly, Sept. 22, 2017)

TPAC will continue to offer insight to Treasury officials and congressional tax-writing committees before final regulations are expected by the end of the year.