Since the passage of the Tax Cuts and Jobs Act, the meetings of the American Bar Association Section of Taxation have produced comments from officials with the Treasury and the IRS that have given hints to the shape of future guidance to be issued on the law.  The October meeting in Atlanta has produced new information about the application of the provisions of §199A.

The proposed regulations issued earlier this year provided for a de minimis rule where the performance of what would be in the category of a specified service trade or business would not cause the underlying business to be treated as such if the gross receipts were below specific floors.  For a business with gross receipts of $25 million or less, the floor is set at 10% or less of gross receipts.  For businesses with gross receipts above $25 million, the floor drops to 5% or less of gross receipts.

The rule implies that if a business clears the floor by even $1, the entire business would be tainted as a specified service trade or business (SSTS).  Audrey Ellis, attorney-adviser, Treasury Office of Tax Legislative Counsel, was quoted in Tax Notes Today as confirming at the Atlanta conference that such a cliff result is the intended result of the proposed regulations.[1]

The question was raised whether, in such a case, there might not be two separate trades or businesses.  The article provides Ms. Ellis’s response as follows:

Ellis responded that the determination as to whether there would be separate trades or businesses in that scenario would be based on the facts and circumstances of each taxpayer, and added that under the proposed rules, if the businesses are split into one eligible business and one barred business, they could not be aggregated.[2]

Another area of concern addressed at the conference was under what conditions, if any, rental real estate could be treated as a trade or business for purposes of the §199A deduction.  Wendy Kribell, assistant to the branch 1 chief, IRS Office of Associate Chief Counsel (Passthroughs and Special Industries), declined to say whether a triple net lease would qualify but noted that rental real estate properties, which were not discussed in the proposed regulations, are being considered in drafting the final regulations.[3]

Ms. Ellis was cited in another article as making interesting comments regarding the impact of entity structure on whether rentals would be one or several trades or businesses.  Specifically, she stated that if the rentals were held in one regarded entity, that is most probably a single trade or business.  However, if the rentals were each held in separate regarded entities, they would probably become multiple trades or businesses.[4] 

The issue of whether there is one or multiple trades or businesses can have several different impacts under the law.  First, most advisers, looking at the prior law, believe the question of whether a rental is a trade or business rests on whether there is sufficient regular and continuous actions undertaken with regard to the potential business—having multiple properties in a single trade or business would seem to make this bar easier to clear.

As well, the W-2 and unadjusted basis immediately after acquisition (UBIA) tests are applied on a per business level (though after any aggregation allowed and elected under the proposed regulations).

Ms. Ellis’s use of the term “regarded entity” caught the attention of the audience.  The use of that term by Ms. Ellis suggested disregarded entities might not create the same issues.  The Tax Notes Today article cited the following question regarding this issue and Ms. Ellis’s response:

Thomas J. Nichols of Meissner, Tierney, Fisher & Nichols SC asked how to treat entities owned in separate disregarded entities that are ultimately owned by one regarded passthrough entity.

“I think that’s something we’ll have to clarify in the final regulations,” Ellis responded.[5]

The key item to take away from these comments is that we are likely to still face situations requiring professional judgment in applying the §199A provisions and that additional guidance, especially in the area of rentals, can be expected in the final regulations in this area.

[1] Eric Yauch, “Treasury Clarifies 199A De Minimis Rules Have Cliff Effect”, Tax Notes Today, October 8, 2018, 2018 TNT 195-2, https://www.taxnotes.com/tax-notes-today/partnerships-and-other-passthrough-entities/treasury-clarifies-199a-de-minimis-rules-have-cliff-effect/2018/10/09/28hc4 (subscription required)

[2] Eric Yauch, “Treasury Clarifies 199A De Minimis Rules Have Cliff Effect”, Tax Notes Today, October 8, 2018, 2018 TNT 195-2, https://www.taxnotes.com/tax-notes-today/partnerships-and-other-passthrough-entities/treasury-clarifies-199a-de-minimis-rules-have-cliff-effect/2018/10/09/28hc4 (subscription required)

[3] Eric Yauch, “Treasury Clarifies 199A De Minimis Rules Have Cliff Effect”, Tax Notes Today, October 8, 2018, 2018 TNT 195-2, https://www.taxnotes.com/tax-notes-today/partnerships-and-other-passthrough-entities/treasury-clarifies-199a-de-minimis-rules-have-cliff-effect/2018/10/09/28hc4 (subscription required)

[4] Eric Yauch, “Rental Property Ownership Could Decide 199A Effects,” Tax Notes Today, October 8, 2018, 2018 TNT 195-6, https://www.taxnotes.com/tax-notes-today/partnerships-and-other-passthrough-entities/rental-property-ownership-could-decide-199a-effects/2018/10/09/28hds (subscription required)

[5] Eric Yauch, “Rental Property Ownership Could Decide 199A Effects,” Tax Notes Today, October 8, 2018, 2018 TNT 195-6, https://www.taxnotes.com/tax-notes-today/partnerships-and-other-passthrough-entities/rental-property-ownership-could-decide-199a-effects/2018/10/09/28hds (subscription required)