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Wednesday, August 22, 2018

199A Fiscal Year Clarification In the Prop Regs

On August 8, the IRS released the long-awaited proposed regulations on Section 199A, the 20% qualified business income deduction added by the Tax Cuts and Jobs Act last December. The double-spaced version including preamble is 184 pages long! It's only 47 pages in the Federal Register's smaller print.

The proposed regulations answer many questions, but leave several lingering. For example, is QBI reduced by the taxpayer's deduction for half of self-employment tax (I think it is) and retirement plan contributions (not sure). But these are significant questions that affect the vast majority of individuals who will claim this new deduction.

One area clarified, but a bit buried in the regs, is how the new deduction applies to eligible owners of a fiscal  year partnership, such as one with a year ending June 30, 2018. Section 199A is effective for tax years beginning after 12/31/17. So, does the partner consider all of the income for the complete year ended 6/30/18 for the §199A deduction or only six months.  The statute and committee report seem to indicate the entire year (see my 3/15/18 article explaining this).

Well, the proposed regulation confirms that approach. Prop. Reg. §1.199A-6(e)(2)(ii) (pages 180-181 of the proposed regs) and page 81 are the sources. But, this is a proposed regulation which generally is not effective until issued as a final regulation. The preamble states though that "taxpayers may rely on the rules set forth in proposed §§1.199A-1 through 1.199A-6, in their entirety, until the date a Treasury decision adopting these regulations as final regulations is published in the Federal Register" (page 80).

January 2019 update - in the final 199A regs, it is at Reg. 1.199A-6(e)(2)(ii) at pages 245-6.

So, some fiscal year partnerships (and any S corps not on a calendar year), likely need to do some additional computations for their year ending in 2018 to get the appropriate information to owners so they can do their §199A computation.

What do you think? What have you found interesting about the §199A regs?


Anonymous said...

Professor: Interesting article. If you have anyone in the Elyria/Cleveland area in need of information over the complicated changes this tax year, Bart has been working in the field for over 25 years, both with individuals and businesses.

Thank you,

Marketing Manager

LTW Tax Services
311 Cleveland St.
Elyria, OH 44035

javenny917 said...

what about DPAD for individuals receiving K-1s from non-calendar RPEs?