199A DEDUCTION FOR PASS- THROUGH ENTITIES...$375,000. A is allocated business income, W -2 wages, and unadjusted basis of qualified property, respectively, from the three separate

July 2018

199A DEDUCTION FOR PASS-THROUGH ENTITIES

2 199A DEDUCTION FOR PASS-THROUGH ENTITIES

With You Today

JACK NUCKOLLSManaging Director

National Tax Office

[email protected]

JEFF BILSKYPartner

National Tax Office

[email protected]

WILLIAM HODGESSenior Manager

National Tax Office

[email protected]


Overview of the Section 199A Deduction

Comprehensive Example

Uncertainties & Possible Opportunities

• Definition of Qualified Business Income

• Definition of Specified Services in the absence of regulations

• Wage limitation impacting partner/employees

• Restructuring to create QBI

Technical Corrections Bill

• Repeal of deduction for cooperative dividends

• Enactment of deduction for qualified production activities

• Modification of capital gain QBI exclusion

Agenda


Calculation of Qualified Business Income deduction

Important definitions:

• Combined qualified business income amount

• Qualified business income

• Specified services trade or business

Wages & capital limitations

Overview of the Section 199A Deduction


The Section 199A deduction applies to years beginning after December 31, 2017 and for tax years ending before January 1, 2026

Taxpayers other than C corporations are generally eligible to claim a deduction equal to the lesser of:

1) The taxpayer’s combined qualified business income amount or

2) 20 percent of the taxpayer’s taxable income in excess of capital gains

Eligible taxpayers should include: Individuals, Trusts, Estates, Partnerships, S Corporations, and Sole Proprietorships

Section 199A DeductionCalculation of Deduction


Taxpayers “Combined Qualified Business Income Amount” is equal to the sum of:

1) 20 percent of the taxpayer’s qualified business income with respect to each qualified trade or business plus

2) 20 percent of the aggregate amount of qualified real estate investment trust dividends and qualified publicly traded partnership income

The QBI Deduction cannot exceed 20 percent of the taxpayer’s taxable income, excluding net capital gain, recognized for the taxable year

QBI is determined separately for each qualified trade or business

Section 199A DeductionCombined Qualified Business Income Amount


Qualified Business Income (QBI) includes net amount of domestic qualified items of income, gain, deduction, and loss with respect to the taxpayer’s qualified trade or businesses

• QBI does not include: REIT dividends and publicly traded partnership income; Items of capital gain, dividends, interest not allocable to a trade or business, amounts not generated in connection with a trade or business, and reasonable compensation or guaranteed payments paid with respect to a trade or business.

Qualified Trades or Businesses include any trade or business except a “specified services” trade or business or the trade or business of performing services as an employee

Section 199A DeductionDefinition of Qualified Business Income


There is no provision allowing for the carryover of unused QBI deduction

Where the combined QBI (from all activities) generated by a taxpayer results in a loss, the net amount is carried forward to the subsequent tax year

The carryforward loss is treated as generated from a separate trade or business in the subsequent tax year

Section 199A DeductionUnused Deduction and QBI Losses


Specified Services Trade or Business means any trade or business involving the performance of services in the fields of:

• Health, law, accounting, actuarial sciences, performing arts, consulting, athletics, financial services, brokerage services,

• Any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees or owners, or

• Which involves the performance of services that consist of investing and investment management trading, or dealing in securities, partnership interests, or commodities.

Section 199A DeductionSpecified Services Trade or Business


Exception for specified service businesses does not apply where a taxpayer’s taxable income does not exceed $315,000 (joint filer) or $157,500 (other filers), subject to full phase-in at $415,000 and $207,500, respectively

Only the “applicable percentage” of qualified items of income, gain, deduction, or loss, and the W-2 wages and the unadjusted basis immediately after acquisition of qualified property, shall be taken into account in computing the qualified business income, W-2 wages, and the unadjusted basis immediately after the acquisition of qualified property of the taxpayer for a taxable year

Applicable percentage = 100% - ((taxable income in excess of threshold amount)/$100,000 (or $50,000 for non-joint filers))

If the taxpayer’s income is below these threshold amounts, the Specified Services Exception is not relevant.

Section 199A DeductionSpecified Services Exception


Taxpayer (joint filer) with $375,000 of taxable income for the year

Included in taxable income is $200,000 of income attributable to a specified services trade or business

Section 199A DeductionSpecified Services Example


Taxpayer (joint filer) with $375,000 of taxable income for the year

Included in taxable income is $200,000 of income attributable to a specified services trade or business

Total QBI deduction is $16,000 ($80,000 * 20 percent)

Section 199A DeductionSpecified Services Example


Wages & Capital Limitation on QBI Deduction – In General The deduction attributable to 20 percent of the taxpayer’s QBI cannot exceed

the greater of

a) 50 percent of W-2 Wages paid with respect to the QBI or

b) The sum of 25 percent of W-2 Wages plus 2.5 percent of the unadjusted basis of qualified property

This limitation does not apply to taxpayers with taxable income not exceeding $315,000 (joint filers) or $157,500 (other filers). The limitation is phased-in for taxpayers with taxable income exceeding these amounts over ranges of $100,000 and $50,000

The limitation does not apply to 20% of qualified REIT dividends and PTP income

If the taxpayer’s income is below these threshold amounts, the Wages & Capital Limitation is not relevant.

Section 199A DeductionLimitations


Wages & Capital Limitation on QBI Deduction – Wages W-2 Wages include total wages subject to wage withholding, elective deferrals,

and deferred compensation paid by the qualified trade or business with respect to employment of its employees during the calendar year ending during the taxable year of the taxpayer

W-2 Wages do not include guaranteed payments under section 707(c) or non-partner payments under section 707(a)

“Wages” for profits interest partners who are currently treated as employees receiving Form W-2 are not treated as wages

Section 199A DeductionLimitations


Taxpayer has $1M of QBI and pays $200,000 of W-2 Wages during the taxable year (assume no qualified property)

Absent the wage limitation, Taxpayer would be entitled to a QBI deduction of $200,000

However as a result of the wage limitation, Taxpayer’s QBI deduction is limited to $100,000

Section 199A DeductionWages Limitation Example

Qualified Business Income 1,000,000x Statutory 20% 20%

QBI Deduction - Pre-Wage Limitation 200,000

W-2 Wages 200,000x Statutory 50% 50%

Wage Limitation 100,000

Eligible QBI Deduction (Lesser of above) 100,000

Wage Limitation


Wages & Capital Limitation on QBI Deduction – Qualified Property Qualified property includes the original unadjusted basis of depreciable

tangible property that is:

1) held by and available for use in the trade or business at the close of the taxable year,

2) used during the year in the production of QBI, and

3) has a remaining depreciable period.

The term “depreciable period” means the later of 10 years from the original placed in-service date or the last day of the last full year in the applicable recovery period determined under section 168

Note that land is not included in the definition of qualified property

Section 199A DeductionLimitation


Section 199A DeductionWages and Capital Limitation Example

Taxpayer has $1M of QBI, pays $100,000 of W-2 Wages during the taxable year, and has $6M of qualified property at the close of the taxable year

Absent the wage & capital limitation, Taxpayer would be entitled to a QBI deduction of $200,000

W-2 Wages 100,000x Statutory 25% 25%

Wage Limitation 25,000

Unadjusted basis of qualified property 6,000,000

x Statutory 2.5% 2.5%

Capital Limitation 150,000

Wage Limitation 25,000Capital Limitation 150,000

Wage and Capital Limitation 175,000

Wage and Capital Limitation


Section 199A DeductionWages and Capital Limitation Example

Qualified Business Income 1,000,000x Statutory 20% 20%

QBI Deduction - Pre-Wage Limitation 200,000

Wage Limitation 25,000Capital Limitation 150,000

Wage and Capital Limitation 175,000

Eligibile QBI Deduction (Lessor of above) 175,000

QBI Deduction Calculation - Before Wage & Capital


Taxpayer has $1M of QBI, pays $100,000 of W-2 Wages during the taxable year, and has $6M of qualified property at the close of the taxable year

QBI deduction is limited to 25% of W-2 Wages plus 2.5% of the unadjusted basis of qualified property

As a result of the wage & capital limitation, Taxpayer’s QBI deduction is limited to $175,000

Specified Services

Calculation of Applicable Percentage

Applicable Percentage CalculationSpecified Services/QBI Calculation

Taxable Income375,000Specified Services Income200,000

Less: Threshold Amount(315,000)x Applicable Percentage40%

Taxable Income in Excess of Threshold60,000Taxpayer's Includible QBI80,000

÷ Statutory Amount for Joint Filers100,000

Percentage Ratio60%

Statutory 100%

Less Percentage Ratio-60%

Applicable Percentage40%

Wages

QBI Deduction Calculation - Before Wage LimitationQBI Deduction Calculation - Before Wage & Capital Limitation

Qualified Business Income1,000,000Qualified Business Income1,000,000

x Statutory 20%20%x Statutory 20%20%

QBI Deduction - Pre-Wage Limitation200,000QBI Deduction - Pre-Wage Limitation200,000

Wage LimitationWage and Capital Limitation

W-2 Wages200,000W-2 Wages 100,000

x Statutory 50%50%x Statutory 25%25%

Wage Limitation100,000Wage Limitation25,000

Eligible QBI Deduction (Lesser of above)100,000Unadjusted basis of qualified property6,000,000

x Statutory 2.5%2.5%

Capital Limitation150,000

Wage Limitation25,000


Wage and Capital Limitation175,000

QBI Deduction Calculation - Before Wage & Capital Limitation

Qualified Business Income1,000,000

x Statutory 20%20%

QBI Deduction - Pre-Wage Limitation200,000


Wage Limitation25,000


Wage and Capital Limitation175,000

Eligibile QBI Deduction (Lessor of above)175,000

Capital

19

Comprehensive Example


Comprehensive Example – Year 1 Facts During Year 1, Taxpayer A files a joint return reporting taxable income of

$375,000. A is allocated business income, W-2 wages, and unadjusted basis of qualified property, respectively, from the three separate business activities:

Activities 1 and 2 meet the definition of a qualified trade or business under §199A(d)(1). Activity 3, however, is a specified services business

Additionally, during the year, A received qualified REIT dividends of $25,000, qualified PTP income of $35,000, and net capital gains of $15,000

Section 199A DeductionExample

Activity 1 Activity 2 Activity 3

Business Income/(Loss) $150,000 ($200,000) $30,000

W-2 Wages $100,000 $10,000 $10,000

Qualified Property $1,500,000 $75,000 $100,000


Comprehensive Example – Calculation of Deduction

Section 199A DeductionExample – Year 1


Comprehensive Example – Combined Business Income Amount


Deductible Amount for Each Trade or BusinessTrade or Business

Activity #1

Trade or Business

Activity #2

Trade or Business

Activity #3

Prior Year Loss

Carryover Amount Used

Total

Net Qualified Business Income per Qualified Trade or Business 150,000 (200,000) 30,000 - (20,000) Reduction for Specified Services Trade or Business Income - - (18,000) - (18,000)

Allowable Qualified Business Income per Qualified Trade or Business 150,000 (200,000) 12,000 - (38,000) Deduction Percentage 20% 20% 20% 20% 20%

Qualified Trade or Business Amount 30,000 (40,000) 2,400 - (7,600) Limitation Based on Wages & Capital - - (240) - (240)

Qualified Trade or Business Amount 30,000 (40,000) 2,160 - - Plus: 20% of Qualified REIT Dividends 5,000 Plus: 20% of Publicly Traded Partnership Income 7,000

Combined Qualified Business Income Amount 12,000


Comprehensive Example – W-2 Wages & Capital Limitation


Limitation Based on Wages & CapitalTrade or Business

Activity #1

Trade or Business

Activity #2

Trade or Business

Activity #3Total

Limitation Based on Wages & Capital50% of the Taxpayer's Allocable W-2 Wages 50,000 5,000 5,000 60,000 Reduction for Specified Services Trade or Business Income - - (3,000) (3,000)

(A) 50% Wages Limitation 50,000 5,000 2,000 57,000

Sum of:25% of the Taxpayer's Allocable W-2 Wages 25,000 2,500 2,500 30,000 2.5% of the Taxpayer's Allocable Qualified Property 37,500 1,875 2,500 41,875

Subtotal 62,500 4,375 5,000 71,875 Reduction for Specified Services Trade or Business Income - - (3,000) (3,000)

(B) Sum of Wages & Capital Limitation Amounts 62,500 4,375 2,000 68,875

Greater of (A) 50% of W-2 Wages or (B) Wages + Capital Amount 62,500 5,000 2,000 69,500

Tentative Wage Limitation Amount - - 400 400 Threshold Percentage Based on Taxable Income 60% 60% 60% 60%

Calculated Wage Limitation Amount - - 240 240


Comprehensive Example – Year 2 Facts During Year 2, Taxpayer A files a joint return reporting taxable income of

$350,000. A is allocated business income, W-2 wages, and unadjusted basis of qualified property, respectively, from the three separate business activities:

Activities 1 and 2 meet the definition of a qualified trade or business under §199A(d)(1). Activity 3, however, is a specified services business

Additionally, during the year, A received qualified REIT dividends of $20,000, qualified PTP income of $40,000, and net capital gains of $10,000

Section 199A DeductionExample

Activity 1 Activity 2 Activity 3

Business Income/(Loss) $250,000 ($100,000) $40,000

W-2 Wages $40,000 $12,000 $12,000

Qualified Property $1,000,000 $100,000 $75,000


Comprehensive Example – Combined Business Income Amount


Deductible Amount for Each Trade or BusinessTrade or Business

Activity #1

Trade or Business

Activity #2

Trade or Business

Activity #3

Prior Year Loss

Carryover Amount Used

Total

Net Qualified Business Income per Qualified Trade or Business 250,000 (100,000) 40,000 (38,000) 152,000 Reduction for Specified Services Trade or Business Income - - (14,000) - (14,000)

Allowable Qualified Business Income per Qualified Trade or Business 250,000 (100,000) 26,000 (38,000) 138,000 Deduction Percentage 20% 20% 20% 20% 20%

Qualified Trade or Business Amount 50,000 (20,000) 5,200 (7,600) 27,600 Limitation Based on Wages & Capital (5,250) - (455) - (5,705)

Qualified Trade or Business Amount 44,750 (20,000) 4,745 (7,600) 21,895 Plus: 20% of Qualified REIT Dividends 4,000 Plus: 20% of Publicly Traded Partnership Income 8,000

Combined Qualified Business Income Amount 33,895


Comprehensive Example – W-2 Wages & Capital Limitation


Limitation Based on Wages & CapitalTrade or Business

Activity #1

Trade or Business

Activity #2

Trade or Business

Activity #3Total

Limitation Based on Wages & Capital50% of the Taxpayer's Allocable W-2 Wages 20,000 6,000 6,000 32,000 Reduction for Specified Services Trade or Business Income - - (2,100) (2,100)

(A) 50% Wages Limitation 20,000 6,000 3,900 29,900

Sum of:25% of the Taxpayer's Allocable W-2 Wages 10,000 3,000 3,000 16,000 2.5% of the Taxpayer's Allocable Qualified Property 25,000 2,500 1,875 29,375

Subtotal 35,000 5,500 4,875 45,375 Reduction for Specified Services Trade or Business Income - - (1,706) (1,706)

(B) Sum of Wages & Capital Limitation Amounts 35,000 5,500 3,169 43,669

Greater of (A) 50% of W-2 Wages or (B) Wages + Capital Amount 35,000 6,000 3,900 44,900

Tentative Wage Limitation Amount 15,000 - 1,300 16,300 Threshold Percentage Based on Taxable Income 35% 35% 35% 35%

Calculated Wage Limitation Amount 5,250 - 455 5,705


Definition of qualified business income

Specified services - guidance in the absence of regulations

Wage limitation impacting partner/employees

Restructuring to create QBI

Uncertainties & Possible Opportunities


Section 199A(c)(1) defines Qualified Business Income as “the net amount of qualified items of income, gain, deduction, and loss with respect to any qualified trade or business of the taxpayer.”

Open Questions:

What activities give rise to a trade or business?

When does rental real estate rise to the level of a trade or business?

Is QBI determined on an activity or entity basis?

What if the taxpayer operates a trade or business that includes specified services and non-specified services?

Can taxpayers aggregate multiple trades or businesses?

Definition of Qualified Business Income


What activities give rise to a trade or business? When does rental real estate rise to the level of a trade or business?

The term “Trade or Business” is not separately defined for purposes of section 199A. However, the section 162 definition applies:

• “…to be engaged in a trade or business, the taxpayer must be involved in the activity with continuity and regularity and…the taxpayer's primary purpose for engaging in the activity must be for income or profit” Groetzinger 107 S.Ct. 980 (1987)

• Rental of even a single piece of real property may constitute a trade or business, but it does not as a matter of law. Factual question. Curphey 73 TC 766 (1976)

The determination of a trade or business is made at the entity level. If the activity is conducted in a partnership, then, the partnership must conduct the trade or business



Is QBI determined on an activity or entity basis? What if the taxpayer operates a trade or business that includes specified services and non-specified services?

Guidance is necessary

Regulation section 1.199-4 as a roadmap to future regulations?

De minimis exception similar to regulation section 1.199-1(d)(3)?

Other reasonable methods?



Aggregation of multiple trades or businesses?

Illustration:

Taxpayer conducts Activity 1 and Activity 2 within a single pass-through entity. Assume Activity 1 generates $100 of income after a $60 W-2 wage expense and Activity 2 generates $100 of income after a $10 W-2 wage expense

What is Taxpayer’s allowable Section 199A Deduction?

What if Activity 1 and Activity 2 are conducted in separate pass-through entities?



Taxpayer conducts Activity 1 and Activity 2 within a single pass-through entity. Assume Activity 1 generates $100 of income after a $60 W-2 wage expense and Activity 2 generates $100 of income after a $10 W-2 wage expense

No Aggregation: Activity 1 generates a $20 Section 199A deduction and is not subject to the wages limitation and Activity 2 generates a $20 deduction which is reduced to $5 due to the wages limitation ($10 wages * 50% limitation). Taxpayer’s total Section 199A deduction is therefore $25

With Aggregation: Total aggregated income of $200 generates a $40 Section 199A deduction subject to a wages limitations of $35 ($70 total wages * 50% limitation). Taxpayer’s total Section 199A deduction is therefore $35

Trade or Business DeterminationPossible Aggregation


Consider regulation section 1.469-4(d)(5) grouping elections for partnership and S corporation entities.

Possible re-grouping under regulation section 1.469-11(b)(3)?

Aggregation of wages across multiple entities consistent with regulation section 1.199-2?

Trade or Business DeterminationPossible Aggregation


What are services performed in the areas of health, law, accounting, actuarial sciences, performing arts, consulting, athletics, financial services, & brokerage?

Section 448 and Regulation Section 1.448-1T deal with the circumstances in which a “qualified personal service corporation” can use the cash method of accounting

Conference Report accompanying the Act suggests looking to Section 448 and the Treasury Regulations thereunder as a framework for guidance in regards to specified services businesses

Specified ServicesGuidance in the Absence of Regulations



95% or more of the time spent by employees of the corporation is devoted to the performance of services in a qualifying field: health, law, engineering, architecture, accounting, actuarial science, performing arts, or consulting

For purposes of satisfying the 95% test, any activity incidental to the actual performance of services in a qualifying field is considered the performance of services in that field

Specified ServicesTreas. Reg. 1.448-1T – Function Test


Includes provision of medical services by:

• Physicians,

• Nurses,

• Dentists, and

• Other similar healthcare professionals

Does not include the provisions of services not directly related to a medical field, even though the services may purportedly relate to the health of the service recipient (e.g., operation of health clubs or health spas that provide physical exercise or conditioning to their customers)

Specified ServicesTreas. Reg. 1.448-1T – Health Services


Includes provision of services by:

• Actors and Actresses,

• Singers and musicians,

• Entertainers, and

• Other similar artists in their capacity as such

Does not include the provisions of services by:

• Persons who themselves are not performing artists (e.g., managers or promoters)

• Persons who broadcast or disseminate the performances of such artists (e.g., employees of a radio station that broadcasts the performances of musicians and singers)

• Athletes (note, these type of services are specifically included in the definition of specified services)

Specified ServicesTreas. Reg. 1.448-1T – Performing Arts


The performance of services in the field of consulting means the provision of advice and counsel.

Does not include other services such as sales or brokerage, or economically similar services.

Facts and circumstances test to determine whether services are sales or brokerage or economically similar services.

Facts and circumstances include the manner in which the taxpayer is compensated for the services provided (e.g., whether the compensation for the services is contingent upon the consummation of the transaction that the services were intended to effect).

Specified ServicesTreas. Reg. 1.448-1T – Consulting


Example 1 - Providing economic analyses and forecasts that are used to advise its clients on their business activities. Consulting Services

Example 2 - Providing services that consist of determining a client’s electronic data processing needs. Consulting Services

Example 3 – Determining a client's management and business structure needs including advising on changes in the client's management and business structure. Consulting Services

Example 4 – Providing financial planning services including assisting in making decisions and plans regarding the client's financial activities. Consulting Services

Example 5 – Executing transactions for customers involving various types of securities or commodities generally traded through organized exchanges or other similar networks. Brokerage Services (Not Consulting)

Example 6 – Studying a client's needs regarding its data processing facilities and making recommendations to the client regarding the design and implementation of data processing systems. Taxpayer's compensation for its services is typically based on the equipment orders made by the clients. Sales Services (Not Consulting)

Specified ServicesTreas. Reg. 1.448-1T – Examples


Example 7 – Assisting businesses in meeting their personnel requirements by referring job applicants to employers with hiring needs in a particular area. Taxpayer's compensation for its services is typically based on the job applicants, referred by the taxpayer to the clients, who accept employment positions with the clients. Brokerage Services (Not Consulting)

Example 8 – Same as in example (7), except that the taxpayer's clients are individuals who use the services of the taxpayer to obtain employment positions. The taxpayer is typically compensated by its clients who obtain employment as a result of the taxpayer's services. Not Consulting

Example 9 – Assisting clients in placing advertisements for their goods and services. Taxpayer's compensation for its services is typically based on the particular orders for advertisements which the client makes. Brokerage Services (Not Consulting)

Example 10 – Selling insurance, annuities, and other similar insurance products to various individual and business clients. Taxpayer's compensation for its services is typically based on the purchases made by the clients. Brokerage or Sales Services (Not Consulting)

Specified ServicesTreas. Reg. 1.448-1T – Examples



PLR 201436001: Pharmaceutical company that specialized in commercialization of experimental drugs was engaged in qualified trade or business under section 1202(e)(3) despite proximity of its business activities to field of health.

Company's activities involve the deployment of specific manufacturing assets and intellectual property assets to create value for customers. Company is a pharmaceutical industry analogue of a parts manufacturer in the automobile industry

Although Company works primarily in the pharmaceutical industry, which is certainly a component of the health industry, Company does not perform services in the health industry within the meaning of section 1202(e)(3)

Specified ServicesOther Guidance



PLR 201717010: Developer of tool used to provide information to healthcare providers was engaged in qualified trade or business Company provides laboratory reports to health care professionals. However, Company

neither discusses with, nor is informed by, healthcare providers about the diagnosis or treatment of a healthcare provider's patients. Company's sole function is to provide healthcare providers with a copy of its laboratory report

The skills employees bring to Company are not useful in performing medical tests and that skills they develop at Company are not useful to other employers

None of Company's revenue is earned in connection with patients' medical care

Company is not in a trade or business (i) involving the performance of services in the field of health or (ii) where the principal asset of the trade or business is the reputation or skill of one or more of its employees



Any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees or owners.

PLR 201717010

AICPA Comments: Suggest that guidance focus on the reputation or skill in providing services based on whether customers, patients, or clients look to specific individuals to perform the required tasks. For example, the assignment of a task to any trained or qualified employee, is not a business relying on the reputation or skill of one or more of its employees. However, a business that is dependent upon a specific employee’s or owner’s skill in performing a task, is a specified trade or business

NYSBA Report: Because of the uncertainty regarding Congress’ intention in choosing this particular standard, we are unable to come to a consensus as to a single particular standard to recommend. Section 1202 is a logical place to start

A Broad vs. Narrow application will have significant impact on the ability to benefit from the deduction



Section 1202 Guidance

John P. Owen v. Commissioner

• Insurance brokerage corporation with extensive training programs and sales structures

• Primarily relied on the services of independent contractors to conduct business

• Courts found that the principal asset of the company was the training program and sales structure rather than the taxpayer’s services

Not applicable to 199A as owner activities are also taken into account?



NYSBA Suggested Approaches (No Consensus)

Publication of a list of business types are clearly qualified trade or businesses or clearly specified services trade or businesses.

Activity based standard like the one described in PLR201436001.

Balance sheet test comparing goodwill and workforce assets to non-goodwill and non-workforce assets.

Mechanical test creating two-way rebuttable presumption regarding the classification of a business as a qualified trade or business or a specified services trade or business.

Standard based on whether the trade or business involves the provision of highly skilled services.



W-2 Wages LimitationPartners as Employees

Partner vs. Employee – Determining W-2 Wages

W-2 wages do not include guaranteed payments

Partnership interests are often held by “employees” but Rev. Rul. 69-184 says a partner cannot be treated as an employee

Wages paid to these partner/employees does not qualify as W-2 wages for purposes of Section 199A.

Possible structuring alternatives?

OperatingPartnership

InvestingPartners

Employees

Profits Interest Units

Employees



InvestingPartners

InvestingPartners

Employee Services


EmployeePartnership


Rev. Rul. 69-184 does not apply to tiered partnership structures, however, the IRS has requested comments on the appropriate application of Rev. Rul. 69-184 to tiered partnership situations

Valid business purpose needed to form the Employee Partnership


Upper-Tier

InvestingPartners

Employees


Employees

Lower-Tier(OpCo)

New Investment

Entity



EmployeeS-Corporation

InvestingPartners

Employees

Employee Services



Additional ConsiderationsRestructuring to Create QBI

Existing partnership operates a specified services trade or business. Partnership incurs significant administrative costs to manage its internal operations

These costs are netted against operating income to calculate a single net income amount. Not eligible for QBI deduction subject to income limitations

Operating Partnership P&L AmountGross Revenue from Services 50,000,000 Less: Operating Expenses (20,000,000) Less: Internal Mgmt Exp (10,000,000)

Operating Profit 20,000,000 Section 199A Deduction -

Net Taxable INCome 20,000,000 Federal Effective Tax Rate 37%

Partner Tax Liability 7,400,000

Sheet1

Operating Partnership P&LAmountManagement Services PartnershipTotal Partner AllocationsSpecified Services PartnershipManagement Services PartnershipTotal Partner Allocations

Gross Revenue from Services50,000,000050,000,000Gross Revenue from Services50,000,00015,000,00065,000,000

Less: Operating Expenses(20,000,000)0(20,000,000)Less: Operating Expenses(20,000,000)(10,000,000)(30,000,000)

Less: Internal Mgmt Exp(10,000,000)0(10,000,000)Less: Internal Mgmt Exp(15,000,000)0(15,000,000)

Operating Profit20,000,000- 020,000,000Operating Profit15,000,0005,000,00020,000,000

Section 199A Deduction- 0- 0- 0Section 199A Deduction- 0(1,000,000)(1,000,000)

Net Taxable INCome20,000,000- 020,000,000Net Taxable INCome15,000,0004,000,00019,000,000

Federal Effective Tax Rate37%37%37%Federal Effective Tax Rate37%37%37%

Partner Tax Liability7,400,000- 07,400,000Partner Tax Liability5,550,0001,480,0007,030,000

Net Tax Savings370,000



Administrative function spun-off into a new partnership

Specified Services Partnership executes a Management Services Agreement

Profit generated at the Management Services Partnership presumably is QBI

Consider section 1.199-7?



Specified Services

Partnership

Management Services

Partnership

Total Partner Allocations

Specified Services

Partnership

Management Services

Partnership

Total Partner Allocations

Gross Revenue from Services 50,000,000 0 50,000,000 Gross Revenue from Services 50,000,000 15,000,000 65,000,000 Less: Operating Expenses (20,000,000) 0 (20,000,000) Less: Operating Expenses (20,000,000) (10,000,000) (30,000,000) Less: Internal Mgmt Exp (10,000,000) 0 (10,000,000) Less: Internal Mgmt Exp (15,000,000) 0 (15,000,000)

Operating Profit 20,000,000 - 20,000,000 Operating Profit 15,000,000 5,000,000 20,000,000 Section 199A Deduction - - - Section 199A Deduction - (1,000,000) (1,000,000)

Net Taxable INCome 20,000,000 - 20,000,000 Net Taxable INCome 15,000,000 4,000,000 19,000,000 Federal Effective Tax Rate 37% 37% 37% Federal Effective Tax Rate 37% 37% 37%

Partner Tax Liability 7,400,000 - 7,400,000 Partner Tax Liability 5,550,000 1,480,000 7,030,000

Net Tax Savings 370,000

Have we successfully created QBI?

Sheet1

Specified Services PartnershipManagement Services PartnershipTotal Partner AllocationsSpecified Services PartnershipManagement Services PartnershipTotal Partner Allocations

Gross Revenue from Services50,000,000050,000,000Gross Revenue from Services50,000,00015,000,00065,000,000

Less: Operating Expenses(20,000,000)0(20,000,000)Less: Operating Expenses(20,000,000)(10,000,000)(30,000,000)

Less: Internal Mgmt Exp(10,000,000)0(10,000,000)Less: Internal Mgmt Exp(15,000,000)0(15,000,000)

Operating Profit20,000,000- 020,000,000Operating Profit15,000,0005,000,00020,000,000

Section 199A Deduction- 0- 0- 0Section 199A Deduction- 0(1,000,000)(1,000,000)

Net Taxable INCome20,000,000- 020,000,000Net Taxable INCome15,000,0004,000,00019,000,000

Federal Effective Tax Rate37%37%37%Federal Effective Tax Rate37%37%37%

Partner Tax Liability7,400,000- 07,400,000Partner Tax Liability5,550,0001,480,0007,030,000

Net Tax Savings370,000


Repeal of deduction for cooperative dividends

Enactment of deduction for qualified production activities

Modification of capital gain QBI exclusion

Additional ConsiderationsTechnical Corrections Bill


Additional ConsiderationsRepeal of Deduction for Cooperative Dividends

As originally enacted taxpayers were entitled to a 20 percent deduction of all cooperative dividends

As originally enacted, the cooperative dividend deduction created an un-level playing field in the agricultural industries, the so-called “grain glitch”

Additionally, the deduction for cooperative dividends created a potential opportunity for specified services businesses to convert to a cooperative structure to maximize potential section 199A benefits

In order to correct for the grain glitch, the technical corrections bill eliminated the deduction for cooperative dividends and added new section 199A(g)

The technical corrections bill eliminates the potential specified services cooperative planning opportunity


As part of correcting the “grain glitch”, section 199A(g) creates a new deduction for agricultural and horticultural cooperatives

The deduction is based on qualified production activities and incorporates concepts from former section 199

Eligible cooperatives are entitled to a deduction equal to 9 percent of the lesser of:

• Qualified production activities income for the year or

• The taxable income of the cooperative for the taxable year (calculated without regard to certain patronage dividends, per-unit retain allocations, and nonpatronagedistributions).

The deduction is subject a W-2 wages limitation

Additional ConsiderationsDeduction for Qualified Production Activities


Prior to the technical corrections bill, Section 199A(c)(3)(B) provided that the certain investment type items, including any long-term capital gain, should not be treated as QBI

This raises the question: Is gain recognized on the sale of trade or business property “investment type” gain? Possible exclusion of section 1231 gain or capital gain on the sale of an operating business?

The technical corrections bill deleted the words “investment type”

Is this change sufficient to prevent inclusion of section 1231 gain as QBI?

Additional ConsiderationsModification of Capital Gain QBI Exclusion

59

Thank You!

60

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199A Deduction for Pass-through EntitiesWith You TodayAgendaOverview of the Section 199A Deduction �Section 199A Deduction�Calculation of DeductionSection 199A Deduction�Combined Qualified Business Income AmountSection 199A Deduction�Definition of Qualified Business IncomeSection 199A Deduction�Unused Deduction and QBI LossesSection 199A Deduction�Specified Services Trade or BusinessSection 199A Deduction�Specified Services ExceptionSection 199A Deduction�Specified Services Example�Section 199A Deduction�Specified Services Example�Section 199A Deduction�LimitationsSection 199A Deduction�Limitations Section 199A Deduction�Wages Limitation Example�Section 199A Deduction�LimitationSection 199A Deduction�Wages and Capital Limitation Example�Section 199A Deduction�Wages and Capital Limitation Example�Comprehensive ExampleSection 199A Deduction�ExampleSection 199A Deduction�Example – Year 1Section 199A Deduction�Example – Year 1Section 199A Deduction�Example – Year 1Section 199A Deduction�Example – Year 1Section 199A Deduction�ExampleSection 199A Deduction�Example – Year 2Section 199A Deduction�Example – Year 2Section 199A Deduction�Example – Year 2Section 199A Deduction�Example – Year 2Uncertainties & Possible OpportunitiesDefinition of Qualified Business IncomeDefinition of Qualified Business IncomeDefinition of Qualified Business IncomeDefinition of Qualified Business IncomeTrade or Business Determination�Possible AggregationTrade or Business Determination�Possible AggregationSpecified Services�Guidance in the Absence of RegulationsSpecified Services�Treas. Reg. 1.448-1T – Function TestSpecified Services�Treas. Reg. 1.448-1T – Health ServicesSpecified Services�Treas. Reg. 1.448-1T – Performing ArtsSpecified Services�Treas. Reg. 1.448-1T – ConsultingSpecified Services�Treas. Reg. 1.448-1T – ExamplesSpecified Services�Treas. Reg. 1.448-1T – ExamplesSpecified Services�Other GuidanceSpecified Services�Other GuidanceSpecified Services�Other GuidanceSpecified Services�Other GuidanceSpecified Services�Other GuidanceW-2 Wages Limitation�Partners as EmployeesW-2 Wages Limitation�Partners as EmployeesW-2 Wages Limitation�Partners as EmployeesAdditional Considerations�Restructuring to Create QBIAdditional Considerations�Restructuring to Create QBIAdditional Considerations�Restructuring to Create QBIAdditional Considerations�Technical Corrections BillAdditional Considerations�Repeal of Deduction for Cooperative DividendsAdditional Considerations�Deduction for Qualified Production ActivitiesAdditional Considerations�Modification of Capital Gain QBI ExclusionThank You!Slide Number 60

199A DEDUCTION FOR PASS- THROUGH ENTITIES...$375,000. A is allocated business income, W -2 wages, and unadjusted basis of qualified property, respectively, from the three separate

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