Webinar Slides: Now Arriving - Qualified Business Income Deduction Regulations for Section 199A

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CBIZ & MHM
Executive Education Series™
Now Arriving: Qualified Business Income
Deduction Regulations for Section 199A
Aug. 15, 2018
Bill Smith and Nate Smith

About Us
• Together, CBIZ & MHM are a Top Ten accounting provider
• Offices in most major markets
• Tax, audit and attest and advisory services
• Over 2,900 professionals nationwide
A member of Kreston International
A global network of independent
accounting firms
MHM (Mayer Hoffman McCann P.C.) is an independent CPA firm that provides audit, review and attest services, and works closely with CBIZ, a business consulting,
tax and financial services provider. CBIZ and MHM are members of Kreston International Limited, a global network of independent accounting firms.

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Disclaimer
The information in this Executive Education Series
course is a brief summary and may not include all
the details relevant to your situation.
Please contact your service provider to further
discuss the impact on your business.

Bill Smith is a managing director in the CBIZ National Tax Office. Bill
monitors federal tax legislation and consults nationally on a broad range
of foreign and domestic tax services for businesses and individuals. He is
frequently sought after by a myriad of media outlets to comment on the
changing tax environment and its effects on companies and individuals.
He has authored numerous tax articles, edits the CBIZ MHM InTouch
newsletter and federal Tax Alerts, and lectures on a broad range of tax
topics across the country.
301.961.1943 • billsmith@cbiz.com • @BillSmithTax1
William M. Smith, Esq.
Managing Director,
CBIZ National Tax Office
Presenters

Nathan Smith is a Director in the CBIZ National Tax Office, bringing over
20 years of experience in public accounting to provide technical support
and strategic solutions for the firm’s tax practice. Nathan leads the
development of practice aids and tactical approaches used in
responding to industry and Federal tax developments in a variety of
subject matter areas. Nathan also consults nationally to facilitate
delivery of client service opportunities and solutions, contributes as an
author and editor to the firm's tax thought leadership publications and
assists with the development and implementation of national tax
policies and procedures.
727.572.1400 • nate.smith@cbiz.com
Nathan Smith, CPA
Director,
CBIZ National Tax Office
Presenters

Agenda
Essential Definitions
04
01
Calculation and Planning
Miscellaneous
02 Limitations
03

ESSENTIAL DEFINITIONS

Qualified Business Income (QBI)
QBI is generally income derived in the ordinary course of the
taxpayer’s trade or business and must be allocated between
partners and shareholders in proportion to the allocation of
deductions.
• From a “trade or business” (to be discussed)
• Not investment income, capital gains/losses
• REIT or PTP income is separate (not QBI)
• Special rules apply for 1231 gain
• Gains not included in QBI unless treated as ordinary
• Losses reduce QBI (because they are treated as ordinary)

Trade or Business
• IRS chose to apply existing criteria
• Derived from case law and administrative guidance
• Does not include hobbies or investment activity
• Does not include employees

Trade or Business
• Rental properties held merely for the production of
income do not rise to the level of a trade or business.
Taxpayers must maintain some level of involvement in any
business (including rental arrangements) to demonstrate
they are engaged in a trade or business
• Triple net leases?
• Rentals of only one residential property?
• AirBnb?
• Solely for purposes of the 199A deduction, rental and
intangible income from a related trade or business
will be considered income from a trade or business

Specified Services Trade or Business (SSTB)
• SSTB
• Health
• Law
• Accounting
• Actuarial Science
• Performing Arts
• Athletics
• Financial Services
• Investing
• Trading
• Dealing in Securities
• Reputation or Skill of Employees/Owners
The SSTB classification was created to prevent high income
taxpayers in these categories from claiming the QBI
deduction.

The Field of Health
• Direct care or services to a patient
• Doctors, Nurses, Dentists, Veterinarians, etc.
This category does not include those who provide
services that are not directly related to medical services
such as owners of health clubs or spas and those
involved in the manufacture or sale of pharmaceuticals
or medical devices.

The Field of Law
• Lawyers and Paralegals
• Legal Arbiters and Mediators
The key criteria is whether the business activity
requires skills unique to the field of law.

The Field of Accounting
• Accountants, Bookkeepers, Auditors
• Nearly everyone involved in tax preparation field
This is a broadly defined category and includes those
who are CPAs, Enrolled Agents, and those without any
designation who are providing accounting or tax
preparation services.

The Field of Actuarial Science
• Actuaries and Similar professionals
In contrast to the accounting field this is a narrowly
defined category and does not include analysts,
economists, mathematicians, and certain statisticians.

The Field of the Performing Arts
• Actors, Singers, Musicians, Entertainers, Directors
• Also includes similar professions
Importantly, this category excludes those whose skills
are not unique to the creation of the performing arts
such as theater operators, producers, and broadcasters.

Consulting
• Advice and Counsel
• Includes Lobbyists
This remains a broad yet vague category, as the
regulations focus on those who assist clients in
achieving goals and solving problems

Athletics
• Similar to Performing Artists
• Athletes, Coaches, and Team Managers
This category, much like the performing arts category,
does not include those whose skills are not directly
related to sports such as broadcasters, those who
operate and maintain facilities, and team or franchise
owners.

Financial Services
• Financial Advisors, Investment Bankers, Investment
Managers, Asset Managers, Wealth Managers, M&A
Advisors, and Retirement Advisors
• Excludes Bankers and Real Estate Managers
This category, much like the consulting category,
focuses on those who provide advice and counsel to
help their clients achieve specific goals.

Brokerage Services
• Very limited category
• Only those who arrange transactions between a buyer
and a seller with respect to securities for a
commission or fee
This narrowly defined category is a big win for real
estate and insurance agents/brokers as it was widely
expected that both of these would be included as
SSTBs.

The Catch-All Category – Principal Asset is Reputation or
Skill of Employees or Owners
• Trade or business where the person receives
compensation or fees for:
• Endorsements
• Licensing of individual’s name, likeness, signature, etc.
• Appearances at events or on radio, TV, or other media
format
This could have been broadly defined to include all service
activities but instead was narrowly defined to focus on
income derived from the person’s reputation.

De Minimis Exception
• Provides an exception from the SSTB classification if:
• The business has gross receipts of $25M or less, and
• Less than 10 percent of the gross receipts are attributable to the
performance of services falling within an SSTB category.
• The business has gross receipts of $25M or more, and
• Less than 5 percent of the gross receipts are attributable to the
performance of services falling within an SSTB category.
To qualify for the de minimis safe harbor the taxpayer
must keep detailed records and affirmative proof
showing that the test was satisfied.

LIMITATIONS

Wage and Reasonable Compensation
• The 20% QBI Deduction may be further limited to the
greater of :
• 50% of W-2 wages, or
• 25% of W-2 wages plus 2.5% of the adjusted basis of
qualifying property
• Allocated to partners/shareholders in the same
manner as the deduction for such wages
W-2 wages will only be included in the calculation of
these limitations if the required forms reporting the
wages have been filed.

Wage and Reasonable Compensation
• QBI does not include reasonable compensation paid (or
that should have been paid) to S corporation
shareholders, or guaranteed payments to partners
• Reasonable compensation requirement was not extended
to partners
In an important clarification, the proposed regulations
clarify that the wages of a shareholder/employee of an S
corporation are included in W-2 wages for purposes of the
wage and wage plus property limits, even though the
shareholder’s income is not included in QBI
• Creates an inequity between partnerships and S
corporations

Unadjusted Basis
• Is not reduced by bonus depreciation or Section 179
• Unadjusted cost basis immediately after acquisition
• Property contributed in a nonrecognition transaction
gets cut to NBV on contribution date
The unadjusted basis rules focus on the cost of the
property when it is acquired and placed into service,
any improvements are tracked as separate pieces of
property.

Unadjusted Basis
• Depreciable life
• The applicable recovery period or 10 years, whichever is
later
• Like-kind exchange and involuntary conversion property
• Exchanged basis portion
• Maintains original placed in service date
• Basis cut to NBV as of exchange date
• Excess basis portion
• Placed in service date is the date of subsequent purchase
• Basis equal to purchase price

Unadjusted Basis
• Partnership special adjustments under §754 are not
eligible
• Special rules for property acquired at the end of the
year
As with W-2 wages, unadjusted basis must be allocated
between partners/shareholders. In this case the pro
rata share of depreciation is used unless the entity does
not produce depreciation in which case special rules
apply.

CALCULATION AND PLANNING

Aggregation
• Aggregation between similar businesses allowed
• Common control and common activity tests must be
met at the entity level
The aggregation rules provide a taxpayer friendly result
that allows taxpayers to receive the maximum possible
benefit of the QBI deduction even if non-tax factors led
to a multi-entity structure that would have produced a
lower deduction were the entities considered
separately.

Aggregation
• Decision to aggregate or not made at individual level
• Consistency is not required among all of the
individuals and their decisions to aggregate
• The same individual is not required to aggregate
every business eligible to be aggregated

Aggregation
• To aggregate:
• Each entity must be a trade or business
• The same person or group of persons must constitute
majority ownership of each entity and entities must
have same taxable year
• None of the entities may be an SSTB
• At least 2 of the following factors must be met
• Businesses provide similar products and services
• Businesses share common facilities or personnel
• Businesses are operated in coordination with each other

Cracking and Packing
• Popular planning strategy eviscerated
• “Crack n’ Pack” was designed to avoid SSTB designation
for related services
• 50% common ownership test
• 80% rule for provision of property or services
“An SSTB includes any trade or business that provides 80
percent or more of its property or services to an SSTB if
there is 50 percent or more common ownership of the
trades or businesses.”

Cracking and Packing
• If 50% common ownership test met but 80% test not
met, then percentage of use by the SSTB is considered
as part of the SSTB
• Original strategies still remain, but they are essentially
impractical
One example would be a three person ownership
structure where a new entity is formed for related
services. To achieve the desired result these owners
must be unrelated and must each own less than 50% of
the new entity.

Netting
• Taxpayers must apply wage and property limitations
to each profitable business separately, but loss
businesses must have such losses netted against
profit businesses before applying wage and property
limits to the profit businesses
• Wages and property allocable to loss entities is not
included when calculating these limits for the profit
businesses
• Qualifying PTP income and REIT dividends are netted
against each other but not netted against QBI

Carryovers
• Any excess QBI loss from a prior year is carried
forward as a loss from a separate entity in the current
year
• Losses from a PTP or REIT are also carried forward,
but only offset current year PTP or REIT income
• NOLs carried forward not considered for QBI purposes
• Excess business losses may be considered, as are
suspended loss carryforwards incurred in 2018 or
later years

MISCELLANEOUS

Trusts
• Special rules also prevent a different planning idea
• IRS permitted to treat multiple trusts as a single trust
• Applies existing rules to do so
Many tax planners advocated a strategy of creating
multiple trusts to avoid the 199A limitations however
the regulations bar this if the goal of the multi-trust
structure is the avoidance of tax (i.e. only to maximize
the deduction).

Non-Calendar Year Entities
• One open question was entities not on a calendar
year
• How would they calculate the deduction
The IRS provided a favorable result for 2018, in that
when an entity’s calendar year begins after Jan. 1, 2017
and ends after Jan. 1, 2018, the entity’s income and
deductions will be allocated to the taxpayer as if they
had all occurred in 2018.

Alternative Minimum Tax (AMT) and Substantial
Underpayment
• The 199A deduction will not cause a taxpayer to be
subject to AMT
• Accomplished by allowing the deduction when
calculating AMT
On the other hand a special rule for underpayment of
tax applies to those who claim the 199A deduction.
Under this special rule the penalty will apply if the
understatement exceeds 5% of the tax shown on the
return (or $5000).

Cooperatives
• Applies legislative fix that limited qualifying
cooperatives to agricultural and horticultural
cooperatives
• Calculated in a similar matter to (repealed) 199 DPAD
• Special regulations for cooperatives to be issued
separately later this year

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QUESTIONS

If You Enjoyed This Webinar…
Upcoming Courses:
• 9/25: Adoption of New Leasing Standards
• 9/28: How Not-for-Profit Organizations Can Prepare for Revenue Recognition
• 10/2: Third Quarter Accounting and Financial Reporting Issues Update
Recent Publications:
• New Bonus Depreciation Regs Bring Clarity, Anti-Abuse Provisions, But No Fixes
• IRS Unveils Procedures to Take Advantage of Expanded Universe for Cash Method
and Other Simplification Methods
• New Charitable Contribution Deduction Regulations: The Devil Is in the Details

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