New proposed regulations on Sec. 199A

Editor: Sally P. Schreiber, J.D.

At the same time as it released final regulations under Sec. 199A in T.D. 9847, the IRS also released new proposed regulations (REG-134652-18) treating certain issues not previously addressed, specifically: (1) the treatment under Sec. 199A of previously suspended losses, (2) “Sec. 199A dividends” paid by a RIC, and (3) the treatment of amounts received from split-interest trusts and CRTs.

Previously suspended losses: The proposed regulations amend Prop. Regs. Sec. 1.199A-3(b)(1)(iv) to provide that previously disallowed, suspended, limited, or carried over losses (including under Secs. 465, 469, 704(b), and 1366(b) and only for disallowance, etc., years ending after Jan. 1, 2018) are taken into account for QBI purposes on a first-in, first-out basis and are treated as from a separate trade or business. To the extent that losses relate to a PTP, they must be treated as losses from a separate PTP. In addition, the attributes of these losses with respect to Sec. 199A are determined according to the year incurred.

Sec. 199A dividends by RICs: In redesignated Prop. Regs. Sec. 1.199A-3(d), the IRS proposed that RICs under Sec. 852(b) may pay Sec. 199A dividends, defined as any dividend that a RIC pays to its shareholders and reports as such in written statements to its shareholders. The rules under which a RIC would compute and report Sec. 199A dividends are based on the rules for capital gain dividends in Sec. 852(b)(3) and exempt interest dividends in Sec. 852(b)(5). The amount of a RIC’s Sec. 199A dividends for a tax year would be limited to the excess of its qualified REIT dividends for the tax year over allocable expenses.

Split–interest trusts and CRTs: These proposed regulations redesignate Prop. Regs. Sec. 1.199A-6(d)(3)(iii) to state that a trust with substantially separate and independent shares and multiple beneficiaries is treated as a single trust for determining the application of the threshold amount under Sec. 199A(e)(2). In addition, new Prop. Regs. Sec. 1.199A-6(d)(v) provides that in the case of a CRT, any taxable recipient of a unitrust or annuity amount from a trust must determine and apply the recipient’s own Sec. 199A threshold amount, taking into account any annuity or unitrust amounts received from the trust. These recipients may take into account any included QBI, qualified REIT dividends, or qualified PTP income so distributed for purposes of determining their own QBI deduction.

PTPs: The IRS reserved for further study and comment the treatment of qualified PTP income in qualified Sec. 199A dividends distributed by RICs, noting several technical and administrative problems of their proper characterization with respect to recipients.

These proposed regulations are effective when adopted as final, but the IRS stated that taxpayers may rely on them in the interim.