RIC shareholders can take Sec. 199A deduction for REIT dividends

By Alistair M. Nevius, J.D.

A regulated investment company (RIC) that receives qualified real estate investment trust (REIT) dividends will be able to report dividends the RIC pays to its shareholders as Sec. 199A dividends under final regulations issued by the IRS on Wednesday (T.D. 9899).

Sec. 199A provides a deduction of up to 20% of income from a domestic business operated as a sole proprietorship or through a partnership, S corporation, trust, or estate. It may be taken by individuals and by some estates and trusts. The deduction is generally equal to the lesser of 20% of the taxpayer’s qualified business income (QBI) plus 20% of the taxpayer’s qualified REIT dividends and qualified publicly traded partnership (PTP) income, or 20% of taxable income minus net capital gains. The Sec. 199A deduction is available to eligible taxpayers with QBI from qualified trades or businesses operated as sole proprietorships or through partnerships, S corporations, trusts, or estates, as well as for qualified REIT dividends and income from PTPs.

T.D. 9899 provides that a shareholder in a RIC may, subject to limitations, treat a Sec. 199A dividend received from a RIC as a qualified REIT dividend for purposes of determining the Sec. 199A deduction.

The regulations also provide additional guidance on the treatment of previously disallowed losses that are included in QBI in subsequent years and provide guidance for taxpayers who hold interests in split-interest trusts or charitable remainder trusts.

T.D. 9899 finalizes with modifications proposed regulations (REG-134652-18) issued in February 2019. The regulations are effective 60 days after their publication in the Federal Register (scheduled for June 25). Taxpayers can elect to apply them to tax years beginning on or before the day the regulations take effect or can continue to rely on the 2019 proposed regulations for those years.

Alistair M. Nevius, J.D., (Alistair.Nevius@aicpa-cima.com) is The Tax Adviser’s editor in chief.

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