On Aug. 8, the Department of Treasury issued the first of three anticipated sets of proposed regulations under Section 199A of the Internal Revenue Code. Section 199A provides individuals and non-corporate entities (e.g., trusts or estates) with a 20 percent deduction for qualified business income from a domestic business operated as a sole proprietorship or through a pass-through entity (such as a partnership or S corporation), limited in certain cases based on type of activity, wages, capital, and income levels. Also, ordinary REIT dividends are treated under Section 199A as qualifying for the 20 percent deduction.

These proposed regulations set forth a variety of computational, definitional, and anti-avoidance guidance regarding the application of Section 199A. Key parts of the proposed regulations released last week address how taxpayers may or may not aggregate activities and the nature of various specified service trade or business activities which are disqualified from the deduction. In particular, the proposed rules set forth a narrow interpretation of financial services making it potentially possible for banks organized as S corporations to qualify. The rules also address restrictions on the nature of investment management in a manner favorable to real estate related activities.

This set of proposed regulations does not clarify issues surrounding the deduction in the case of a REIT dividend paid to an individual through shares in a mutual fund. This issue may be addressed in future guidance. The Section 199A deduction is expected to be reported on a new line (Line 9) of the revised Form 1040.

Contact: Dara Bernstein.

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