By Julie Dale, CPA-Austin
The Tax Cuts and Jobs Act enacted in 2017 included new Section 199A to provide a potential tax reduction to qualified businesses operating as flow-through entities. A more in-depth discussion of the mechanics of the deduction can be found in the article entitled, The Qualified Business Income Deduction, published on the TXCPA website on Feb. 13, 2019. This deduction is currently available for tax years 2018 to 2025.
The IRS guidance required surrounding this new deduction is substantial. The IRS declined to issue any tax forms specifically for the calculation of this deduction in 2018. Below is a summary of recent primary guidance issued. These items include examples that will be useful in verifying accuracy of the computations involved with this deduction.
- Final Regulations (page numbers referenced below are for the corrected version as drafted at date of the article’s publication):
- Regulation Section 1.199A-1, Operational rules, page 156
- Regulation Section 1.199A-2, Determination of W-2 wages and unadjusted basis immediately after acquisition of qualified property, page 176
- Regulation Section 1.199A-3, Qualified business income, qualified real estate investment trust (REIT) dividends, and qualified publicly traded partnerships (PTP) income, page 197
- Regulation Section 1.199A-4, Aggregation, page 205
- Regulation Section 1.199A-5, Specified service trades or businesses and the trade or business of performing services as an employee, page 217
- Regulation Section 1.199A-6, Relevant passthrough entities (RPEs), PTPs, trusts, and estates, page 239
- Regulation Section 1.643(f)-1, Treatment of multiple trusts, page 248
- Notice 2019-7 for rental real estate safe harbor
- Revenue Procedure 2019-11 for wage calculation and qualified property
Section 199A on Information Returns
A variety of information returns will include Section 199A data. Below is a listing of a few forms you may regularly see with this information included:
- Form 1099-DIV
- Form 1099-PATR
- Schedules K-1
There are other forms that should be considered in evaluating eligibility for the Section 199A deduction even though there is no specific information regarding the deduction included on the forms. The most common examples will be Form 1099-MISC, Form 1099-K or other documents provided by a sole proprietor. These forms may contain income that qualifies for the deduction, but additional analysis is necessary.
2019 Form 8995
On Feb. 13, 2019, the IRS issued a draft version of 2019 Form 8995, Qualified Business Income Deduction Simplified Computation. Although this is a 2019 tax form, it may serve as a template for the simplified computation. For an expanded discussion of this form, see the Tax Adviser article published recently.
Form Instructions and Publications
The IRS has issued instructions for forms, publications and FAQs that reference Section 199A:
- Form 1040 Instructions
- Form 1041 Instructions
- Form 1065 Instructions
- Form 1120S Instructions
- Publication 535, Business Expenses
- Publication 5318, What’s New for Your Business – Tax Reform 2018
- Qualified Business Income Deduction FAQs
There may be additional guidance issued, so this area should be monitored closely for modifications and expanded information to come during this tax season. If questions should arise during tax season that appear to be unanswered, please consider posting your question in TXCPA Exchange to see if others have run across similar concerns. This may be a valuable resource to learn more about this deduction as tax season unfolds.