Chapter A Deduction. Overview Of 199A

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1 Chapter 2 199A Deduction 5 Overview Of 199A 2

2 T-Bs of Partnerships* S Corporations* Sole Proprietorships Eligible Taxpayers Individuals Trusts Estates Ag. Cooperatives * Applied at the Partner or S shareholder level 3 Maximum 199A Deduction 199A Ded. 20% x Qualified Business Income () + 20% x Qualified REIT Div. (QRD) + 20% x Qualified Publicly Traded Partnership Income (QPTPI) 199A(a) Ag. Coops.: 9% x Qualified Production Activity Income (QPAI) 199A(g) 4

3 Qualified Business Income (detail below) Must be a 162 T-B (not 212). Ordinary income (Sch C, K-1, etc.) Cannot be capital gain (LT or ST). Cannot be a dividend (except REIT Div). CAN be negative. 5 Maximum Reduction in Effective Tax Rate = 7.4% Single H of H MFJ Indiv. Bracket Rate on <$9,525 <$13,600 <$19,050 10% 8% <$38,700 <$51,800 <$77,400 12% 9.6% <$82,500 <$82,500 <$165,000 22% 17.6% <$157,500 <$157,500 <$315,000 24% 19.2% <$200,000 <$200,000 <$400,000 32% 25.6% <$500,000 <$500,000 <$600,000 35% 28% >$500,000 >$500,000 >$600,000 37% 29.6% 6

4 Cannabis Business 280E: No deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business consists of trafficking in controlled substances. (emphasis added) 7 Taxable Income T.I. Warning: when 199A mentions taxable income (TI), it generally means TI without regard to the 199A deduction ( 199A(e)(1)). 8

5 Threshold Amount Taxable Income of : $315,000 (MFJ) $157,500 (Other) (Inflation adjusted after 2018) 9 When T.I. is Above the Threshold: 1) 199 deduction phases-out for SSTBs 2) The W-2+UBIA limit applies. 10

6 Definition of SSTBs The term specified service trade or business means any trade or business (A) which is described as follows (in 1202(e)(3)(A)) any trade or business involving the performance of services in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, OR 11 any trade or business where the principal asset of such trade or business is the reputation or skill of 1 or more of its [employees or owners], OR (B) which involves the performance of services that consist of: investing and investment management, trading, or dealing in securities, partnership interests, or commodities. 12

7 SSTB Is like any other business if TI is: < $315,000 (MFJ), or < $157,500 (other). No 199A deduction if TI: > $415,000 (MFJ), or > $207,500 (other). Phase-out (of 199A deduction) range: $100,000 (MFJ); $50,000 (other). Prop. Reg A-5: Specified service trades or businesses and the trade or business of performing services as an 13 employee. Fully Phased-in W2+UBIA Limit If T.I. exceeds the threshold amounts: The 199A deduction is limited to the greater of: 50% of W-2 wages paid, or 25% of W-2 wages + 2.5% of unadjusted basis immediately after acquisition (UBIA) 14

8 W-2+UBIA Limit Complete taxpayer relief from W2+UBIA limit if TI is at or below the threshold amount--$315,000 (MFJ) or $157,500 (other)). Fully-phased in W-2+UBIA limit applies if the taxpayer s TI exceeds $415,000 (MFJ) or $207,500 (other). Taxpayer is allowed to phase-in the W-2+UBIA limit over a $100,000 range (MFJ) or $50,000 range (Other). Prop. Reg A-2: Determination of W-2 Wages and unadjusted basis immediately after acquisition of qualified property. 15 Form Pg. 2 The 199A deduction is from AGI and available to nonitemizers and itemizers. 16

9 S.E. Tax. The 199A deduction not allowed for SE tax purposes ( 199A(f)(3)). Negative T.I. The 199A deduction will never generate an NOL due to the overall T.I. limit. NOL Deduction. The 199A deduction must be removed from an NOL deduction ( 172(d)(8)). AMT. Is allowed for AMT purposes ( 199A(f)(1)(B)) 17 Impact of Passive Loss Rules of 469 Passive income is eligible for the 199A deduction. The section 199A deduction is not based on the level of a taxpayer's involvement in the trade or business (that is, both active and passive owners of a trade or business may be entitled to a section 199A deduction if they otherwise satisfy the requirements of section 199A and these proposed regulations). Preamble. 18

10 Suspended Losses Losses suspended under 469 (passive), 465 (at-risk), 704(d) (partner outside basis), and 1366(d)) (S shareholder stock and debt basis) do not reduce. o When freed-up, such losses reduce. Exception: Losses disallowed before o Tracking/ordering rules will be needed. 469 PAL grouping rules do not apply to 199A. 19 Impact on the NIIT The NIIT is 3.8% of the LESSER OF: 1) NII for the tax year, OR 2) The excess of modified AGI over the threshold amount (250K MFJ or 200K Other) The 199A deduction does not reduce the NII. ( 199A(f)(1)(B)) Because the 199A deduction is from AGI deduction, it does not reduce modified AGI. A profitable rental, if a T-B, will generally be subject to the NIIT and eligible for the 199A deduction. 20

11 Lower Threshold for Substantial Understatement Penalty For any taxpayer who claims a 199A deduction: A substantial understatement of income tax, is generally an understatement that exceeds the greater of 10 5 percent of the tax required to be shown on the return or $ 5,000. ( 6662(d)(1(A) modified by (d)(1)(c)) A Effective Date: tax years beginning after Dec. 31, 2017, and before Jan. 1, A is applied at the partner or S shareholder level. 22

12 Calendar year individual PTR in fiscal year PSP: PSP FY 2/1/2017 thru 1/31/2018. Is reported on PTRs 2018 Form PTR gets 199A deduction on all 12 months of (including 11 from 2017). Reverses in Bluebook nixes any attempt to also claim prior law 199. Per Prop. Reg A-3(d)(1)(ii),, W-2 wages, and UBIA are all treated as having been incurred by the individual during the individual's taxable year in which or with which such RPE taxable year ends. (emphasis added) 23 Computation if T.I. is At Or Below The Threshold Amount -- Prop. Reg A-1(c) 8 24

13 Threshold Amount Taxable Income of : $315,000 (MFJ) $157,500 (Other) (Inflation adjusted after 2018) 25 Recall: When T.I. is At or Below the Threshold: No need to pay W-2 wages No need for unadjusted basis. No difference between a specified service trade or business (SSTB) and any T-B. Irrelevant whether to aggregate T-Bs or not. 26

14 Overall T.I. Limit For all taxpayers, the 199A deduction cannot exceed 20% of T.I. in excess of net capital gain. 27 1(h) Definition of Net Capital Gain (NCG) Net Capital gain (NLTCG NSTCL) ( 1222(11)) + Qualified dividend income. ( 1(h)(11)) 28

15 Formula 1) 20% x Total, plus 2) 20% x Qualified REIT Dividend, plus 3) 20% x QPTPI = The tentative 199A deduction General rule: The 199A deduction is the lesser of: a)the tentative 199A deduction or b) 20% of taxable income minus net capital gain. 29 Total Amount The net total qualified business income () from all trades or businesses (including share from RPEs) 30

16 199A Ded. Sub. (a) T-B #1 x 20% T-B #2 x 20% T-B #3 <> x 20% QRD x 20% T-B #4 QPTPI x 20% * The 199A(a) deduction is the lesser of: (a) the combined amount or (b) 20% x taxable income (TI) minus net capital gain. 31 Example 2 A married couple (MFJ) owns two qualified T-Bs. Schedule C accounting practice profit of $200,000 in S2 is a 12% partner in a rental real estate partnership and S2 sells the partnership interest in 2018 for a long-term capital gain of $224,000. (Hint: LTCGs are not (detail below)). The disposition frees-up losses, previously suspended (pre-2018 so no reduction) under the 469 passive loss rules of <$100,000>. 32

17 Taxable Income (Pre-199A) Sch. C Accounting Practice 200,000 LTCG on Sale of PSP Interest 224,000 Suspended Losses Freed-up <100,000> AGI 324,000 -Standard Deduction - 24,000 = Taxable Income = 300,000 They are below the threshold T.I. of $315, Sch C 200,000 34

18 QRD + QPTPI Sch C 200,000 None 35 QRD + QPTPI Tentative 199A Deduction Sch C 200,000 None 40,000* *20% x 200,000 (200K () + 0 (QRD + QPTPI)) = $40,000 36

19 QRD + QPTPI Tentative 199A Deduction 20% x TI minus NCG** Sch C 200,000 None 40,000* 15,200** *20% x 200,000 (200K () + 0 (QRD + QPTPI)) = $40,000 **20% x 76,000 (300,000 (T.I.) 224,000 (net capital gain) = $15, The Lesser of QRD + QPTPI Tentative 199A Deduction 20% x TI minus NCG** 199A Ded. Sch C 200,000 None 40,000* 15,200** 15,200 *20% x 200,000 (200K () + 0 (QRD + QPTPI)) = $40,000 **20% x 76,000 (300,000 (T.I.) 224,000 (net capital gain) = $15,200 38

20 Causes of Lower Deduction Taxable Income (Pre-199A) Sch. C Accounting Practice 200,000 LTCG on Sale of PSP Interest 224,000 Suspended Losses Freed-up <100,000> AGI 324,000 -Standard Deduction - 24,000 = Taxable Income = 300, Exception One Net Negative If the total amount is negative, then the 199A deduction for is zero. Carryover. The net negative total amount carries over to the following year and is treated as negative from a separate T-B. 40

21 Negative Carries Forward to Following Year and Offsets 199A Ded. Sub. (a) T-B #1 x 20% T-B #2 x 20% T-B #3 <> x 20% QRD x 20% T-B #4 QPTPI x 20% 41 Exception Two: Net Negative QRD + QPTPI If the combined amount of qualified REIT dividends and QPTPI is negative, then the 199A deduction for that combined portion (QRD and QPTPI) is zero for the tax year. Carryover. The net negative is carried forward and offsets the combined QRD and QPTPI in the following year. 42

22 Negative [QRD + QPTPI] Carries Forward to Following Year and Offsets QRD + QPTPI 199A Ded. Sub. (a) T-B #1 x 20% T-B #2 x 20% T-B #3 <> x 20% QRD x 20% T-B #4 <QPTPI> x 20% 43 Ex. 3: Multiple Businesses and a T-B Loss. Married couple filing jointly. S2 has W-2 wage income of $374,000 Qualified REIT Dividend of $40,000. Qualified PTP Income (QPTPI) of $60,000. Two qualified T-Bs: 1) McDonalds Sch. C Restaurant: o Net profit $200,000 in 2018 () 2) Rental real estate T-B (S1 is a REP): o Loss of <$350,000> (S1 materially participates) 11 44

23 Taxable Income (Pre-199A) S-2 W-2 Wages Income 374,000 Sch. C McDonalds 200,000 Sch. E Rental Income (T-B) <350,000> (REP) Qualified REIT Dividend 40,000 QPTPI 60,000 AGI 324,000 -Standard Deduction - 24,000 = Taxable Income = 300, Sch C 200,000 Rental <350,000> 46

24 Sch C 200,000 Rental <350,000> Total 0 47 Sch C 200,000 Rental <350,000> Total 0 <150,000> Carryover 48

25 QRD + QPTPI Sch C 200, ,000 Rental <350,000> Total 0 Carryover <150,000> 49 QRD + QPTPI Tentative 199A Deduction Sch C 200, ,000 20,000* Rental <350,000> Total Carryover 0 <150,000> *20% x 100,000 ( 0 () + 100,000 (QRD + QPTPI) ) = $20,000 50

26 QRD + QPTPI Tentative 199A Deduction 20% x TI minus NCG Sch C 200, ,000 20,000* 60,000** Rental <350,000> Total Carryover 0 <150,000> *20% x 100,000 ( 0 () + 100,000 (QRD + QPTPI) ) = $20,000 **20% x 300,000 (300,000 (T.I.) $0 (net capital gain) = $60, The Lesser of QRD + QPTPI Tentative 199A Deduction 20% x TI minus NCG 199A Deduction Sch C 200, ,000 20,000* 60,000** 20,000 Rental <350,000> Total Carryover 0 <150,000> *20% x 100,000 ( 0 () + 100,000 (QRD + QPTPI) ) = $20,000 **20% x 300,000 (300,000 (T.I.) $0 (net capital gain) = $60,000 52

27 Draft Form Pg. 2 20, Form 1040 Line 9 Instructions Use the Deduction Simplified Worksheet (keep for your records ) if: 54

28 Recall Our Facts Taxable Income (Pre-199A) S-2 W-2 Wages Income 374,000 Sch. C McDonalds 200,000 Sch. E Rental Income (T-B) <350,000> (REP) Qualified REIT Dividend 40,000 QPTPI 60,000 AGI 324,000 -Standard Deduction - 24,000 = Taxable Income = 300, Form 1040 Inst. Worksheet 2018 Draft T-B #1 -- McDonalds T-B #2 Rental Loss EIN EIN 200,000 (350,000) Total Income or (Loss) from Line 1(c) (150,000) Qualified Business Carryforward Loss from Prior Year Total if zero or less enter zero Component: 20% x Line 4 Qualifed REIT and PTP Income or (Loss) Qualifed REIT and PTP Loss Carryover from Prior Year Total REIT and PTP Income -- If zero or less enter zero 20% x Line 8 100, , ,000

29 Deduction Before [T.I.] Limitation. Line [Taxable] Income Before Deduction Net Capital Gains * Subtract Line 12 from 11. If zero or less, enter 0 [Taxable] Income Limit. 20% x Line 13 Deduction: the smaller of Line 10 or 14 Qualified Business Loss Carryforward Qualified REIT & QPTP Loss Carryforward * 300, ,000 20,000 60,000 20,000 (150,000) 0 57 Ex. 4: Large Itemized Deductions married couple filing jointly. 12 Qualified dividend of $50,000. LTCG $60,000. Sch. C accounting practice profit of $200,000 in 2018 (). Due to large charitable contributions, itemized deductions are $60,

30 Taxable Income (Pre-199A) Qualified Divided Income $50,000 Net Long-Term Capital Gain $60,000 Sch. C Accounting Practice $200,000 AGI $310,000 -Itemized Deductions - 60,000 = Taxable Income = 250, QRD + QPTPI Sch C 200,000 0 Total 200,000 60

31 QRD + QPTPI Tentative 199A Deduction Sch C 200, ,000* Total 200,000 *20% x 200,000 ( + QRD + QTPPI) = $40, QRD + QPTPI Tentative 199A Deduction 20% x TI minus NCG Sch C 200, ,000* 28,000** Total 200,000 *20% x 200,000 ( + QRD + QTPPI) = $40,000 **20% x 140,000 (250,000 (T.I.) $110,000 (NCG)) = $28,000 62

32 The Lesser of QRD + QPTPI Tentative 199A Deduction 20% x TI minus NCG 199A Deduction Sch C 200, ,000* 28,000** 28,000 Total 200,000 *20% x 200,000 ( + QRD + QTPPI) = $40,000 **20% x 140,000 (250,000 (T.I.) $110,000 (NCG)) = $28, Draft Form Pg. 2 28,000 64

33 Form 1040 Inst. Worksheet 2018 Draft T-B #1 Accounting EIN 200,000 Total Income or (Loss) from Line 1(c) 200,000 Qualified Business Carryforward Loss from Prior Year Total if zero or less enter zero Component: 20% x Line 4 Qualifed REIT and PTP Income or (Loss) Qualifed REIT and PTP Loss Carryover from Prior Year Total REIT and PTP Income -- If zero or less enter zero 20% x Line ,000 40, Deduction Before [T.I.] Limitation. Line [Taxable] Income Before Deduction Net Capital Gains * Subtract Line 12 from 11. If zero or less, enter 0 [Taxable] Income Limit. 20% x Line 13 Deduction: the smaller of Line 10 or 14 Qualified Business Loss Carryforward Qualified REIT & QPTP Loss Carryforward * 250, , ,000 40,000 28,000 28,

34 , Qualified REIT Dividends, and Qualified PTP Income (Prop. Reg A-3) Qualified Business Income 68

35 Qualified Business Income () [The net amount of qualified items of income, gain, deduction, and loss with respect to any qualified trade or business of the taxpayer. Not Qualified REIT dividends (QRDs) Qualified publicly traded partnership income (QPTPI). 69 What is a T-B? 70

36 Qualified Trade or Business (T-B) Any T-B except: (A) a specified service T-B (SSTB), or (B) a T-B of performing services as an employee. 71 Employee versus Independent Contractor Employees do not get the 199A deduction. Employees are officers of a corporation and employees under the common law rules. Apparently, statutory employees full-time insurance salesperson, traveling or city salesperson, etc -- are eligible for the 199A deduction. (They receive a W-2, but use Sch C and social security and medicare withheld by the employer ) 72

37 Misclassified Workers. A worker misclassified by the employer as an independent contractor is is an employee notwithstanding. Rebuttable Presumption. An individual treated as an employee by the employer, and who is subsequently treated as an I.C. while doing substantially the same work, is presumed to be an employee. 73 What is a T-B? 162 v. 212 will distinguish a T-B from investment. 74

38 When is Rental Real Estate a T-B? A gross lease in which the landlord is responsible for the repairs and maintenance. Work by employees or agents of the landlord count as done by landlord. Links to my two articles in the Journal of Real Estate Taxation are in the text. Prop. regs. allowed deemed T-B treatment for self-rental to a 50% or more commonly controlled business (Prop. reg A-1(b)(13). 75 Draft Form 1065 Instructions on What is a T-B? Irrelevant! 76

39 T-B Definition Applicable to REPs. Reg (b)(1) Trade or business. A trade or business including any interest in rental real estate that gives rise to deductions under section 212. (emphasis added) 77 Draft Pub 535 Instructions on What is a T-B? 78

40 Campbell v. Comm r, 5 TC 272 (1945) Taxpayer inherited residential property in 1934 and tried to rent or sell it. Never used it as his residence. Attempted to rent it, until sold in 1941 at a loss. Campbell sought ordinary loss treatment on sale (v. capital loss) 79 The Tax Court Found a Trade or Business Same in Jephson v. Comm r, 37 BTA 1117 (1938), 80

41 In Hazard v. Comm. r, 7 T.C. 372 (1946), acq CB 3 A single family residential rental in Kansas City was viewed as a trade or business of the taxpayer and thus produced an ordinary loss on sale under the predecessor to 1221(a)(2) and Mr. Hazard lived in Pittsburgh (several hundred miles away) and devoted his entire time to his job as general counsel of a Pittsburgh company. 82

42 Grier v. U.S., 218 F.2d 603 (2nd Cir. 1955) (Rejected Hazzard) Grier required a broader activity than a single residential rental, long-term (14 years), to one tenant, with minimal repair activity. Ruled that the rental was an investment activity. 83 Grier referred broader activity as: Pinchot (eleven commercial buildings in New York), Gilford (eight buildings in New York), Fackler (a six-story commercial building), and Rogers (sixty-one properties). 84

43 IRS Pub 535 The ownership and rental of real property doesn t, as a matter of law, constitute a trade or business, and the issue is ultimately one of fact in which the scope of your activities in connection with the property must be so extensive as to give rise to the stature of a trade or business. However, the rental or licensing of property to a commonly controlled trade or business is con-sidered a trade or business under section 199A. 85 The IRS has never revoked its acquiescence to Hazard. In GCM (7/27/81) IRS Chief Counsel rejected the IRS National Office audit division request for a reversal of the acquiescence to Hazard. 86

44 Chief Counsel in GCM In the typical case, the taxpayer has offered evidence of the various activities involved in managing the rental property and the court has accepted this evidence as indicating that the taxpayer was engaged in a trade or business.. 87 Chief Counsel in GCM The problem that you raise is not with the legal standard applied by the courts, but with the relatively small amount of activity that the court have found to be indicative of a trade or business. In view of the number of cases that have been decided on this issue it is unlikely that the Service could now persuade the courts to take a more restrictive approach 88

45 But we have a split in the Circuits (not merely Tax Court v. 2 nd Circuit) 89 Reiner v. U.S., 222 F.2d 770 (7th Cir. 1955) The issue was whether the taxpayer, living in the U.S. could carry back and forward her NOL resulting from the 1944 bombing raid on her rental property (former primary residence) in Austria during WW2 (confiscated by the Nazi gov t for 5 years). 90

46 Seventh Circuit in Reiner, Quoting the Tax Court in LaGriede: It is clear from the facts that the real estate was devoted to rental purposes, and we [the Tax Court] have repeatedly held that such use constitutes use of the property in trade or business, regardless of whether or not it is the only property so used th Circuit in Reiner We add that the use of the property in trade or business was, upon the facts, an operation of the trade or business in which it was so used. It is clear, also, that the business was regularly carried on, there having been no deviation, at any time, from the obviously planned use. Factually indistinguishable from Grier. 92

47 The Tax Court only follows Grier in the Second Circuit (Golsen Rule) 93 Keefe, TC Memo (3/15/19) Footnote 10: This case is appealable to the U.S. Court of Appeals for the Second Circuit, absent a stipulation to the contrary. Sale of land following meager (didn t advertise) attempts to rent: While we have no doubt that petitioners devoted a great deal of time, effort, and expense to the renovation of Wrentham House Mansion, the record overwhelmingly confirms that Wrentham House Mansion was never held out for rent or rented after the restoration was complete. Quite simply, the rental activity with respect to Wrentham House Mansion never commenced in any meaningful or substantive way. 94

48 Taxpayer sought a section 1231 ordinary loss. Tax Court agreed with IRS: not a T- B. 95 Keefe Tax Court: The Court of Appeals for the Second Circuit requires that taxpayers be engaged in continuous, regular, and substantial activity to support a conclusion that the property was used in a trade or business and was not a capital asset.. ( Grier is settled law in the Second Circuit). 96

49 Tax Court: Conspicuously absent from the Tax Court s citations and legal standard: Campbell and Jephson Even if the taxpayer had rigorously attempted to rent the property (but failed), it would likely not be substantial enough to rise to the level of a T-B in the Second Circuit. With Keefe facts, the Tax Court in the Ninth Circuit would likely reach the same conclusion. Again, facts do matter. 97 Other Example of Tax Court in the 2 nd Circuit: Murtaugh TC Memo (1997) Facts: A sale (foreclosure) of two timeshare rentals at a loss -- managed via a property manager. Investment (capital loss) or T-B ( 1231 ord. loss)? IRS stressed Golsen rule and 2 nd Circuit thus Grier. Taxpayer focused on distinguishing Grier. Tax Court Holding: A T-B. Overcame Grier, because multiple transient rentals. 98

50 Murtaugh Follows the Sup. Ct Groetzinger case. To be engaged in a trade or business, there must be continuity and regularity to the activity. Commissioner v. Groetzinger Although it does not appear that the *** [taxpayer] did anything herself in connection with the management of these *** buildings, an appreciable amount of time and work was necessarily required on the part of the managing agent. And if such management was a trade or business, the *** [taxpayer] was so engaged although she acted only through an agent. [Gilford (2d Cir. 1953).] 99 Does the Tax Court ever treat a rental as an investment? Yes! 100

51 Triple Net Lease Property A triple-net lease in which the tenant is responsible for taxes, insurance, and repairs, is normally a mere investment. Herbert v. Comm r, 30 T.C. 26 (1958) (but Herbert interpreted 864) 101 Bluebook Comment on Distinguishing T-Bs 102

52 Existing Reg (d): Where a taxpayer has two or more separate and distinct trades or businesses, a different method of accounting may be used for each trade or business, provided the method used for each trade or business clearly reflects the income of that particular trade or business. No trade or business will be considered separate and distinct for purposes of this paragraph unless a complete and separable set of books and records is kept for such trade or business. 103 JCT Bluebook Pg. 24 An activity that is treated as a trade or business for all relevant Federal income tax purposes (and that keeps a complete and separable set of books and records) may be treated as a qualified trade or business. For example, assume that an individual owns a rental building in which the ground floor space is rented to three unrelated commercial establishments (a coffee shop, a drycleaner, and a newsstand) and the upper floors hold apartments rented to residential tenants. For Federal tax purposes, the individual accounts for the rental activities with respect to the entire building using a single set of books and records. 104

53 Assume further that the individual materially participates in the rental activity, cost recovery deductions under section 168 are allowable with respect to the building, and deductions for expenses with respect to operating and maintaining the building are allowable under section 162. Because a complete and separable set of books and records is kept with respect to the entire building (including both the commercial and residential rentals), and because deductions under section 162 are allowable, the real estate rental trade or business is a qualified trade or business for purposes of section 199A. 105 Whether one or more trade or business activities or rental activities may be treated as a single activity for purposes of section 469 is not determinative of a separate and distinct trade or business for purposes of section 199A. 106

54 Back to 199A T-Bs and 107 STCG, STCL, LTCG, LTCL Dividends, dividend equivalents, and payments in lieu of dividends. Interest income unless allocable to a T or B. Annuity income (See 199A(c)(3)(B) Not Qualified Items Qualified REIT Dividends and qualified PTP income. 108

55 Not Examples Net 1231 gain taxed as LTCG is not Prop. Reg A-3(b)(2)(ii)(A) Unrecaptured 1250 gain (LTCG) is not 109 Sch C income, 1065/1120S K-1 ordinary business income. Ordinary net 1231 loss reduces. Secs and 1250 recapture is. o Bonus depreciation recapture o 179 recapture 481 Adjustments. Examples of Freed-up losses previously disallowed (including under s 465, 469, 704(d), and 1366(d)) reduce unless pre

56 The NOL deduction under 172 is removed from. The new 461(l) limit (because it blocks the allowed loss) is considered before losses can be calculated. As result, a business loss disallowed by new 461(l) (not necessarily an NOL), when allowed, it reduces. 111 Still an Open Question on These Deductions: Do they reduce? State income tax on income attributable to trade or business o But it must first be deductible (ordering?). The deduction for the deductible part of selfemployed health insurance. litigation expenses on state and federal income taxes related to your business. Nonbusiness: Self-Employed Retirement Plan Contrib. (under 172 says Pub 536) 112

57 Qualified Items Income, gain, deduction, and loss to the extent such items are: Allowed in determining T.I. (Sch C, E (K-1s), F) U.S. ECI. [E]ffectively connected with the conduct of a trade or business within the United States (within the meaning of 864(c), determined by substituting qualified trade or business (within the meaning of 199A) for nonresident alien individual or a foreign corporation or for a foreign corporation each place it appears.) ( 199A(c)(3)(A)). 113 Effectively Connected Income ( 864(c)(1) General Rule. In the case of a nonresident alien individual or a foreign corporation qualified trade or business within the meaning of 199A engaged in trade or business within the United States during the taxable year, the rules [in 864] shall apply in determining the income, gain, or loss which shall be treated as effectively connected with the conduct of a trade or business within the United States. 114

58 Example (1) (not in text): U.S. citizen performs services in China and is paid $100,000. Service income is sourced where the services are performed. Foreign source so not U.S. ECI and not. 115 General Rule and Exception For Inventory Sale General Rule. is ECI. Only U.S. source business income Exception. For inventory, foreign source sales are U.S. ECI if (1) a U.S. office is "a material factor in the production of such income", and (2) the U.S. office "regularly carries on activities of the type from which such income, gain, or loss is derived." 116

59 Per the TCJA, sales of inventory are sourced solely based upon where produced (outbound and inbound). 863(b) -- TYBA 2017 Ex.: Inventory produced in the U.S. and sold in Mexico is U.S. source effectively connected income (ECI). 117 Example (2): Richard, a U.S. citizen sells inventory in the U.S. that was manufactured (by Richard s sole proprietorship) in Mexico. No U.S. office is a material factor in the sale. Foreign source business income thus not ECI so not. Observation: If Richard were a foreign person, he would not be subject to U.S. tax on the sale. 118

60 When is Rental Real Estate U.S. ECI? Again, a net lease is not ECI, but section 871(d) allows nonresidents to elect to treat U.S. rental real estate as ECI U.S. T-B Eliminates 30% withholding on gross rents. Can this election be used by a U.S. taxpayer to make triple net lease real estate a T-B under section 199A? No. Because section 162 must also be satisfied. 119 Preamble Quote (in italics) 871(d) allows a nonresident alien individual to elect to treat income from real property in the United States as effectively connected. However, for purposes of 199A, if items are not attributable to a trade or business under 162, such items do not constitute. How to Elect: Reg (d)(1)(ii). File a statement with the return before the S of L for refunds expires. 120

61 A Higher Bar Than 162 for Rentals With respect to 864(c)(2), a U.S. business activity must be considerable, continuous, and regular. A higher bar than section 162 (more like Grier). See Lewenhaupt 20 T.C. 151 (1953), aff'd per curiam, 221 F. 2d 227 (9th Cir. 1955); Herbert 30 T.C. 26 (1958), acq C.B. 6; Rev. Rul Solution: With Grier facts, U.S. citizens should make the 871(d) election to overcome 864(c)(2). 121 Qualified REIT Dividend (QRD) 122

62 Qualified REIT dividend. A dividend from a REIT that is: Not a capital gain dividend Not qualified dividend income. Anti-abuse rule in Prop. Regs.: The stock must be held for 45 days or more, taking into account the principles of 246(c)(3) 123 Draft Instructions for 1099-Div (2018) Presumably REIT Dividends. Other than REIT Dividends, dividends are not per 199A(c)(3)(B)(ii). 124

63 Qualified Publicly Traded Partnership Income (QPTPI) 125 Qualified Publicly Traded Partnership Income. With respect to any qualified T or B, the sum of: Allocable share of income, gain, deduction and loss from a PTP that is not taxed as a corporation. Any gain upon disposition if ordinary income under 751(a) or (b) (per Prop. Regs.) 126

64 Comments of the Investment Company Institute Per Tax Notes, Karen Gibian of the Investment Company Institute met with Treasury and is optimistic that future regs. will allow RIC shareholders investing in real estate investment trusts or publicly traded partnerships to pass through to shareholders any qualified REIT dividends or qualified PTP income Determination Of W-2 Wages And UBIA Prop. Reg A-2 128

65 W-2 Wages Total wages (defined in 3401(a)), plus Elective deferrals, and Deferred compensation Designated Roth Contributions. 129 W-2 Wages must be properly allocable to the ( 199A(b)(4)(B) No related party prohibition. Ex: 100% S shareholder counts as W-2 wages paid. 130

66 Third Party Payors OK A person (T) may take into account any W-2 wages paid by another person (P) and reported by P on Forms W-2 with P as the employer listed in Box c of the Forms W-2, provided that the W-2 wages were paid to common law employees or officers of T for employment by T. A green light for professional employer organizations (PEOs) companies that provide payroll and other services to small and midsize businesses (AKA: employee leasing ( co-employers )). The key is that the company that contracts with the PEO retains control over the work performed by the employees. 131 Notice W-2 wages to a statutory employee ( 3121(d)(3)) do not count. Is limited to employees as defined in 3121(d)(1) and (2): officers of a corporation and employees of the person under the common law rules. Three Methods to determine W-2 wages (the higher the better) 132

67 133 1) Unmodified Box Method The lesser of Box 1 or Box 5. (Box 1 does not include elective deferrals) 2) Modified Box 1 Method Box 1 minus Box 1 amounts not wages subject to withholding. Plus amounts in Box 12 Codes D,E,F,G,S (Elective Deferrals and salary reductions 134 under SIMPLE plans)

68 3) Tracking Wages Method W-2 Wages subject to fed. income tax withholding, plus Amounts in Box 12, coded D,E,F,G and S. 135 Social Security Admin. (SSA) Filing Deadline To be counted, the W-2 wages must be filed with the SSA on or before the 60 th day after the due date (including extensions). W-2 and W-3 (transmittal form) are generally due to SSA by January 31. Corrected W-2 and W-3 (W2c and W3-c) are due to SSA by January

69 UBIA If T.I. is above the threshold amount, the W2+UBIA limit is the greater of: (i) 50% if the W-2 wages paid, or (ii) 25% of the W-2 wages paid and 2.5% of the UBIA of qualified property attributable to a trade or business. 137 Qualified property" is Qualified Property any tangible property, subject to depreciation ( 199A(b)(6(A)). Held at year end and available for use. Used at any point during the year in the business. If the depreciable period has not ended. 138

70 Depreciable period begins when the property is first placed in service and Ends on the LATER OF 1)10 years, or 2)Last year of the recovery period (not ADS) 139 Meaning of Unadjusted Basis Use the basis on the placed in service date, but ignore all depreciation including bonus depreciation, and ignore any section 179 expense. 140

71 Example A Sch C. Business purchases a machine for $500,000 (5 year MACRS life) in 2013 and claims regular MACRS depreciation. $500,000 unadjusted basis through 2022 (10 years) 5 years beyond its MACRS life (unless disposed of earlier) Won t work with de minimis safe harbor. No unadjusted basis. 141 Example B In 2013, taxpayer purchases a commercial building for $5 mil. that is depreciable over 39 years (on leased land). $5 mil. unadjusted basis through 2051 unless disposed of earlier. 2.5% x $5 mil. = $125,

72 Owners Share of Entity W-2 Wages W-2 wages are properly allocable to if the associated wage expense is taken into account in computing. A partner's or shareholder's allocable share of W-2 wages must be determined in the same manner as the partner's allocable share or a shareholder's pro rata share of wage expenses. (Prop. reg A-2(b)(4) and 199A(f)(1)(A)(iii)) 14 3 UBIA of Qualified Property Each partner's or shareholder's share of the UBIA of qualified property is based upon the owner s relative share of tax depreciation with respect to the property for the year. Special Rule For Partners. If the qualified property held by a partnership does not produce tax depreciation during the year (for example, property that has been held for less than 10 years but whose recovery period has ended), each partner's share of the UBIA is based on how gain would be allocated to the partners pursuant to 704(b) and 704(c) if hypothetically sold for cash equal to FMV. Special Allocations? 144

73 S corporations. If no tax depreciation, each shareholder's share of the UBIA of qualified property is based upon the ratio of shares in the S Corporation held by the shareholder over the total shares of the S corporation. Penalty if Not Reported. The UBIA of qualified property is presumed to be zero if not determined and reported for each trade or business. (Prop. Reg (a)(3)) 145 Contributions to Partnerships. Purchased Property. For qualified property purchased and placed in service by partnership the prop. reg. looks to the unadjusted basis of property immediately after acquisition. Contributed Property. For qualified property contributed to a partnership in a 721 transaction and immediately placed in service, UBIA generally will be the contributing partner s adjusted basis increased by gain recognized. Yet, the prop. regs. insist that the depreciable period begin when placed in service by transferor partner. 146

74 Contributions to S corporations. Same as partnerships for a contributions of qualified property to an S corporation in a 351 transaction. UBIA generally will be the contributing shareholder s adjusted basis increased by gain recognized. Yet, the depreciable period begins on the date the transferor placed the property in service Election Adjustments Does not include basis adjustments arising from 754 elections: o 743(b) adjustments o 734(b) adjustments Commentators are criticizing this. 148

75 Inherited Property Fair market value on the DOD if acquired and placed in service at the time of the decedent s death. Must be reduced for any nonbusiness use % if any. 149 Like-Kind Exchanges Replacement Property Unadjusted Basis The adjusted basis of the relinquished property becomes the unadjusted basis of the replacement property (exchange basis), plus excess basis. 150

76 Like-Kind Exchange Depreciable Period Subject to one exception, for purposes of determining the depreciable period: The date the exchanged basis in the replacement qualified property is first placed in service by the trade or business is the date on which the relinquished property was first placed in service by the individual or RPE and The date the excess basis in the replacement qualified property is first placed in service by the individual or RPE is the date on which the replacement qualified property was first placed in service by the individual or RPE. 151 Exception: Election under reg (i)-6 An (i)(6) election treats the adjusted basis of the relinquished property as if disposed of at the time of the exchange. The replacement property is depreciated as if you had placed it in service on the date of the exchange. Uses the recovery period and method of the replacement property. If the election is made, the 199A regs. also starts the depreciable period on the date of the exchange. 152

77 Computation if T.I. is Above The Threshold Amount -- Prop. Reg A-1(d) Threshold Amount For TYBB 2019: $315,000 (MFJ) $157,500 (Other) (Inflation adjusted after 2018) 154

78 When T.I. is Above the Threshold: 1) 199 deduction phases-out for SSTBs 2) The W-2+UBIA limit applies. o Aggregation of T-Bs may be available to minimize the W-2+UBIA limit (not an option for SSTBs). 3) The overall T.I. limit still applies. 155 Formula 1) The Component, plus 2) 20% x (QRD and QPTPI Component) = The tentative 199A deduction General rule: The 199A deduction is the lesser of: a)the tentative 199A deduction or b) 20% of taxable income minus net capital gain. 156

79 Definition of component The sum of the following for each T-B: The lesser of: 1) 20% x (as modified for SSTBs) 2) The greater of: i. 50% x W-2 wages, or ii. 25% x W-2 wages + 2.5% x UBIA 157 Prop. Reg. Language Component QRD + QPTPI Component 199A Ded. Sub. (a) T-B #1 x 20% T-B #2 x 20% T-B #3 <> x 20% QRD x 20% T-B #4 QPTPI x 20% * The 199A(a) deduction is the lesser of: (a) the combined components or (b) 20% x taxable income (TI) minus net capital gain. 158

80 First Step Determine the phase out of, W-2 wages, and UBIA for any SSTB: 159 Phase-Out For SSTBs Applies to SSTBs with TI above the threshold amount and within the phase-out range. Only the applicable percentage of, W-2 wages, and unadjusted basis are taken into account for purposes of 199A 160

81 The Applicable Percentage 100% minus the percentage equal to the following ratio: TI Threshold Amount ($315K (MFJ) or 157.5K (other) Phase-out range (100K (MFJ) or 50K (other)) 161 SSTB Example S1 is the sole-proprietor of a law practice that earns a net profit () of $200,000. o W-2 wages paid of $100,000 o UBIA of $100,000 The couple files a joint return. 33 The couple s TI (pre- 199A) is $340,000 (due to S2 s W- 2 wages earned). The applicable percentage is 75% calculated as follows: 100% - 25% ($25,000 ($340,000 - $315,000) $100,000). 162

82 $150,000 of for the law practice (75% x $200,000). $75,000 of W-2 wages (75% x 100,000) are treated as paid. $75,000 of UBIA (75% x 100,000). 163 Pub 535: Schedule A SSTBs Keep for Your Records W-2 Wages UBIA T.I. Threshold Line 5 minus Line 6 Phase-In Range LAW Practice , , , , ,000 25, ,000 Line % Applicable Percentage = 100% minus Line 9 75% Line 2 x 75% (Applicable Percentage) 150,000 Line 3 x 75% (Applicable Percentage) 75,000 Line 4 x 75% (Applicable Percentage) 75,

83 If Beyond the Phase-Out Range for SSTB No. No W-2 Wages. No UBIA. No 199A deduction for the SSTB. 165 W2+UBIA Limit and Phase-in 166

84 If a Fully Phased in W2+UBIA Limit, then the component is: The sum of the following for each T-B: The lesser of: 1) 20% x (as reduced for SSTBs) 2) The greater of: i. 50% x W-2 wages, or ii. 25% x W-2 wages + 2.5% x UBIA 167 Example (1) Fully Phased-in W2+UBIA Limit A married couple owns rental real estate (T-B#1) that constitutes a qualified T-B and earns a net profit () of $200,000. The couple files a joint return. Due to one spouse s W-2 wages of $244,000, the couple s TI (pre- 199A) is $420,000 (they claim the standard deduction). The maximum 199A(a) deduction is $40,000 (20% x 200,000). The couple s unadjusted basis in the depreciable rental property (building and related personalty) is $2,000,000. They do not pay any W-2 wages. 168

85 2018 Taxable Income (Pre-199A) S2 s W-2 Wage Income 244,000 Sch. E Rental T-B 200,000 AGI 444,000 -Standard Deduction - 24,000 = Taxable Income = 420, x 20% T-B#1 200,000 40,

86 The Greater of x 20% 50% of 25% of W-2 Wages W-2 Wages + 2.5% x U.B. T-B#1 200,000 40, , The Lesser of The Greater of x 20% 50% of W-2 Wages 25% of W-2 Wages + 2.5% x U.B. Component T-B#1 200,000 40, ,000 40,

87 The Lesser of The Greater of x 20% 50% of W-2 Wages 25% of W-2 Wages + 2.5% x U.B. Component QRD + QPTPI Component T-B#1 200,000 40, ,000 40, The Lesser of The Greater of x 20% 50% of W-2 Wages 25% of W-2 Wages + 2.5% x U.B. Component QRD + QPTPI Component Tentat. 199A Ded. (Combined Amount) T-B#1 200,000 40, ,000 40, ,000 The 199A deduction is $40,000 (the lesser of $40,000 (the tentative 199A deduction) or $84,000 (20% x $420,000 (TI) 0 (NCG)) 174

88 Observation Same answer if T.I. were say $340,000 due to lower W-2 wages of the spouse. The partially phased-in W-2 limit is never more than the fully phased-in limit. 175 Example (2) Fully Phased-in W2+UBIA Limit Same facts as Example 1 above (T.I. is $420,000), in which the couple s is from rental real estate is $200,000 but with one change, the unadjusted basis of the building is $640,000 (instead of $2,000,000). 2.5% x $640,000 is $16,000 so the fully phased-in W2+UB limit is $16,000. Recall, No W-2 wages are paid. Taxable Income (Pre-199A) S2 s W-2 Wage Income 244,000 Sch. E Rental T-B 200,000 AGI 444,000 -Standard Deduction - 24,000 = Taxable Income = 420,

89 The Greater of x 20% 50% of 25% of W-2 Wages W-2 Wages + 2.5% x U.B. T-B#1 200,000 40, , The Lesser of The Greater of x 20% 50% of W-2 Wages 25% of W-2 Wages + 2.5% x U.B. Component QRD + QPTPI Component Tentat. 199A Ded. (Combined Amount) T-B#1 200,000 40, ,000 16, ,000 The 199A deduction is $16,000 (the lesser of $16,000 (the tentative 199A deduction) or $84,000 (20% x $420,000 (TI) 0 (NCG)) 178

90 Phase-In of W2+UBIA Limit The W2+UB limit phases in by reducing the maximum deduction by the product of an excess amount multiplied by a fraction. 179 The excess amount is the excess (if any) of the maximum 199A deduction (20% x ) over the fully phased-in W-2+UB limit. The excess amount is multiplied by a fraction: Excess Amount x TI Threshold Amount ($315K (MFJ) or 157.5K (other) Phase-out range (100K (MFJ) or 50K (other)) The product reduces the maximum deduction. 180

91 Example (3A) Phased-in W2+UBIA Limit Same facts as Example 2 except the spouse s W-2 wages are $164,000 (instead of $244,000). Recall, the couple s unadjusted basis in the depreciable rental property (building and related personalty) is $640,000. They do not pay any W-2 wages. If fully phased-in the W2+UBIA Limit is $16,000 (2.5% x 640K) Taxable Income (Pre-199A) S2 s W-2 Wage Income 164,000 Sch. E Rental T-B 200,000 AGI 364,000 -Standard Deduction - 24,000 = Taxable Income = 340, The excess amount is $24,000 ($40,000 (maximum 199A deduction) - $16,000 (fully phased-in W2+UB limit)). The phased-in reduction of the maximum 199A deduction is $6,000 calculated as follows: $24,000 x $340,000 - $315,000 $100K = $6,000 The tentative deduction is $34,000 ($40,000 minus $6,000), which is the 199A deduction because the TI-NCG limit is $68,000 (20% x 340,000). 182

92 Pub 535: Worksheet Part 1: Line 1 Keep for Your Records T-B # Part II: Lines 2 thru 16 Line 2: 200,000 Line 3: x 20% 40,000 Line 4: W-2 Wages 0 Line 5: Line 4 x 50% 0 Line 6: Line 4 x 25% 0 Line 7: UBIA 640,000 Line 8: Line 7 x 2.5% 16,000 Line 9: Add Lines 6 and 8 Line 10: Greater of 5 or 9 16,000 16,000 Line 11: W-2+UBIA Limit -- Lesser of 3 or 10 16,000 Line 12: Phase-in Reduction from Part III Line 26, if any 184

93 Part III: Phased-In Reduction of W2+UBIA Limit Line 17: Enter Amt. from Line 3 Line 18: Enter Amt. from Line 10 Line 19: Line 17 minus Line 18 Line 20: T.I. before 199A deduction Line 21: T.I. Threshold for MFJ Line 22: Line 20 minus Line 21 Line 23: Phase-in Range for MFJ 340, ,000 25, ,000 40,000 (Max. Ded.) 16,000 (Max. W-2+UBIA Limit) 24,000 Line 24: Phase-in Percentage 25% Line 25: Line 24 x Line 19 6,000 Line 26: after Reduction: Line 4 x 75% (Applicable Percentage) Line 17 minus Line 25 34,000 (40,000 75,000 6,000) 185 Finish Part II: Lines 2 thru 16 Line 2: 200,000 Line 3: x 20% 40,000 Line 4: W-2 Wages 0 Line 5: Line 4 x 50% 0 Line 6: Line 4 x 25% 0 Line 7: UBIA 640,000 Line 8: Line 7 x 2.5% 16,000 Line 9: Add Lines 6 and 8 16,000 Line 10: Greater of 5 or 9 16,000 Line 11: W-2+UBIA Limit -- Lesser of 3 or 10 16,000 Line 12: Phase-in Reduction from Part III Line 26, if any Line 13: Greater of 11 or 12 Line 14: Patron Reduction, if any Line 15: Component for each T-B: Line Line 16: Total Component: Add 15s 34,000 34,000 N/A 34,000 34,

94 Part IV Determine Your Deduction Line 27: Total Component from all T-Bs 34,000 Line 28: Qualified REIT Div and Qualified PTPI or <L> 0 Line 29: Qualified REIT Div and QPTPI Loss PY Carryover <0> Line 30: Total Qualifed REIT Div and QPTPI: Add Lines 28 and 29 0 Line 31: REIT and PTP Component: Line 30 x 20% 0 Line 32: Deduction Before Income Limitation Line 33: T.I. Before Deduction 340,000 Line 34: Net Capital Gain 0 Line 35: Subtract Line 34 from Line ,000 Line 36: Line 35 x 20% (340,000 x 20%) Line 37: Deduction: Smaller of Line 32 or 36 Line 38: Qualified REIT and QPTP loss carryforward Line 39: DPAD from Ag. Cooperative. Don t enter more than line 33 minus line 37. Enter on Line 1040 Line 10 (T.I.). 34,000 68,000 34,000 0 N/A 187 Example (3B) Same as 3B but zero UBIA (and still zero W-2 wage) Taxable Income (Pre-199A) S2 s W-2 Wage Income 164,000 Sch. E Rental T-B 200,000 AGI 364,000 -Standard Deduction - 24,000 = Taxable Income = 340,

95 Part II: Lines 2 thru 16 Line 2: 200,000 Line 3: x 20% 40,000 Line 4: W-2 Wages 0 Line 5: Line 4 x 50% 0 Line 6: Line 4 x 25% 0 Line 7: UBIA 0 Line 8: Line 7 x 2.5% 0 Line 9: Add Lines 6 and 8 Line 10: Greater of 5 or Line 11: W-2+UBIA Limit -- Lesser of 3 or 10 0 Line 12: Phase-in Reduction from Part III Line 26, if any 189 Part III: Phased-In Reduction of W2+UBIA Limit Line 17: Enter Amt. from Line 3 Line 18: Enter Amt. from Line 10 Line 19: Line 17 minus Line 18 Line 20: T.I. before 199A deduction Line 21: T.I. Threshold for MFJ Line 22: Line 20 minus Line 21 Line 23: Phase-in Range for MFJ 340, ,000 25, ,000 40,000 (Max. Ded.) 40,000 Line 24: Phase-in Percentage 25% Line 25: Line 24 x Line 19 10,000 Line 26: after Reduction: 0 (Max. W-2+UBIA Limit) Line 4 x 75% (Applicable Percentage) Line 17 minus Line 25 30,000 75,000 (40,000 10,000) 190

96 Finish Part II: Lines 2 thru 16 Line 2: 200,000 Line 3: x 20% 40,000 Line 4: W-2 Wages 0 Line 5: Line 4 x 50% 0 Line 6: Line 4 x 25% 0 Line 7: UBIA 0 Line 8: Line 7 x 2.5% 0 Line 9: Add Lines 6 and 8 0 Line 10: Greater of 5 or 9 0 Line 11: W-2+UBIA Limit -- Lesser of 3 or 10 0 Line 12: Phase-in Reduction from Part III Line 26, if any Line 13: Greater of 11 or 12 Line 14: Patron Reduction, if any Line 15: Component for each T-B: Line Line 16: Total Component: Add 15s 30,000 30,000 N/A 30,000 30, Part IV Determine Your Deduction Line 27: Total Component from all T-Bs 30,000 Line 28: Qualified REIT Div and Qualified PTPI or <L> 0 Line 29: Qualified REIT Div and QPTPI Loss PY Carryover <0> Line 30: Total Qualifed REIT Div and QPTPI: Add Lines 28 and 29 0 Line 31: REIT and PTP Component: Line 30 x 20% 0 Line 32: Deduction Before T.I. Limit: Line 27 + Line 31 Line 33: T.I. Before Deduction 340,000 Line 34: Net Capital Gain 0 Line 35: Subtract Line 34 from Line ,000 Line 36: Line 35 x 20% (340,000 x 20%) Line 37: Deduction: Smaller of Line 32 or 36 Line 38: Qualified REIT and QPTP loss carryforward Line 39: DPAD from Ag. Cooperative. Don t enter more than line 33 minus line 37. Enter on Line 1040 Line 10 (T.I.). 30,000 68,000 30,000 0 N/A 192

97 Example (6) Multiple Businesses No Aggregation F, an unmarried individual, owns as a sole proprietor 100 percent of three trades or businesses, Business X, Business Y, and Business Z. None of the businesses are SSTBs and all income is effectively connected with a U.S. trade or business. No capital gains or losses are reported. None of the businesses hold qualified property. F does not aggregate the trades or businesses under 1.199A-4. For taxable year 2018: Business X generates $1 million of and pays $500,000 of W-2 wages with respect to the business. Business Y also generates $1 million of but pays no wages. Business Z generates $2,000 of and pays $500,000 of W-2 wages with respect to the business. 193 W-2 Wages Pd. UBIA T-B: X 1,000, ,000 0 T-B: Y 1,000, T-B: Z 2, ,000 0 F also has $750,000 of wage income from employment with an unrelated company. After allowable deductions unrelated to the businesses, F's taxable income is $2,722,

98 The Lesser of The Greater of x 20% 50% of W-2 Wages 25% of W-2 Wages + 2.5% x U.B. Component QRD + QPTPI Component Tentat. 199A Ded. (Combined Amount) X T-B 1,000, , , , , The Lesser of The Greater of x 20% 50% of W-2 Wages 25% of W-2 Wages + 2.5% x U.B. Component QRD + QPTPI Component Tentat. 199A Ded. (Combined Amount) X T-B 1,000, , , , ,000 Y T-B 1,000, ,