Friday, September 14, 2018

§199A Update


As discussed in previous posts, one of the most complicated yet compelling provisions of the recently enacted tax reform is the addition of §199A to the Internal Revenue Code.

As a brief background, §199A provides a deduction for business owners of pass-through entities (non-corporations). Subject to certain thresholds and exceptions, §199A permits such pass-through business owners to deduct up to 20% of their qualified business income.

Naturally, many taxpayers (through their advisors) have begun utilizing extra deductions by transferring interest in their businesses to non-grantor trusts. Since each non-grantor trust is a separate tax-paying entity, it may (subject to limitations) qualify for its own deduction under §199A.

As expected, the IRS has responded to such planning by issuing proposed regulations. Some of the proposed limitations are as follows:
  • The IRS will aggregate trusts if i) they have the same grantor; ii) they have substantially the same beneficiaries; and iii) the principal purpose of the trust is to avoid income tax.
  • Trusts formed with a significant purpose of receiving a §199A deduction, will not be respected under §199A. 
  • When calculating taxable income of a trust for §199A purposes, it will include amounts that the trust has already distributed to beneficiaries.  

Please stay tuned for updates regarding the proposed regulations. However, in the interim, please do not hesitate to contact Morris Law Group should you have any questions about the new §199A.