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Memorandum                           TM

   Reproduced with permission from Tax Management Memorandum, Vol. 59, No. 19, p. 293, 09/17/2018.
   Copyright 姝 2018 by The Bureau of National Affairs, Inc. (800-372-1033) http://www.bna.com

                                                                       articles.4 This article is a continuation of that quest for
Do the §199A Proposed                                                  clarity. The §199A proposed regulations address many
Regulations Provide Clarity                                            questions and comments the IRS received from tax
                                                                       practitioners, including: the definition and methods of
for Business Owners?                                                   calculating W-2 wages;5 specified service trades or
                                                                       businesses (SSTB) and the definitions of those types
By James M. Kehl, CPA*                                                 of businesses; and, rules for trusts and estates and
                                                                       publicly traded partnerships (PTPs). In addition, new
                                                                       terms and definitions were added to the §199A glos-
                                                                       sary. The §199A proposed regulations cover a lot of
                                                                       ground.
INTRODUCTION                                                              This article will not undertake the Herculean task
                                                                       of discussing every definition and every explanation
   The Internal Revenue Service has recently released                  contained in the §199A proposed regulations. Instead,
proposed regulations with respect to §199A.1 Tax pro-                  this article will restrict itself to discussing the trade or
fessionals have eagerly awaited these regulations with                 business concept and the new aggregation rules that
the expectation that this guidance would address                       may benefit the owners of certain trades or businesses.
many of the issues and questions concerning §199A.2                    This article also discusses clarifications to the rules
A public hearing on these proposed regulations has                     concerning the trade or business of performing ser-
been scheduled for October 16, 2018. It is thus im-                    vices as an employee and for determining the unad-
perative for tax practitioners to understand these new                 justed basis immediately after acquisition (UBIA) of
regulations so they can submit comments on these                       qualified property. The new rules for carrying forward
new rules prior to that date. However, Prop. Reg.                      a negative combined amount of qualified REIT divi-
§1.199A-1 through §1.199A-6 do not apply to the cal-                   dends and qualified PTP income are also mentioned.
culation of the §199A(g) deduction for specified agri-                 The rule for offsetting the losses from trades or busi-
cultural and horticultural cooperatives.3                              nesses with negative qualified business income (QBI)
                                                                       against the QBI of businesses with positive QBI in
  The author embarked on the journey to understand                     situations where the total QBI amount is positive is
§199A and its benefits for taxpayers in two previous                   noted. This article concludes with an example that
                                                                       compares a taxpayer’s computation of the §199A de-
    *
      James M. Kehl, CPA, M.S. Taxation, is currently with the ac-     duction without an aggregation election for that tax-
counting firm of Weil, Akman, Baylin & Coleman, P.A. (WABC),           payer’s commonly controlled trades or businesses
in Timonium, Maryland. Mr. Kehl is the author of The Practical         with a computation of the §199A deduction of the
Guide to Code Sec. 199 and the Code Sec. 199 Tax Planning &            same taxpayer that reflects an election to aggregate
Compliance Manual. He has also authored articles on partnership        those commonly controlled trades or businesses.
income tax topics that have appeared in The Journal of Pass-
through Entities, Taxes — The Tax Magazine, Tax Strategies,               The new §199A proposed regulations for trades or
Bloomberg Tax Daily Tax Report, and the TM Real Estate Jour-           businesses do not contain a concise and specific defi-
nal. Mr. Kehl is one of the contributing authors to the treatise en-   nition of the term ‘‘trade or business.’’ However, they
titled Federal Taxation of Partnerships & Partners.
    1
      REG-107892-18, 83 Fed. Reg. 40,004 (Aug. 16, 2018). All
section references in this article are to the Internal revenue code       4
                                                                            James M. Kehl, The Most Important Deduction in the 2017
of 1986, as amended (the Code), and the regulations thereunder,        Tax Act: 199A 34 Tax Mgmt. Real Estate J., 48 (March 7, 2018).
unless otherwise specified.                                            See also James M. Kehl, §199A Gets an Update Three Months Af-
    2
      Laura Davison, Pass-through Guidance Said to be Delayed          ter Its Enactment, 59 Tax Mgmt. Memo. 115 (April 16, 2018).
Until End of July, 135 Daily Tax Rep. 4, (July 13, 2018).                 5
                                                                            These methods were discussed in more detail by IRS Notice
    3
      Prop. Reg. §1.199A-1(a)(1).                                      2018-64.
do permit certain commonly controlled entities that                            is not engaged in any trade or business, then the rest
conduct operations through several pass-through enti-                          of the steps are unnecessary. For instance, a partner-
ties to elect to aggregate the QBI, W-2 wages, and                             ship that invests solely in bonds or other securities is
UBIA of qualified property of these controlled busi-                           not engaged in a trade or business. That partnership is
nesses if certain conditions are satisfied. In that re-                        not an RPE and would not have any §199A informa-
spect, the §199A proposed regulations offer a choice                           tion to furnish to its partners. It is possible that a part-
to certain taxpayers.                                                          nership not engaged in a trade or business directly
                                                                               may indirectly be engaged in a trade or business
DEFINITIONS                                                                    through investments in other partnerships that are
                                                                               RPEs (lower-tier partnerships). If that is the case, then
   Prop. Reg. §1.199A-1 discusses the operational                              the lower-tier partnerships would have passed through
rules of §199A and defines several §199A terms.                                this partnership’s distributive share of §199A items
Many of these operational rules and definitions were                           generated by those lower-tier partnerships. Second,
discussed in the prior articles alluded to in the intro-                       after an RPE determines it is engaged in one or more
duction to this article. However, the §199A proposed                           trades or businesses, it must determine whether any of
regulations contain some new definitions and explana-                          those trades or businesses is an SSTB. Third, the QBI
tions of some definitions discussed in the prior ar-                           for each trade or business that the RPE engages in di-
ticles.                                                                        rectly must be computed. Fourth, the RPE must deter-
                                                                               mine the W-2 wages and UBIA of qualified property
RELEVANT PASS-THROUGH ENTITY                                                   for each trade or business it engages in directly. Fifth,
(RPE)                                                                          the RPE must determine whether it has any qualified
                                                                               REIT dividends that it either earned directly or
   This is a new term used to describe either a part-                          through another RPE. Sixth, the RPE must determine
nership that is not a PTP or an S corporation that is                          the net amount of qualified PTP income it has either
owned, directly or indirectly, by at least one indi-                           earned directly or earned indirectly because of its in-
vidual, estate, or trust.6 A trust or estate is treated as                     vestments in PTPs.10
an RPE to the extent that fiduciary entity passes                                 After the RPE makes these calculations, it must re-
through QBI, W-2 wages, UBIA of qualified property,                            port the results on an attachment to the Form 1065
qualified REIT dividends, or qualified PTP income.7                            Schedule K-1 it furnishes to each of its partners. The
It is apparently termed a ‘‘relevant’’ pass-through en-                        items to be reported on that attachment are the QBI,
tity because §199A items may be passed through by                              W-2 wages, and UBIA of qualified property attribut-
this entity to its owners. This definition does not seem                       able to each of its trades or businesses. The RPE must
to address an upper-tier/lower-tier partnership ar-                            also inform its owners of any trade or business it con-
rangement. In that type of arrangement, the upper-tier                         ducts directly that is an SSTB.11 Furthermore, an RPE
partnership has partners who are individuals (when                             must inform its owners of any QBI, W-2 wages,
the term ‘‘individual’’ is used in the §199A proposed                          UBIA of qualified property, or SSTB determinations
regulations, it refers not only to individuals but also                        reported to it by any RPE in which it owns a direct or
to non-grantor trusts and estates to the extent the                            indirect interest.12 The RPE must also report to each
§199A deduction for those trusts or estates is deter-                          of its owners on each owner’s Form 1065 Schedule
mined under Prop. Reg. §1.199A-6)8 and owns inter-                             K-1 attachment that owner’s share of any qualified
ests in lower-tier partnerships that conduct trades or                         REIT dividends or qualified PTP income or loss it has
businesses. However, an upper-tier partnership may                             received directly or that it is treated as having re-
be an RPE and each lower-tier partnership it owns an                           ceived as a result of its investments in other RPEs.13
interest in could also be an RPE.                                              As it stands right now, each RPE must report this in-
   Generally, an RPE must determine and report infor-                          formation ‘‘regardless of whether a taxpayer is below
mation to its owners or beneficiaries concerning its                           the threshold.’’14
trades or businesses that enables those persons to                                The burden for any failure of an RPE to comply
compute their §199A deduction.9 There are six steps                            with these reporting obligations falls squarely on the
an RPE must normally take to ascertain this informa-                           shoulders of the RPE’s owners. The reason for this ef-
tion. First, the RPE must determine if it is engaged in                        fect is because if an RPE fails to either separately
at least one trade or business. If a pass-through entity
                                                                                  10
                                                                                     Prop. Reg. §1.199A-6(b)(2).
    6                                                                             11
      Prop. Reg. §1.199A-1(b)(9).                                                    Prop. Reg. §1.199A-6(b)(3)(i).
    7                                                                             12
      Id.                                                                            Prop. Reg. §1.199A-6(b)(3)(ii).
    8                                                                             13
      Prop. Reg. §1.199A-1(a)(2).                                                    Id.
    9                                                                             14
      Prop. Reg. §1.199A-6(b)(1).                                                    REG-107892-18, Preamble, Explanation of Provisions, §VI.

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identify or separately report an owner’s share of any                     whether a group of activities is ‘‘carrying on a trade
of the items described in the above paragraph, that                       or business requires an examination of the facts in
owner’s share of positive QBI, W-2 wages, and UBIA                        each case.’’20 That statement is the reason it is not
of qualified property attributable to any trades or busi-                 possible to come up with a standard definition of the
nesses of the reporting RPE is presumed to be zero.15                     term ‘‘trade or business’’ that applies in every case.
   The IRS requested comments as to whether it is ad-                     The classification of an activity or group of activities
ministratively feasible to provide a special rule that                    as a trade or business is too dependent upon facts and
exempts RPEs with no owners that have taxable in-                         circumstances for anyone to provide a concise, all-
comes above the threshold amount ($157,500 for a                          encompassing definition that applies in every situa-
single taxpayer and $315,000 for a joint return) from                     tion.
the above reporting requirements. To be eligible for                         The preamble to the §199A proposed regulations
this special rule, the RPE would need to know each of                     states that the IRS and Treasury Department agree
its owners’ taxable incomes.16 A family-owned or                          with commenters that the ‘‘§162(a) definition pro-
other closely held RPE may possess this knowledge                         vides the most appropriate definition of a trade or
and a special rule that exempts those RPEs from these                     business.’’21 Persons that read this statement literally
reporting requirements may relieve those entities of                      will discern that there is no definition of the term
an unnecessary reporting burden.                                          ‘‘trade or business’’ contained in §162(a). However,
                                                                          the next sentences may indicate that this statement is
TRADE OR BUSINESS                                                         not to be read literally. Those sentences note that the
   The first two articles in this §199A trilogy dis-                      §162 ‘‘trade or business’’ definition ‘‘is derived from
cussed the meaning of a trade or business and at-                         a large body of existing case law and administrative
tempted to convey that this is the most important con-                    guidance interpreting the meaning of trade or business
cept that underlies §199A.17 Some practitioners were                      in the context of a broad range of industries.’’22 This
hoping the §199A proposed regulations would pro-                          statement indicates that the case law and other guid-
vide a clear, bright-line definition of the term ‘‘trade                  ance discussed in the first two articles of this trilogy
or business.’’ That did not happen. However, the rules                    is applicable in defining a §162 trade or business. The
permitting certain commonly controlled trades or                          definition of a trade or business as an activity or group
businesses to be treated as a single aggregated trade                     of activities conducted on a regular, continuous, and
or business should benefit many taxpayers. The treat-                     substantial basis for the purpose of making a profit
ment of the activity of renting or licensing property to                  still seems to be an appropriate definition of a trade or
a commonly controlled trade or business as a trade or                     business.23
business for purposes of §199A may result in many
taxpayers in that situation obtaining a §199A deduc-                      RENTAL ACTIVITY
tion. For this reason, the trade or business definition                      A ‘‘trade or business’’ is defined by the §199A pro-
and the aggregation rules contained in the §199A pro-                     posed regulations as ‘‘a §162 trade or business other
posed regulations merit scrutiny and analysis.                            than the trade or business of performing services as an
   The preamble to the §199A proposed regulations                         employee.’’24 The next sentence begins with the
correctly states that ‘‘neither the statutory text of                     phrase ‘‘in addition, rental or licensing of tangible or
§199A nor the legislative history provides a definition                   intangible property (rental activity) that does not rise
of trade or business for purposes of §199A.’’18 An-                       to the level of a §162 trade or business.’’25 This is an
other sentence in the preamble begins with the phrase                     indication that the IRS continues to believe that not
‘‘although the term trade or business is defined in                       every rental activity is a trade or business. As noted in
more than one provision of the Code.’’19 This is not                      the prior articles, a rental activity may be a §212 ac-
literally correct. While numerous sections of the Code                    tivity with a purpose of producing income. The ques-
and its related regulations use the term ‘‘trade or busi-                 tion some tax practitioners may have is how one
ness,’’ none of those sections or income tax regula-                      knows if a rental activity is a §162 trade or business
tions define that term. The reason for this lack of a                     or is a §212 activity. The §199A proposed regulations
definition was stated by the Supreme Court in Higgins                     do not answer that question.
v. Commissioner, where the Court explained that
                                                                             20
                                                                                312 U.S. 212 (1941).
  15                                                                         21
     Prop. Reg. §1.199A-6(b)(3)(iii).                                           REG-107892-18, Preamble, Explanation of Provisions, §I.
  16                                                                         22
     REG-107892-18. Preamble, Explanation of Provisions, §VI.                   Id.
  17                                                                         23
     See n.4, above.                                                            See n.4, above.
  18                                                                         24
     REG-107892-18, Preamble, Explanation of Provisions, §I.                    Prop. Reg. §1.199A-1(b)(13).
  19                                                                         25
     Id.                                                                        Id.

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Many cases, regulations, and other published guid-                           vices as an employee and to include a presumption
ance have addressed whether net rental income is                                about former employees who perform the same ser-
trade or business income or some other type of in-                              vices as independent contractors that those persons
come. In addition to the guidance cited in the prior ar-                        performed as employees.
ticles of this trilogy, there is the definition of ‘‘rents                         A person may be an employee of another person if
derived in the active trade or business of renting prop-                        the common law relationship of an employer and em-
erty’’ for purposes of determining whether rent in-                             ployee exists. This relationship generally exists if
come is passive investment income.26 After defining                             ‘‘the person for whom the services are performed has
rents as ‘‘amounts received for the use of, or right to                         the right to direct and control the individual who per-
use, property (whether real or personal) of the corpo-                          forms the services, not only as to the result to be ac-
ration,’’ Reg. §1.1362-2(c)(5)(ii)(B)(2) states that the                        complished by the work but also as to the details and
term rents, for purposes of passive investment in-                              means by which that result is accomplished.’’28 In an
come, does not include ‘‘any rents derived from the                             employer-employee common law relationship, an em-
active trade or business of renting property.’’ Rents                           ployee is subject to the employer’s direction and con-
‘‘are derived in an active trade or business of renting                         trol as to the tasks to be performed as well as to how
property only if, based on all the facts and circum-                            those tasks are to be done. It is not necessary for the
stances, the corporation provides significant services                          employer to actually direct or control the way these
or incurs substantial costs in the rental business. Gen-                        tasks are performed; it is sufficient if the employer has
erally, significant services are not rendered, and sub-                         the right to do so.29 An officer of a corporation, in-
stantial costs are not incurred in connection with net                          cluding an S Corporation, is generally an employee.30
leases. Whether significant services are performed, or                          However, for purposes of §199A, an officer who per-
substantial costs are incurred in the rental business is                        forms either no services or only minor services as an
determined based upon all the facts and circumstances                           officer and is neither entitled to nor receives compen-
including, but not limited to, the number of persons                            sation may not be considered an employee of that cor-
employed to provide the services and the types and                              poration.31 An individual who is considered an em-
amounts of costs and expenses incurred (other than                              ployee under the common law rules for determining
depreciation).’’27 What constitutes ‘‘significant ser-                          an employer-employee relationship is also an em-
vices’’ and ‘‘substantial costs’’ may vary depending                            ployee.32
upon the facts and circumstances, the location of a                                Income derived from the trade or business of being
property, and other situational factors. Making repairs,                        an employee includes all wages described in §3401(a)
providing janitorial and cleaning services, and incur-                          as well as W-2 payments described in Reg. §1.6041-
ring significant expenses in providing those services                           2(a)(1).33 The term does not include: (1) payments
on an active and continuous basis would seem to con-                            under life insurance contracts described in §72(m)(3);
stitute significant services. Perhaps published guid-                           or (2) amounts distributed or made available to a ben-
ance that references this regulation would help tax-                            eficiary to which the rules of §402 or §403 apply.34
payers and their advisors decide whether any net                                Income derived from the trade or business of being an
rental income generated by those rental activities is                           employee does not include payments received by per-
derived from a trade or business.                                               sons who are not corporate officers or common law
                                                                                employees but who are individuals described in
TRADE OR BUSINESS OF BEING AN                                                   §3121(d)(3) (certain life insurance salespersons, agent
EMPLOYEE                                                                        or commission drivers, home workers, or traveling
                                                                                salespersons).35
   Prop. Reg. §1.199A-5(a)(3) clarifies that the trade
or business of performing services as an employee is                               If a worker is properly classified as an employee for
not a §199A trade or business and that no §199A de-                             purposes of §199A under these rules, the employer’s
duction may be claimed with respect to a taxpayer’s                             classification of that employee for federal employ-
wage income regardless of the amount of that per-
son’s taxable income. To prevent individuals who are                              28
                                                                                     REG-107892-18, Preamble, Explanation of Provisions,
employees from subsequently treating themselves as                              §V.B.1.
independent contractors and claiming a §199A deduc-                               29
                                                                                     Id.
tion based on income that was formerly employee                                   30
                                                                                     §3121(d)(1).
                                                                                  31
wages, the IRS and the Treasury Department felt it                                   REG-107892-18, Preamble, Explanation of Provisions,
was necessary to elaborate on the definition of ser-                            §V.B.1. See also Rev. Rul. 74390.
                                                                                  32
                                                                                     §3121(d)(2).
                                                                                  33
                                                                                     Prop. Reg. §1.199A-5(d)(1).
    26                                                                            34
         Reg. §1.1362-2(c)(5)(ii)(B).                                                Id. referring to payments described in Reg. §1.6041-2(b)(1).
    27                                                                            35
         Reg. §1.1362-2(c)(5)(ii)(B)(2).                                             §3121(d)(1).

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ment tax purposes is immaterial.36 To prevent indi-                           mer employer in an employee capacity.39 This pre-
viduals who are employees from subsequently treat-                            sumption can be rebutted if the individual can
ing themselves as independent contractors and claim-                          demonstrate that, under the federal income tax regula-
ing a §199A deduction with respect to income that is,                         tions and principles, the person is performing these
in substance, employee compensation for services,                             subsequent services in a non-employee capacity.40
Prop. Reg. §1.199A-5(d)(3) contains a rebuttable pre-                         Example 2
sumption that an individual who was properly treated                             Nicole is an architect that has been employed by
as an employee by an employer for federal employ-                             AIA LLC, an architectural firm that is treated as a
ment tax purposes and who is subsequently treated as                          partnership for federal income tax purposes. AIA
an independent contractor or other than an employee                           LLC’s policy is that persons can become partners af-
by that employer with respect to the rendering of                             ter a period of seven years if they attain certain per-
‘‘substantially the same services directly or indi-                           formance goals. After 13 years, Nicole attains those
rectly’’ to that employer or to a person related to that                      goals and is admitted as a partner in charge of AIA
employer is ‘‘presumed to be in the trade or business                         LLC’s Sarasota, Florida office. Nicole makes a capital
of performing services as an employee with regard to                          contribution to AIA LLC, shares in its profits, and
such services.’’37                                                            does other things necessary to be respected as a part-
Example 1                                                                     ner. For purposes of §199A(d)(1)(B), Nicole is still
   Nancy is a CPA who was employed as an accoun-                              presumed to be in the trade or business of performing
tant by WABC (a CPA firm partnership) and was                                 services as an employee of AIA LLC with respect to
properly treated as an employee by WABC for federal                           her services to AIA LLC. However, Nicole rebuts this
employment tax purposes. Nancy and some other ac-                             presumption by clearly showing that she became a
countants formerly employed by WABC have taxable                              partner because of achieving certain performance ob-
incomes below the $157,500/$315,000 thresholds.                               jectives, becoming in charge of AIA LLC’s Sarasota
Nancy and those accountants terminate their employ-                           office, making a capital contribution, and satisfying
ment relationship with WABC and form their own                                the other requirements of federal income tax law and
CPA firm partnership, which contracts with WABC to                            regulations for being treated as a partner.41
perform accounting services for WABC. Nancy, who
is now a partner in this new CPA firm partnership,                            RENTAL OF PROPERTY TO
continues to provide the same services to WABC and                            COMMONLY CONTROLLED
its clients that she rendered during her term of em-                          BUSINESS
ployment with WABC. The compensation for Nancy’s                                 The prior articles in this trilogy questioned whether
services is now business income of Nancy’s firm. Be-                          the net rental income derived by an owner of a build-
cause Nancy was previously classified as an employee                          ing from leasing that building to that owner’s family-
and now is no longer treated as such with respect to                          owned business could be QBI. As also noted in those
the services she currently provides to WABC, Nancy                            articles, many of these leasing arrangements may not
is presumed to be, solely for purposes of                                     have qualified as §162 trades or businesses. Some tax
§199A(d)(1)(B), to be in the trade or business of per-                        practitioners were wondering whether there would
forming services as employee with respect to the ser-                         have to be regulations that would permit the grouping
vices she renders to WABC indirectly through her                              of these rental activities with other qualified trades or
CPA firm partnership. Unless this presumption is re-                          businesses for purposes of §199A. Even the IRS ob-
butted, Nancy’s distributive share of income from her                         served that ‘‘it is not uncommon that for legal or other
CPA firm partnership that is attributable to her ser-                         non-tax reasons taxpayers may segregate rental prop-
vices for WABC is not QBI. The results would be the                           erty from operating businesses.’’42 Fortunately, the
same if Nancy’s CPA firm partnership were admitted                            definition of a trade or business in Prop. Reg.
as a partner in WABC.38                                                       §1.199A-1(b)(13) seems to have provided guidance in
   This rebuttable presumption would also apply to a                          this area.
full-time employee who quits that person’s current job                           It is interesting to note that the Preamble to the
and then enters into a contract with that person’s for-                       §199A proposed regulations states that these ‘‘regula-
mer employer to provide ‘‘substantially the same ser-
vices’’ that were provided by that person to that for-
                                                                                 39
                                                                                    See Prop. Reg. §1.199A-5(d)(3)(ii) Ex. 1.
                                                                                 40
                                                                                    REG-107892-18, Preamble, Explanation of Provisions,
     36
        Prop. Reg. §1.199A-5(d)(2).                                           §V.B.1.
     37                                                                          41
        Prop. Reg. §1.199A-5(d)(3)(i).                                              This example is based on Prop. Reg. §1.199A-5(d)(3)(ii) Ex.
     38
        This example is based on Prop. Reg. §1.199A-5(d)(3)(ii) Ex.           3.
                                                                                 42
2.                                                                                  REG-107892-18, Preamble, Explanation of Provisions, §I.A.

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tions extend the definition of trade or business for pur-                     §267(b) or §707(b), is included in the 50% or more
poses of §199A beyond §162 in one circumstance.’’43                           common ownership test.46
That circumstance is the second sentence of the defi-
                                                                              Example 3
nition of ‘‘trade or business’’ in Prop. Reg. §1.199A-
1(b)(13), which states that, in addition to a §162 trade                         Dr. Albert is a dentist who owns a dental practice
or business that is other than the trade of business of                       and an office building. If Dr. Albert leases 80% or
performing services as an employee, the ‘‘rental or li-                       more of that building to his dental practice, the rental
censing of tangible or intangible property (rental ac-                        of the building is treated as part of an SSTB and the
tivity) that does not rise to the level of a section 162                      rental income derived from that activity is not derived
trade or business is nevertheless treated as a trade or                       from a §199A(d)(1) qualified trade or business. If Dr.
business for purposes of section 199A, if the property                        Albert leases less than 80% of his building to his den-
is rented or licensed to a trade or business which is                         tal practice, then only the portion of the building
commonly controlled under §1.199A-4(b)(1)(i) (re-                             rented to the dental practice will be treated as part of
gardless of whether the rental activity and the trade or                      the SSTB.47
business are otherwise eligible to be aggregated under
§1.199A-4(b)(1)).’’ If a rental activity satisfies this                       COMMON CONTROL
definition of a trade or business, then one must look                            The common control test of Prop. Reg. §1.199A-
to the definition of a ‘‘qualified trade or business’’ for                    4(b)(1)(i) states that either the same person or the
purposes of §199A, which is contained in                                      same group of persons must, directly or indirectly,
§199A(d)(1). A ‘‘qualified trade or business’’ under                          own 50% or more of each trade or business, which
§199A(d)(1) is any trade or business that is neither a                        means ‘‘in the case of such trades or businesses
specified service trade or business (SSTB) nor a trade                        owned by an S corporation, 50 percent or more of the
or business of performing services as an employee.                            issued and outstanding shares of the corporation, or,
Therefore, if the commonly controlled test of Prop.                           in the case of such trades or businesses owned by a
Reg. §1.199A-4(b)(1)(i) is satisfied, the rental of                           partnership, 50 percent or more of the capital or prof-
buildings and other property by an owner to that own-                         its in the partnership.’’ In determining whether this
er’s trade or business should be a qualified trade or                         ownership test is satisfied, an individual is treated as
business that generates QBI. The IRS hopes that al-                           owning the interest in each trade or business that is
lowing this exception ‘‘may prevent taxpayers from                            owned, directly or indirectly, by or for: (1) that indi-
improperly allocating losses or deductions away from                          vidual’s spouse, provided that individual is not sepa-
trades or businesses that generate income that is eli-                        rated from the spouse under a divorce or separate
gible for a §199A deduction.’’44                                              maintenance decree; and (2) the individual’s parents,
   One of the questions some tax practitioners had                            children, and grandchildren.48
was whether the rental income derived by a profes-                            Example 4
sional from a building leased to a medical practice or                           Mort owns 100% of the stock of Gold, Inc., which
other SSTB could be QBI. This question was ad-                                is a C corporation that engages in the business of min-
dressed by Prop. Reg. §1.199A-5(c)(2). Prop. Reg.                             ing gold and other minerals. Mort also owns a build-
§1.199A-5(c)(2)(i) states that any trade or business                          ing that he leases to Gold, Inc as a warehouse and ad-
that provides 80% or more of its property or services                         ministrative office. The rental of a building may or
to an SSTB is an SSTB if there is 50% or more com-                            may not be a §162 trade or business, depending on the
mon ownership of the SSTB and that trade or busi-                             facts and circumstances. Gold, Inc. and Mort’s rental
ness. If a trade or business provides less than 80% of                        property cannot be aggregated because Gold, Inc. is a
its property or services to an SSTB, but there is 50%                         C Corporation that is not eligible for the §199A de-
or more common ownership of that SSTB and the                                 duction.49 However, the mining activity of Gold, Inc.
trade or business providing the property or services,                         is a §162 trade or business. Mort also satisfies the
then the portion of the trade or business that provides                       definition of common control because he owns 100%
property or services to the 50% or more commonly                              of the building and 100% of the trade or business of
owned SSTB is treated as part of the SSTB.45 For                              Gold, Inc. through his stock ownership in that corpo-
purposes of these rules, direct or indirect ownership
by related parties, within the meaning of either
                                                                                 46
                                                                                   Prop. Reg. §1.199A-5(c)(2)(iii).
                                                                                 47
                                                                                   This example is based on an example contained in REG-
    43
       Id.                                                                    107892-18, Preamble, Explanation of Provisions, §V.A.3.
    44                                                                          48
       Id.                                                                         Prop. Reg. §1.199A-4(b)(3).
    45                                                                          49
       Prop. Reg. §1.199A-5(c)(2)(ii).                                             §199(a)(1); Prop. Reg. §1.199A-4(d) Ex. 11.

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ration. Once the rental of Mort’s building is consid-                  ness operations for tax purposes.52 In response to this
ered a trade or business for purposes of §199A, it                     need, the aggregated trade or business concept was
should be a qualified trade or business based on                       devised.
§199A(d)(1). The question about this conclusion is                        An aggregated trade or business is two or more
because the common control definition in Prop. Reg.                    trades or businesses that have been aggregated pursu-
§1.199A-4(b)(1)(i) only talks about businesses owned                   ant to Prop. Reg. §1.199A-4. This aggregated trade or
by S Corporations and partnerships. That portion of                    business is treated as a single trade or business for
the definition could lead to the belief that the common                purposes of determining the QBI component of the
control definition is only meant to apply to ownership                 §199A deduction.53 This aggregation is allowed but is
interests in partnerships and S Corporations. A clarifi-               not required; trades or businesses can only be aggre-
cation of this example when the §199A proposed                         gated to the extent provided in Prop. Reg. §1.199A-4.
regulations are finalized would help business owners                      First Requirement: An individual can aggregate
who rent property to their C Corporations.                             trades or businesses only if that individual can dem-
   The result is much clearer if the trade or business                 onstrate that the requirements of Prop. Reg. §1.199A-
that leases the property as a tenant is a pass-through                 4(b)(1) are fulfilled. The first requirement is that each
                                                                       trade or business to be aggregated must be a trade or
entity.
                                                                       business as defined by Prop. Reg. §1.199A-
Example 5                                                              1(b)(13).54
   Howard and Mary are a married couple who to-                        Example 6
gether own 100% of a partnership that leases its build-                   Donna owns a golf course through a single member
ing to an S Corporation. The S Corporation conducts                    LLC. The golf course is open seven days per week
a §162 trade or business of providing transportation.                  and allows golfers to play golf on the golf course in
The stock of the S Corporation is owned 20% by                         exchange for fees. The golf course has a shop that
Howard, 20% by Mary, 30% by their son Mark, and                        sells golf clubs, golf balls, tees, and other golf para-
30% by their daughter Rachael. The common control                      phernalia. This golf course is a profit-making venture.
test is met because the stock owned by Mark and Ra-                    Donna also owns a 100% interest in a golf team that
chael is attributed to Howard and Mary. A business                     plays in amateur golf tournaments and is a hobby. The
that provides transportation services is not an SSTB.                  golf course is a §162 trade or business defined in
Therefore, the building is not part of an SSTB. Thus,                  Prop. Reg. §1.199A-1(b)(13). The golf team is not.
the commonly controlled definition is satisfied and the                Donna cannot aggregate the golf course and her own-
rental of the building to the S Corporation is treated                 ership interest in the golf team.55
as a trade or business for purposes of §199A. The                         Second Requirement:The second requirement is
rental of the building to the S Corporation is a quali-                that either the same persons or group of persons must,
fied trade or business described in §199A(d)(1) be-                    directly or indirectly, own 50% or more of each trade
cause the trade or business of renting the building is                 or business that is being aggregated.56 This is the
neither a SSTB nor a trade or business of performing                   common control requirement that was discussed
services as an employee. The net rental income de-                     above. The family attribution rules of Prop. Reg.
rived from renting the building should be QBI.                         §1.199A-4(b)(3) apply for purposes of this ownership
                                                                       test. The IRS noted that ‘‘because the proposed rules
                                                                       look to a group of persons, non-majority owners may
AGGREGATED TRADE OR BUSINESS                                           benefit from the common ownership and are permit-
   This concept was created in response to requests re-                ted to aggregate.’’57
ceived by the IRS that taxpayers be allowed to group                      Third Requirement:The third requirement is that
their trades or businesses for purposes of §199A.50                    the majority ownership in each business that is part of
The IRS rejected the idea of allowing this grouping to
be done using the grouping rules contained in Reg.                        52
                                                                            Id.
§1.469-4 because it deemed those rules to be ‘‘not ap-                    53
                                                                            Prop. Reg. §1.199A-1(b)(1); Prop. Reg. §1.199A-4(a).
propriate for determining a trade or business for                        54
                                                                            REG-107892-18, Preamble, Explanation of Provisions,
§199A purposes.’’51 However, the IRS recognized                        §IV.A.
that aggregation rules were necessary in order to pre-                   55
                                                                            This example is based on Prop. Reg. §1.199A-4(d) Ex. 13,
vent taxpayers from having to restructure their busi-                  which is an example of a marina and a sailboat racing team not
                                                                       qualifying for aggregation under Prop. Reg. §1.199A-4(b)(1) be-
                                                                       cause the racing team is not a §162 trade or business.
  50                                                                     56
     REG-107892-18, Preamble, Explanation of Provisions,                    Prop. Reg. §1.199A-4(b)(1)(i). See Prop. Reg. §1.199A-4(d)
§IV.A.                                                                 Exs. 2 and 11, which are examples of a group of individuals own-
  51
     Id.                                                               ing a majority interest in several entities.
                                                                         57
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the aggregation must exist most of the taxable year in                      man resources, or information technology resources.68
which the items attributable to each trade or business                      The third factor, which is apparently referring to
being aggregated are included in income.58                                  ‘‘supply chain interdependencies,’’ is that the aggre-
                                                                            gated trades or businesses must be operated in either
   Fourth Requirement:The fourth requirement is
                                                                            coordination with or reliance on other businesses in
that all items attributable to each trade or business be-
                                                                            the aggregated group.69
ing aggregated must be reported on income tax re-
turns with the same taxable year.59 This requirement                        Example 7
means that RPEs with calendar tax years cannot be
aggregated with RPEs that use fiscal years.                                    Taylor owns two buildings in single member LLCs
                                                                            that she leases to two businesses that are operated in
  Fifth Requirement:The fifth requirement is that                           partnerships owned by Taylor’s parents and herself.
none of the trades or businesses being aggregated is                        One of these partnerships is a manufacturer of auto
an SSTB.60                                                                  parts. The other partnership is a retail store that sells
   Sixth Requirement:The purpose of the sixth re-                           those auto parts. Taylor does the accounting for her
quirement is to make individuals show that the trades                       buildings and both partnerships using a computerized
or businesses being aggregated ‘‘are in fact part of a                      bookkeeping program. Taylor and her parents manage
larger, integrated trade or business.’’61 To accomplish                     the buildings and both businesses. Employees of both
this, Prop. Reg. §1.199A-4(b)(1)(v) requires that the                       partnerships perform services for each business and
trades or businesses being aggregated must meet two                         for both buildings. Because Taylor and her parents as
of three factors.62 The first factor is that the trades or                  a group or individually own 50% or more of the capi-
businesses must provide products and services that are                      tal and profits interest of each partnership, the com-
either the same or that are ‘‘customarily offered to-                       mon control test of Prop. Reg. §1.199A-4(b)(1)(i) is
gether.’’63 Services that are the same under Prop. Reg.                     met. Taylor’s buildings and both partnerships share
§1.199A-4(b)(1)(v)(A) include the following: (1) a                          significant centralized business elements in terms of
restaurant and a food truck;64 (2) a catering business                      the same personnel, accounting, management, and in-
and a restaurant; (3) four hardware stores; (4) three                       formation technology resources. Taylor’s buildings
grocery stores; and (5) five restaurants.65 An example                      and both partnerships are also operated in coordina-
of two businesses that provide products or services                         tion with and in reliance upon one or more of the
that are customarily offered together is a gas station                      businesses in the aggregated group. Because two of
business and a car wash business.66 Examples of two                         three factors are satisfied, Taylor can treat the business
businesses that provide products or goods that are nei-                     operations of both partnerships as a single trade or
ther the same nor customarily offered together is a                         business. Taylor’s two LLC’s are also eligible to be
business that manufactures clothing and a business                          included in the aggregated group because both entities
that is a retail pet store, or a business that sells non-                   lease real property to trades or businesses that are
food items to grocery stores and a business that is a                       commonly controlled and meet the aggregation re-
trucking business.67 The second factor is that the busi-                    quirements of Prop. Reg. §1.199A-4(b)(1).70
nesses share either facilities or significant centralized                      A partnership that owns a business that sells non-
business elements, which could be common person-                            food items to grocery stores and another partnership
nel, accounting, legal, manufacturing, purchasing, hu-                      that owns a trucking business that predominantly
                                                                            transports goods for the non-food items partnership
                                                                            are two partnerships that are considered operated in
§IV.A. See also Prop. Reg. §1.199A-4(d) Exs. 5 and 10.
   58
      Prop. Reg. §1.199A-4(b)(1)(ii).
                                                                            reliance on each other.71 An example of businesses
   59
      Prop. Reg. §1.199A-4(b)(1)(iii).
                                                                            operated in coordination are three partnerships where
   60
      Prop. Reg. §1.199A-4(b)(1)(iv).                                       one partnership engages in the business of construc-
   61
      REG-107892-18, Preamble, Explanation of Provisions,                   tion, another partnership has a business that is a lum-
§IV.A.                                                                      ber yard that supplies the construction partnership
   62
      See Prop. Reg. §1.199-4(d) Ex. 12, for an example of two              with building materials, and a third partnership oper-
businesses that could not be aggregated because only one of three           ates a trucking business that delivers the lumber and
factors was satisfied.
   63
      Prop. Reg. §1.199A-4(b)(1)(v)(A).
   64                                                                          68
      REG-107892-18, Preamble, Explanation of Provisions,                        Prop. Reg. §1.199A-4(b)(1)(v)(B). See Prop. Reg. §1.199A-
§IV.B.                                                                      4(d) Exs. 1–4, 5–6, 8–10, 14, for examples of businesses that
   65
      See Prop. Reg. §1.199A-4(d) Exs. 1, 4, 6, 10.                         share facilities or centralized business elements.
                                                                              69
   66
      REG-107892-18, Preamble, Explanation of Provisions,                        Prop. Reg. §1.199A-4(b)(1)(v)(C).
                                                                              70
§IV.B.                                                                           This example is based on Prop. Reg. §1.199A-4(d) Exs. 8, 9.
   67                                                                         71
      See Prop. Reg. §1.199A-4(d) Exs. 3, 12.                                    See Prop. Reg. §1.199A-4(d) Ex. 12.

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other building supplies sold by the second partner-                        rules to determine if there is a new permissible aggre-
ship.72                                                                    gation.77
                                                                              For each taxable year that there is an aggregation,
                                                                           the taxpayer doing the aggregation must attach a
OPERATING RULES FOR                                                        statement to that individual’s tax return that identifies
AGGREGATING BUSINESSES                                                     each trade or business being aggregated and contains
                                                                           the information for each aggregated trade or business
   An individual may aggregate all trades or busi-                         that is required by Prop. Reg. §1.199A-4(c)(2)(i). If
nesses that satisfy the aggregation requirements that                      the individual fails to attach this required statement,
the individual operates directly and that individual’s                     the IRS may disaggregate the individual’s trades or
share of QBI, UBIA of qualified property, and W-2                          businesses.78
wages generated by trades or businesses that are oper-
ated through RPEs.73 The individual must carefully
evaluate whether the trades or businesses of the RPEs                      TO AGGREGATE OR NOT TO
meet the qualifications to be aggregated with the                          AGGREGATE
trades or businesses the individual operates directly. If                     This will be one of the major decisions confronting
an individual chooses to aggregate trades or busi-                         taxpayers and their advisors for 2018. The fact that
nesses under these rules, the individual must first                        this is in essence an irrevocable election heightens the
compute QBI, W-2 wages, and UBIA of qualified                              importance of this decision.
property for each trade or business operated directly
by the individual before applying the aggregation                          Example 8
rules.74 That rule seems logical because each RPE                             A married couple, both of whom are U. S. citizens,
owned by an individual would have already computed                         own interests in two RPEs that are limited liability
that individual’s share of QBI, W-2 wages, and UBIA                        companies (LLCs) treated as partnerships for federal
of qualified property for each of that RPE’s trade or                      income tax purposes. The married couple owns an
businesses and furnished those amounts to that indi-                       80% interest in partnership capital and profits in each
vidual. Under the general computational rule of Prop.                      of these RPEs. Both RPEs own and operate hotels.
Reg. §1.199A-1(d)(2)(iv), the individual must com-                         The married couple owns a third hotel through a dis-
bine the QBI, W-2 wages, and UBIA of qualified                             regarded entity. The married couple has held these
property for all trades or businesses that are part of                     majority ownership interests throughout the entire
the aggregated trade or business before applying the                       taxable year. The married couple and each of the
§199A(b)(2)(B) limitations.                                                RPEs use a calendar year for income tax reporting
                                                                           purposes. The married couple actively manages these
   The basic premise of the rules for aggregating                          three hotels and makes all personnel decisions. The
trades or businesses is that each of the individual                        accounting and payroll records are maintained by a
trades or businesses being aggregated are part of one                      bookkeeper at one of the hotels using a software pro-
business. Once a taxpayer makes an election to aggre-                      gram designed for hotels that is operated on a com-
gate trades or businesses, the taxpayer must continue                      puter. All hotels generate income that is effectively
to report the aggregated trades or businesses as one                       connected to a trade or business within the United
aggregated business in all future years.75 Any new                         States. The hotels are §162 trades or businesses.
trades or businesses that are created or acquired in                          The fictional married couple satisfies the control re-
subsequent years can be added to the existing aggre-                       quirement of Prop. Reg. §1.199A-4(b)(1)(i) because
gated business if the conditions for aggregation of                        the couple owns 50% or more of each trade or busi-
Prop. Reg. §1.199A-4(b)(1) are fulfilled.76 If there is                    ness to be aggregated. This ownership was present for
a change in facts and circumstances and a taxpayer’s                       the entire taxable year. All taxable items of each trade
prior aggregation of trades or businesses no longer                        or business that is being aggregated are reported on
qualifies for aggregation under the aggregation rules,                     returns that have the same taxable year. The require-
then the trades or businesses will no longer be aggre-                     ment that none of these trades or businesses be an
gated, and the taxpayer must reapply the aggregation                       SSTB is also met. Finally, the hotels to be aggregated
                                                                           satisfy two of the three factors contained in Prop. Reg.
                                                                           §1.199A-4(b)(1)(v). All hotels provide lodging for
  72
     See Prop. Reg. §1.199A-4(d) Ex. 14.                                   transients and thereby satisfy the requirement that the
  73
     Prop. Reg. §1.199A-4(b)(2).
  74
     Id.
  75                                                                          77
     Prop. Reg. §1.199A-4(c)(1).                                                   Id.
  76                                                                          78
     Id.                                                                           Prop. Reg. §1.199A-4(c)(2)(ii).

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trades or businesses to be aggregated provide the                          tion or improvement to qualified property that has al-
same services. The factor specified by Prop. Reg.                          ready been placed in service is treated as separate
§1.199A-4(b)(1)(v)(B) that the businesses to be ag-                        qualified property that is first placed in service on the
gregated share centralized elements or facilities is sat-                  date this addition or improvement is placed in service.
isfied because all businesses share the same manage-                       For instance, a taxpayer may place qualified property
ment, accounting, information technology resources,                        in service during 2018 and then make capitalized im-
and human resources functions. The married couple                          provements to that property in 2020. In this case, the
may thus aggregate its hotel operated directly with its                    taxpayer has two separate qualified properties that
share of QBI, W-2 wages, and UBIA of qualified                             consist of the original item of qualified property and
property from the hotels operated through RPEs. The                        the improvements to that qualified property that were
married couple is unsure about making the aggrega-                         placed in service in 2020.82
tion election. The couple decides to make a calcula-                          Contrary to some speculation, Prop. Reg. §1.199A-
tion of its §199A deduction without aggregating its                        2(c)(1)(iii) clarifies that qualified property does not in-
trades or businesses and compare that calculation to a                     clude any partnership special basis adjustments under
calculation of its §199A deduction with aggregation                        §743(b) or §734(b). This rule was enacted because the
of its trades or businesses.                                               IRS felt that ‘‘treating partnership special basis adjust-
                                                                           ments as qualified property could result in inappropri-
                                                                           ate duplication of UBIA of qualified property (if, for
Example: Calculation of the §199A                                          example, the fair market value of the property has not
Deduction without Aggregation                                              increased, and its depreciable period has not
   Worksheet 1, Worksheet 2, and Worksheet 3 con-                          ended).’’83
tain the calculation of the fictional couple’s §199A de-                      There is also an ‘‘anti-stuffing’’ rule contained in
duction. The §199A proposed regulations have added                         the §199A proposed regulations. The reason for this
some new definitions to the glossary of §199A terms                        rule is to prevent taxpayers from acquiring qualified
and have added a netting rule when some of a taxpay-                       property for the principal purpose of increasing the
er’s qualified trades or businesses have positive QBI,                     §199A deduction through manipulation of UBIA of
some have negative QBI, but the total QBI amount is                        qualified property attributable to a trade or business.84
positive. The combined qualified business income                           This rule applies to property acquired shortly before
amount has been described by the §199A proposed                            the end of a taxable year and disposed of by a tax-
regulations as consisting of a QBI component and a                         payer within a short period of time afterwards. This
component that is a taxpayer’s combined qualified                          rule states that acquired property is not qualified prop-
REIT dividends and qualified PTP income. The QBI                           erty if that property is acquired within 60 days of the
component is the amount computed in accordance                             end of the taxable year and disposed of within 120
with the rules prescribed by Prop. Reg.                                    days without having been used in a trade or business
§1.199A(d)(2).79 A taxpayer’s total QBI amount is the                      for at least 45 days prior to disposition.85 This rule
net total QBI from all trades or businesses and in-                        will not apply if the taxpayer can show that the prin-
cludes an individual’s share of QBI from businesses                        cipal purpose of the acquisition and related disposi-
that are conducted by RPEs.80                                              tion of the property was a purpose other than increas-
                                                                           ing the §199A deduction.86
                                                                              The proposed regulations also address the depre-
UNADJUSTED BASIS IMMEDIATELY                                               ciable period and placed-in-service date of qualified
AFTER ACQUISITION (UBIA) OF                                                property. Prop. Reg. §1.199A-2(c)(2)(i) restates the
QUALIFIED PROPERTY                                                         statutory definition of depreciable period found in
   The §199A proposed regulations have also clarified                      §199A(b)(6)(B). Prop. Reg. §1.199A-2(c)(2)(ii) then
the definition of unadjusted basis immediately after                       states that the applicable recovery period for qualified
acquisition (UBIA) of qualified property. This amount                      property is not affected by any additional first-year de-
is part of the §199A(b)(2)(B)(ii) alternative deduction                    preciation deductions that are allowable under §168
limitation of the §199A(b)(2) deductible amount for
each trade or business.81 After restating the definition                      82
                                                                                 REG-107892-18, Preamble, Explanation of Provisions,
of qualified property contained in §199A(b)(6)(A),                         §II.B.7.
Prop. Reg. §1.199A-2(c)(1)(ii) clarifies that any addi-                       83
                                                                                 REG-107892-18, Preamble, Explanation of Provisions,
                                                                           §II.B.2.
                                                                              84
                                                                                 REG-107892-18, Preamble, Explanation of Provisions,
  79
     Prop. Reg. §1.199A-1(b)(5).                                           §II.B.3.
  80                                                                          85
     Prop. Reg. §1.199A-1(b)(12).                                                Prop. Reg. §1.199A-2(c)(1)(iv).
  81                                                                          86
     Prop. Reg. §1.199A-1(b)(14).                                                Id.

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(for instance, the bonus depreciation deduction of                         §1033(b)) that exceeds the exchanged basis.93 For
§168(k)). This provision seems reasonable in that the                      property acquired through a like-kind exchange or in-
§168 bonus depreciation allowances deal with the                           voluntary conversion, the depreciable period of the
timing of the depreciation deductions and do not af-                       exchanged basis that is part of the basis of the re-
fect the recovery periods. This rule also negates the                      placement MACRS qualified property begins on the
speculation by some people that the UBIA of qualified                      date on which the relinquished MACRS property was
property was to be reduced by bonus depreciation.                          first placed in service by the individual or RPE; the
                                                                           depreciable period of the excess basis begins on the
  The Preamble to the §199A proposed regulations                           date on which the replacement MACRS property was
explains the meaning of the term ‘‘immediately after                       first placed in service by the individual or RPE.94
acquisition.’’ This term means ‘‘as of the date the                           The effect of this rule is that the depreciable period
property is placed in service.’’87 The IRS felt this was                   for the exchanged basis portion of the replacement
the appropriate meaning of this statutory term because                     qualified property will expire before the depreciable
§199A requires qualified property ‘‘be used in the pro-                    period for the excess basis portion of the replacement
duction of QBI. In order to be used in the production                      qualified property terminates.95 There is an exception
of QBI, the qualified property necessarily must be                         to this rule for an individual or an RPE that makes an
placed in service.’’88 Using the placed-in-service date                    election under Reg. §1.168(i)-6(i)(1) not to apply the
as the meaning of the phrase ‘‘immediately after ac-                       rules of Reg. §1.168(i)-6. If an individual or an RPE
quisition’’ also ‘‘ensures consistency between pur-                        makes this election, then the date the exchanged basis
chased and produced qualified property.’’89                                and excess basis in the replacement qualified property
                                                                           are first placed in service is the date on which the re-
   Unless an exception applies, qualified property ac-                     placement qualified property is first placed in service
quired in a §1031 like-kind exchange or §1033 invol-                       by the individual or RPE.96 The effect of the Reg.
untary conversion will have two placed-in-service                          §1.168(i)-6(i)(1) election is that the depreciable peri-
dates for purposes of two different determinations.90                      ods for the exchanged basis and the excess basis of
For purposes of determining the UBIA of MACRS                              the replacement qualified property will expire on the
property acquired in a like-kind exchange or due to an                     same date.97 The UBIA of the replacement qualified
involuntary conversion, the placed-in-service date is                      property for an individual or RPE that makes a Reg.
the date the replacement MACRS property (MACRS                             §1.168(i)-6(i)(1) election is also determined as of the
property in the hands of the acquiring taxpayer that is                    date on which the replacement qualified property is
acquired for other MACRS property in a like-kind ex-                       first placed in service by the individual or RPE.98
change or in an involuntary conversion) is actually                           An individual or an RPE may acquire property in a
placed in service.91 In determining the depreciable pe-                    §168(i)(7)(B) non-recognition transaction that is de-
riod of that property, the placed in service date is gen-                  scribed in §332, §351, §361, §721 or §731. These
erally the date the relinquished MACRS property                            transactions may be described as ‘‘transferred basis
(MACRS property transferred by the taxpayer in a                           transactions’’ because, generally, a portion of the re-
like-kind exchange or in an involuntary conversion) is                     cipient’s basis for property received in these transac-
first placed in service.92 The tax basis of property ac-                   tions is determined by reference to the transferor’s ba-
quired in a §1031 exchange or a §1033 exchange may                         sis in the transferred property.99 There are different
consist of an ‘‘exchanged basis,’’ which is generally                      placed-in service dates for purposes of determining
the basis in the MACRS property that is being relin-                       the depreciable period for portions of qualified prop-
quished in the like-kind exchange or involuntary con-                      erty acquired in one of these non-recognition transac-
version, and an ‘‘excess basis,’’ which is the amount                      tions. For the portion of the recipient’s unadjusted ba-
of the basis in the replacement MACRS property (as                         sis in the qualified property that does not exceed the
determined under either the basis rules of §1031(d) or                     transferor’s unadjusted basis in that property, the date

                                                                              93
  87
      REG-107892-18, Preamble, Explanation of Provisions,                        Reg. §1.168(i)-6(b)(7); §1.168(i)-6(b)(8).
                                                                              94
§II.B.1.                                                                         Prop. Reg. §1.199A-2(c)(2)(iii).
   88                                                                         95
      Id.                                                                        REG-107892-18, Preamble, Explanation of Provisions,
   89
      Id.                                                                  §II.B.4.
                                                                              96
   90
      REG-107892-18, Preamble, Explanation of Provisions,                        Prop. Reg. §1.199A-2(c)(2)(iii)(C).
                                                                              97
§II.B.4.                                                                         REG-107892-18, Preamble, Explanation of Provisions,
   91
      Reg. §1.168(i)-6(b)(1); REG-107892-18, Preamble, Explana-            §II.B.4.
                                                                              98
tion of Provisions, §II.B.4.                                                     Id.
   92                                                                         99
      Reg. §1.168(i)-6(b)(2); REG-107892-18, Preamble, Explana-                  REG-107892-18, Preamble, Explanation of Provisions,
tion of Provisions, §II.B.4.                                               §II.B.5.

                                                      Tax Management Memorandum
                                姝 2018 Tax Management Inc., aISSN
                                                              subsidiary of The Bureau of National Affairs, Inc.
                                                                   0148-8295
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