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Calculating New IRC 199A Qualified Pass-Through

Business Income Deduction

THURSDAY, MAY 10, 2018, 1:00-2:50 pm Eastern

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THURSDAY, MAY 10, 2018

Calculating New IRC 199A Qualified Pass-Through Business Income Deduction

Jeffrey N. Bilsky, Partner, National Tax Office

BDO USA, Atlanta

[email protected]

Will Hodges, Senior Manager

BDO USA, Atlanta

[email protected]

Notice

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The information contained herein is of a general nature and based on authorities that are

subject to change. Applicability of the information to specific situations should be

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PLANNING FOR TAX REFORM

Section 199A – Where are we now?

Jeff Bilsky, Partner – National Tax Office

Will Hodges, Senior Manager – National Tax Office

May 10, 2018

6

Agenda

➢ Overview of the Section 199A Deduction

➢ Comprehensive Example

➢ Uncertainties & Possible Opportunities

• Definition of Qualified Business Income

• Definition of Specified Services in the Absence of Regulations

• Wage Limitation Impacting Partner/Employees

• Restructuring to Create QBI

➢ Technical Corrections Bill

• Repeal of deduction for cooperative dividends

• Enactment of deduction for qualified production activities

• Modification of capital gain QBI exclusion

7

Overview of the Section 199A Deduction

➢ Calculation of qualified business income deduction

➢ Important definitions:

• Combined qualified business income amount

• Qualified business income

• Specified services trade or business

➢ Wages & capital limitations

8

Section 199A DeductionCalculation of Deduction

➢ The Section 199A deduction applies to years beginning after December 31, 2017

and for tax years ending before January 1, 2026

➢ Taxpayers other than C corporations are generally eligible to claim a deduction

equal to the lesser of:

1) The taxpayer’s combined qualified business income amount or

2) 20 percent of the taxpayer’s taxable income in excess of capital gains.

➢ Eligible taxpayers should include: Individuals, Trusts, Estates, Partnerships, S

Corporations, and Sole Proprietorships.

9

Section 199A DeductionCombined Qualified Business Income Amount

➢ Taxpayers “Combined Qualified Business Income Amount” is equal to the sum

of:

1) 20 percent of the taxpayer’s qualified business income with respect to

each qualified trade or business plus

2) 20 percent of the aggregate amount of qualified real estate investment

trust dividends and qualified publicly traded partnership income

➢ The QBI Deduction cannot exceed 20 percent of the taxpayer’s taxable income,

excluding net capital gain, recognized for the taxable year

➢ QBI is determined separately for each qualified trade or business

10

Section 199A DeductionDefinition of Qualified Business Income

➢ Qualified Business Income (QBI) includes net amount of domestic qualified

items of income, gain, deduction, and loss with respect to the taxpayer’s

qualified trade or businesses

• QBI does not include: REIT dividends and publicly traded partnership income;

Items of capital gain, dividends, interest not allocable to a trade or business,

amounts not generated in connection with a trade or business, and

reasonable compensation or guaranteed payments paid with respect to a

trade or business

➢ Qualified Trades or Businesses include any trade or business except a

“specified services” trade or business or the trade or business of performing

services as an employee

11

Section 199A DeductionUnused Deduction and QBI Losses

➢ There is no provision allowing for the carryover of unused QBI deduction

➢ Where the combined QBI (from all activities) generated by a taxpayer results in

a loss, the net amount is carried forward to the subsequent tax year

➢ The carryforward loss is treated as generated from a separate trade or business

in the subsequent tax year

12

Section 199A DeductionSpecified Services Trade or Business

➢ Specified Services Trade or Business means any trade or business involving

the performance of services in the fields of:

• Health, law, accounting, actuarial sciences, performing arts, consulting,

athletics, financial services, brokerage services,

• Any trade or business where the principal asset of such trade or business is

the reputation or skill of one or more of its employees or owners, or

• Which involves the performance of services that consist of investing and

investment management trading, or dealing in securities, partnership

interests, or commodities

13

Section 199A DeductionSpecified Services Exception

➢ Exception for specified service businesses does not apply where a taxpayer’s

taxable income does not exceed $315,000 (joint filer) or $157,500 (other filers),

subject to full phase-in at $415,000 and $207,500, respectively.

➢ Only the “applicable percentage” of qualified items of income, gain, deduction,

or loss, and the W-2 wages and the unadjusted basis immediately after

acquisition of qualified property, shall be taken into account in computing the

qualified business income, W-2 wages, and the unadjusted basis immediately

after the acquisition of qualified property of the taxpayer for a taxable year.

➢ Applicable percentage = 100% - ((taxable income in excess of threshold

amount)/$100,000 (or $50,000 for non-joint filers))

If the taxpayer’s income is below these threshold amounts,

the Specified Services Exception is not relevant

14

➢ Taxpayer (joint filer) with

$375,000 of taxable income for

the year.

➢ Included in taxable income is

$200,000 of income attributable

to a specified services trade or

business.

Section 199A DeductionSpecified Services Example

Applicable Percentage Calculation

Taxable Income 375,000

Less: Threshold Amount (315,000)

Taxable Income in Excess of Threshold 60,000

÷ Statutory Amount for Joint Filers 100,000

Percentage Ratio 60%

Statutory 100%

Less Percentage Ratio -60%

Applicable Percentage 40%

15

➢ Taxpayer (joint filer) with

$375,000 of taxable income for

the year.

➢ Included in taxable income is

$200,000 of income attributable

to a specified services trade or

business.

➢ Total QBI deduction is $16,000

($80,000 * 20 percent).

Section 199A DeductionSpecified Services Example

Specified Services/QBI Calculation

Specified Services Income 200,000

x Applicable Percentage 40%

Taxpayer's Includible QBI 80,000

16

Section 199A DeductionLimitations

Wages & Capital Limitation on QBI Deduction – In General

➢ The deduction attributable to 20 percent of the taxpayer’s QBI cannot exceed

the greater of

a) 50 percent of W-2 Wages paid with respect to the QBI or

b) The sum of 25 percent of W-2 Wages plus 2.5 percent of the unadjusted

basis of qualified property

➢ This limitation does not apply to taxpayers with taxable income not exceeding

$315,000 (joint filers) or $157,500 (other filers). The limitation is phased-in for

taxpayers with taxable income exceeding these amounts over ranges of

$100,000 and $50,000.

➢ The limitation does not apply to 20% of qualified REIT dividends and PTP

income.

If the taxpayer’s income is below these threshold amounts,

the Wages & Capital Limitation is not relevant

17

Section 199A DeductionLimitations

Wages & Capital Limitation on QBI Deduction – Wages

➢ W-2 Wages include total wages subject to wage withholding, elective deferrals,

and deferred compensation paid by the qualified trade or business with respect

to employment of its employees during the calendar year ending during the

taxable year of the taxpayer

➢ W-2 Wages do not include guaranteed payments under section 707(c) or non-

partner payments under section 707(a)

➢ “Wages” for profits interest partners who are currently treated as employees

receiving Form W-2 are not treated as wages

18

➢ Taxpayer has $1M of QBI and

pays $200,000 of W-2 Wages

during the taxable year (assume

no qualified property).

➢ Absent the wage limitation,

Taxpayer would be entitled to a

QBI deduction of $200,000.

➢ However as a result of the

wage limitation, Taxpayer’s QBI

deduction is limited to

$100,000.

Section 199A DeductionWages Limitation Example

Qualified Business Income 1,000,000

x Statutory 20% 20%

QBI Deduction - Pre-Wage Limitation 200,000

W-2 Wages 200,000

x Statutory 50% 50%

Wage Limitation 100,000

Eligible QBI Deduction (Lesser of above) 100,000

Wage Limitation

19

Section 199A DeductionLimitation

Wages & Capital Limitation on QBI Deduction – Qualified Property

➢ Qualified property includes the original unadjusted basis of depreciable

tangible property that is:

(i) held by and available for use in the trade or business at the close

of the taxable year,

(ii) used during the year in the production of QBI, and

(iii) has a remaining depreciable period.

➢ The term “depreciable period” means the later of 10 years from the

original placed in-service date or the last day of the last full year in the

applicable recovery period determined under section 168.

➢ Note that land is not included in the definition of qualified property

20

➢ Taxpayer has $1M of QBI, pays

$100,000 of W-2 Wages during

the taxable year, and has $6M

of qualified property at the

close of the taxable year.

➢ Absent the wage & capital

limitation, Taxpayer would be

entitled to a QBI deduction of

$200,000.

Section 199A DeductionWages and Capital Limitation Example

W-2 Wages 100,000

x Statutory 25% 25%


Unadjusted basis of qualified property 6,000,000

x Statutory 2.5% 2.5%

Capital Limitation 150,000



Wage and Capital Limitation 175,000

Wage and Capital Limitation

21

➢ Taxpayer has $1M of QBI, pays

$100,000 of W-2 Wages during

the taxable year, and has $6M

of qualified property at the

close of the taxable year.

➢ QBI deduction is limited to 25%

of W-2 Wages plus 2.5% of the

unadjusted basis of qualified

property.

➢ As a result of the wage &

capital limitation, Taxpayer’s

QBI deduction is limited to

$175,000.

Section 199A DeductionWages and Capital Limitation Example

Qualified Business Income 1,000,000

x Statutory 20% 20%

QBI Deduction - Pre-Wage Limitation 200,000



Wage and Capital Limitation 175,000

Eligibile QBI Deduction (Lessor of above) 175,000

QBI Deduction Calculation - Before Wage & Capital

Wage and Capital Limitation

23

Comprehensive Example

24

Section 199A DeductionExample

Comprehensive Example – Year 1 Facts

➢ During Year 1, Taxpayer A files a joint return reporting taxable income of

$375,000. A is allocated business income, W-2 wages, and unadjusted basis of

qualified property, respectively, from the three separate business activities:

➢ Activities 1 and 2 meet the definition of a qualified trade or business under

§199A(d)(1). Activity 3, however, is a specified services business.

➢ Additionally, during the year, A received qualified REIT dividends of $25,000,

qualified PTP income of $35,000, and net capital gains of $15,000.

Activity 1 Activity 2 Activity 3

Business Income/(Loss) $150,000 ($200,000) $30,000

W-2 Wages $100,000 $10,000 $10,000

Qualified Property $1,500,000 $75,000 $100,000

25

Comprehensive Example – Calculation of Deduction

Section 199A DeductionExample – Year 1

Calculation of Section 199A Qualified Business Income DeductionDeduction

Amount

Lesser of:

(A) Combined Qualified Business Income Amount 12,000

(B) Taxable Income (reduced by net capital gain) 360,000

Pass-through Deduction (Lesser of (A) and (B)) 12,000

26

Comprehensive Example – Combined Business Income Amount


Deductible Amount for Each Trade or Business

Trade or

Business

Activity #1

Trade or

Business

Activity #2

Trade or

Business

Activity #3

Prior Year

Loss

Carryover

Amount Used

Total

Net Qualified Business Income per Qualified Trade or Business 150,000 (200,000) 30,000 - (20,000)

Reduction for Specified Services Trade or Business Income - - (18,000) - (18,000)

Allowable Qualified Business Income per Qualified Trade or Business 150,000 (200,000) 12,000 - (38,000)

Deduction Percentage 20% 20% 20% 20% 20%

Qualified Trade or Business Amount 30,000 (40,000) 2,400 - (7,600)

Limitation Based on Wages & Capital - - (240) - (240)

Qualified Trade or Business Amount 30,000 (40,000) 2,160 - -

Plus: 20% of Qualified REIT Dividends 5,000

Plus: 20% of Publicly Traded Partnership Income 7,000

Combined Qualified Business Income Amount 12,000

27

Comprehensive Example – W-2 Wages & Capital Limitation


Limitation Based on Wages & Capital

Trade or

Business

Activity #1

Trade or

Business

Activity #2

Trade or

Business

Activity #3

Total


50% of the Taxpayer's Allocable W-2 Wages 50,000 5,000 5,000 60,000

Reduction for Specified Services Trade or Business Income - - (3,000) (3,000)

(A) 50% Wages Limitation 50,000 5,000 2,000 57,000

Sum of:


2.5% of the Taxpayer's Allocable Qualified Property 37,500 1,875 2,500 41,875

Subtotal 62,500 4,375 5,000 71,875


(B) Sum of Wages & Capital Limitation Amounts 62,500 4,375 2,000 68,875

Greater of (A) 50% of W-2 Wages or (B) Wages + Capital Amount 62,500 5,000 2,000 69,500

Tentative Wage Limitation Amount - - 400 400

Threshold Percentage Based on Taxable Income 60% 60% 60% 60%

Calculated Wage Limitation Amount - - 240 240

28




Amount

Lesser of:




29

Section 199A DeductionExample

Comprehensive Example – Year 2 Facts

➢ During Year 2, Taxpayer A files a joint return reporting taxable income of

$350,000. A is allocated business income, W-2 wages, and unadjusted basis of

qualified property, respectively, from the three separate business activities:

➢ Activities 1 and 2 meet the definition of a qualified trade or business under

§199A(d)(1). Activity 3, however, is a specified services business.

➢ Additionally, during the year, A received qualified REIT dividends of $20,000,

qualified PTP income of $40,000, and net capital gains of $10,000.

Activity 1 Activity 2 Activity 3

Business Income/(Loss) $250,000 ($100,000) $40,000

W-2 Wages $40,000 $12,000 $12,000

Qualified Property $1,000,000 $100,000 $75,000

30




Amount

Lesser of:




31

Comprehensive Example – Combined Business Income Amount


Deductible Amount for Each Trade or Business

Trade or

Business

Activity #1

Trade or

Business

Activity #2

Trade or

Business

Activity #3

Prior Year

Loss

Carryover

Amount Used

Total

Net Qualified Business Income per Qualified Trade or Business 250,000 (100,000) 40,000 (38,000) 152,000

Reduction for Specified Services Trade or Business Income - - (14,000) - (14,000)

Allowable Qualified Business Income per Qualified Trade or Business 250,000 (100,000) 26,000 (38,000) 138,000

Deduction Percentage 20% 20% 20% 20% 20%

Qualified Trade or Business Amount 50,000 (20,000) 5,200 (7,600) 27,600

Limitation Based on Wages & Capital (5,250) - (455) - (5,705)

Qualified Trade or Business Amount 44,750 (20,000) 4,745 (7,600) 21,895

Plus: 20% of Qualified REIT Dividends 4,000

Plus: 20% of Publicly Traded Partnership Income 8,000

Combined Qualified Business Income Amount 33,895

32

Comprehensive Example – W-2 Wages & Capital Limitation



Trade or

Business

Activity #1

Trade or

Business

Activity #2

Trade or

Business

Activity #3

Total




(A) 50% Wages Limitation 20,000 6,000 3,900 29,900

Sum of:


2.5% of the Taxpayer's Allocable Qualified Property 25,000 2,500 1,875 29,375

Subtotal 35,000 5,500 4,875 45,375


(B) Sum of Wages & Capital Limitation Amounts 35,000 5,500 3,169 43,669

Greater of (A) 50% of W-2 Wages or (B) Wages + Capital Amount 35,000 6,000 3,900 44,900

Tentative Wage Limitation Amount 15,000 - 1,300 16,300

Threshold Percentage Based on Taxable Income 35% 35% 35% 35%

Calculated Wage Limitation Amount 5,250 - 455 5,705

33




Amount

Lesser of:




34

Uncertainties & Possible Opportunities

➢ Definition of qualified business income

➢ Specified services - guidance in the absence of regulations

➢ Wage limitation impacting partner/employees

➢ Restructuring to create QBI

35

Definition of Qualified Business Income

Section 199A(c)(1) defines Qualified Business Income as “the net amount of

qualified items of income, gain, deduction, and loss with respect to any qualified

trade or business of the taxpayer.”

Open Questions:

➢ What activities give rise to a trade or business?

➢ When does rental real estate rise to the level of a trade or business?

➢ Is QBI determined on an activity or entity basis?

➢ What if the taxpayer operates a trade or business that includes specified

services and non-specified services?

➢ Can taxpayers aggregate multiple trades or businesses?

36


What activities give rise to a trade or business? When does rental real estate rise

to the level of a trade or business?

➢ The term “Trade or Business” is not separately defined for purposes of

section 199A. However, the section 162 definition applies:

“…to be engaged in a trade or business, the taxpayer must be involved

in the activity with continuity and regularity and…the taxpayer's

primary purpose for engaging in the activity must be for income or

profit” Groetzinger 107 S.Ct. 980 (1987)

Rental of even a single piece of real property may constitute a trade or

business, but it does not as a matter of law. Factual question. Curphey

73 TC 766 (1976)

➢ The determination of a trade or business is made at the entity level. If the

activity is conducted in a partnership, then, the partnership must conduct

the trade or business.

37


Is QBI determined on an activity or entity basis? What if the taxpayer operates a

trade or business that includes specified services and non-specified services?

➢ Guidance is necessary

➢ Regulation section 1.199-4 as a roadmap to future regulations?

➢ De minimis exception similar to regulation section 1.199-1(d)(3)?

➢ Other reasonable methods?

38


Aggregation of multiple trades or businesses?

Illustration:

Taxpayer conducts Activity 1 and Activity 2 within a single pass-through entity.

Assume Activity 1 generates $100 of income after a $60 W-2 wage expense and

Activity 2 generates $100 of income after a $10 W-2 wage expense.

➢ What is Taxpayer’s allowable Section 199A Deduction?

➢ What if Activity 1 and Activity 2 are conducted in separate pass-through

entities?

39

Trade or Business DeterminationPossible Aggregation

Taxpayer conducts Activity 1 and Activity 2 within a single pass-through entity.

Assume Activity 1 generates $100 of income after a $60 W-2 wage expense and

Activity 2 generates $100 of income after a $10 W-2 wage expense.

No Aggregation: Activity 1 generates a $20 Section 199A deduction and is not

subject to the wages limitation and Activity 2 generates a $20 deduction which

is reduced to $5 due to the wages limitation ($10 wages * 50% limitation).

Taxpayer’s total Section 199A deduction is therefore $25.

With Aggregation: Total aggregated income of $200 generates a $40 Section

199A deduction subject to a wages limitations of $35 ($70 total wages * 50%

limitation). Taxpayer’s total Section 199A deduction is therefore $35.

40

Trade or Business DeterminationPossible Aggregation

➢ Consider regulation section 1.469-4(d)(5) grouping elections for partnership

and S corporation entities.

➢ Possible re-grouping under regulation section 1.469-11(b)(3)?

➢ Aggregation of wages across multiple entities consistent with regulation

section 1.199-2?

42

Specified ServicesGuidance in the Absence of Regulations

What are services performed in the areas of health, law, accounting, actuarial

sciences, performing arts, consulting, athletics, financial services, & brokerage?

➢ Section 448 and Regulation Section 1.448-1T deal with the circumstances in

which a “qualified personal service corporation” can use the cash method of

accounting.

➢ Conference Report accompanying the Act suggests looking to Section 448 and

the Treasury Regulations thereunder as a framework for guidance in regards to

specified services businesses.

43

Specified ServicesTreas. Reg. 1.448-1T – Function Test



➢ 95% or more of the time spent by employees of the corporation is devoted to

the performance of services in a qualifying field: health, law, engineering,

architecture, accounting, actuarial science, performing arts, or consulting.

➢ For purposes of satisfying the 95% test, any activity incidental to the actual

performance of services in a qualifying field is considered the performance of

services in that field.

44

Specified ServicesTreas. Reg. 1.448-1T – Health Services

➢ Includes provision of medical services by:

• Physicians,

• Nurses,

• Dentists, and

• Other similar healthcare professionals

➢ Does not include the provisions of services not directly related to a medical

field, even though the services may purportedly relate to the health of the

service recipient (e.g., operation of health clubs or health spas that provide

physical exercise or conditioning to their customers).

45

Specified ServicesTreas. Reg. 1.448-1T – Performing Arts

➢ Includes provision of services by:

• Actors and Actresses,

• Singers and musicians,

• Entertainers, and

• Other similar artists in their capacity as such

➢ Does not include the provisions of services by:

• Persons who themselves are not performing artists (e.g., managers or

promoters)

• Persons who broadcast or disseminate the performances of such artists (e.g.,

employees of a radio station that broadcasts the performances of musicians

and singers)

• Athletes (note, these type of services are specifically included in the

definition of specified services)

46

Specified ServicesTreas. Reg. 1.448-1T – Consulting

➢ The performance of services in the field of consulting means the provision of

advice and counsel.

➢ Does not include other services such as sales or brokerage, or economically

similar services.

➢ Facts and circumstances test to determine whether services are sales or

brokerage or economically similar services.

➢ Facts and circumstances include the manner in which the taxpayer is

compensated for the services provided (e.g., whether the compensation for the

services is contingent upon the consummation of the transaction that the

services were intended to effect).

47

Specified ServicesTreas. Reg. 1.448-1T – Examples

➢ Example 1 - Providing economic analyses and forecasts that are used to advise its clients

on their business activities. Consulting Services

➢ Example 2 - Providing services that consist of determining a client’s electronic data

processing needs. Consulting Services

➢ Example 3 – Determining a client's management and business structure needs including

advising on changes in the client's management and business structure. Consulting

Services

➢ Example 4 – Providing financial planning services including assisting in making decisions

and plans regarding the client's financial activities. Consulting Services

➢ Example 5 – Executing transactions for customers involving various types of securities or

commodities generally traded through organized exchanges or other similar networks.

Brokerage Services (Not Consulting)

➢ Example 6 – Studying a client's needs regarding its data processing facilities and making

recommendations to the client regarding the design and implementation of data

processing systems. Taxpayer's compensation for its services is typically based on the

equipment orders made by the clients. Sales Services (Not Consulting)

48

Specified ServicesTreas. Reg. 1.448-1T – Examples

➢ Example 7 – Assisting businesses in meeting their personnel requirements by referring job

applicants to employers with hiring needs in a particular area. Taxpayer's compensation

for its services is typically based on the job applicants, referred by the taxpayer to the

clients, who accept employment positions with the clients. Brokerage Services (Not

Consulting)

➢ Example 8 – Same as in example (7), except that the taxpayer's clients are individuals

who use the services of the taxpayer to obtain employment positions. The taxpayer is

typically compensated by its clients who obtain employment as a result of the taxpayer's

services. Not Consulting

➢ Example 9 – Assisting clients in placing advertisements for their goods and services.

Taxpayer's compensation for its services is typically based on the particular orders for

advertisements which the client makes. Brokerage Services (Not Consulting)

➢ Example 10 – Selling insurance, annuities, and other similar insurance products to various

individual and business clients. Taxpayer's compensation for its services is typically based

on the purchases made by the clients. Brokerage or Sales Services (Not Consulting)

49



PLR 201436001: Pharmaceutical company that specialized in commercialization

of experimental drugs was engaged in qualified trade or business under section

1202(e)(3) despite proximity of its business activities to field of health.

➢ Company's activities involve the deployment of specific manufacturing assets and

intellectual property assets to create value for customers. Company is a

pharmaceutical industry analogue of a parts manufacturer in the automobile industry.

➢ Although Company works primarily in the pharmaceutical industry, which is certainly a

component of the health industry, Company does not perform services in the health

industry within the meaning of section 1202(e)(3).

Specified ServicesOther Guidance

50



PLR 201717010: Developer of tool used to provide information to healthcare

providers was engaged in qualified trade or business

➢ Company provides laboratory reports to health care professionals. However, Company

neither discusses with, nor is informed by, healthcare providers about the diagnosis or

treatment of a healthcare provider's patients. Company's sole function is to provide

healthcare providers with a copy of its laboratory report.

➢ The skills employees bring to Company are not useful in performing medical tests and

that skills they develop at Company are not useful to other employers.

➢ None of Company's revenue is earned in connection with patients' medical care.

➢ Company is not in a trade or business (i) involving the performance of services in the

field of health or (ii) where the principal asset of the trade or business is the

reputation or skill of one or more of its employees.


51

Any trade or business where the principal asset of such trade or business is the

reputation or skill of one or more of its employees or owners.

➢ PLR 201717010

➢ AICPA Comments: Suggest that guidance focus on the reputation or skill in providing

services based on whether customers, patients, or clients look to specific individuals

to perform the required tasks. For example, the assignment of a task to any trained or

qualified employee, is not a business relying on the reputation or skill of one or more

of its employees. However, a business that is dependent upon a specific employee’s

or owner’s skill in performing a task, is a specified trade or business

➢ NYSBA Report: Because of the uncertainty regarding Congress’ intention in choosing

this particular standard, we are unable to come to a consensus as to a single

particular standard to recommend. Section 1202 is a logical place to start.

A Broad vs. Narrow application will have significant impact on the ability to benefit

from the deduction


52

Section 1202 Guidance

➢ John P. Owen v. Commissioner

• Insurance brokerage corporation with extensive training programs and sales

structures

• Primarily relied on the services of independent contractors to conduct

business

• Courts found that the principal asset of the company was the training

program and sales structure rather than the taxpayer’s services.

➢ Not applicable to 199A as owner activities are also taken into account?


53

NYSBA Suggested Approaches (No Consensus)

➢ Publication of a list of business types are clearly qualified trade or businesses

or clearly specified services trade or businesses.

➢ Activity based standard like the one described in PLR201436001.

➢ Balance sheet test comparing goodwill and workforce assets to non-goodwill

and non-workforce assets.

➢ Mechanical test creating two-way rebuttable presumption regarding the

classification of a business as a qualified trade or business or a specified

services trade or business.

➢ Standard based on whether the trade or business involves the provision of

highly skilled services.


54

W-2 Wages LimitationPartners as Employees

Partner vs. Employee – Determining W-2

Wages

➢ W-2 wages do not include guaranteed

payments.

➢ Partnership interests are often held by

“employees” but Rev. Rul. 69-184 says a

partner cannot be treated as an employee

➢ Wages paid to these partner/employees

does not qualify as W-2 wages for purposes

of Section 199A.

➢ Possible structuring alternatives?

OperatingPartnership

InvestingPartners

Employees

Profits Interest Units

Employees

55

➢ Rev. Rul. 69-184 does not apply to

tiered partnership structures,

however, the IRS has requested

comments on the appropriate

application of Rev. Rul. 69-184 to

tiered partnership situations

➢ Valid business purpose needed to

form the Employee Partnership


InvestingPartners

InvestingPartners

Employee Services


EmployeePartnership


56


EmployeeS-Corporation

InvestingPartners

Employees

Employee Services



Upper-Tier

InvestingPartners

Employees


Employees

Lower-Tier(OpCo)

New Investment

Entity

57

➢ Existing partnership operates a specified services

trade or business. Partnership incurs significant

administrative costs to manage its internal

operations.

➢ These costs are netted against operating income to

calculate a single net income amount. Not eligible for

QBI deduction subject to income limitations

Additional ConsiderationsRestructuring to Create QBI

SpecifiedServices

Partnership

IndividualPartners

Operating Partnership P&L Amount

Gross Revenue from Services 50,000,000

Less: Operating Expenses (20,000,000)

Less: Internal Mgmt Exp (10,000,000)

Operating Profit 20,000,000

Section 199A Deduction -

Net Taxable INCome 20,000,000

Federal Effective Tax Rate 37%

Partner Tax Liability 7,400,000

58

➢ Administrative function spun-

off into a new partnership.

➢ Specified Services Partnership

executes a Management

Services Agreement.

➢ Profit generated at the

Management Services

Partnership presumably is QBI

➢ Consider section 1.199-7?

SpecifiedServices

Partnership

IndividualPartners

ManagementServices

Partnership

Management Services Agreement


59

Specified

Services

Partnership

Management

Services

Partnership

Total Partner

Allocations

Specified

Services

Partnership

Management

Services

Partnership

Total Partner

Allocations

Gross Revenue from Services 50,000,000 0 50,000,000 Gross Revenue from Services 50,000,000 15,000,000 65,000,000

Less: Operating Expenses (20,000,000) 0 (20,000,000) Less: Operating Expenses (20,000,000) (10,000,000) (30,000,000)

Less: Internal Mgmt Exp (10,000,000) 0 (10,000,000) Less: Internal Mgmt Exp (15,000,000) 0 (15,000,000)

Operating Profit 20,000,000 - 20,000,000 Operating Profit 15,000,000 5,000,000 20,000,000

Section 199A Deduction - - - Section 199A Deduction - (1,000,000) (1,000,000)

Net Taxable INCome 20,000,000 - 20,000,000 Net Taxable INCome 15,000,000 4,000,000 19,000,000

Federal Effective Tax Rate 37% 37% 37% Federal Effective Tax Rate 37% 37% 37%

Partner Tax Liability 7,400,000 - 7,400,000 Partner Tax Liability 5,550,000 1,480,000 7,030,000

Net Tax Savings 370,000


Have we successfully created QBI?

60

➢ Repeal of deduction for cooperative dividends

➢ Enactment of deduction for qualified production activities

➢ Modification of capital gain QBI exclusion

Additional ConsiderationsTechnical Corrections Bill

61

➢ As originally enacted taxpayers were entitled to a 20 percent deduction of all

cooperative dividends

➢ As originally enacted, the cooperative dividend deduction created an un-level

playing field in the agricultural industries, the so-called “grain glitch”

➢ Additionally, the deduction for cooperative dividends created a potential

opportunity for specified services businesses to convert to a cooperative

structure to maximize potential section 199A benefits

➢ In order to correct for the grain glitch, the technical corrections bill eliminated

the deduction for cooperative dividends and added new section 199A(g)

➢ The technical corrections bill eliminates the potential specified services

cooperative planning opportunity

Additional ConsiderationsRepeal of Deduction for Cooperative Dividends

62

➢ As part of correcting the “grain glitch”, section 199A(g) creates a new

deduction for agricultural and horticultural cooperatives

➢ The deduction is based on qualified production activities and incorporates

concepts from former section 199

➢ Eligible cooperatives are entitled to a deduction equal to 9 percent of the lesser

of:

• Qualified production activities income for the year or

• The taxable income of the cooperative for the taxable year (calculated

without regard to certain patronage dividends, per-unit retain allocations,

and nonpatronage distributions).

➢ The deduction is subject a W-2 wages limitation.

Additional ConsiderationsDeduction for Qualified Production Activities

63

➢ Prior to the technical corrections bill, Section 199A(c)(3)(B) provided that the

certain investment type items, including any long-term capital gain, should not

be treated as QBI

➢ This raises the question: Is gain recognized on the sale of trade or business

property “investment type” gain? Possible exclusion of section 1231 gain or

capital gain on the sale of an operating business?

➢ The technical corrections bill deleted the words “investment type”

➢ Is this change sufficient to prevent inclusion of section 1231 gain as QBI?

Additional ConsiderationsModification of Capital Gain QBI Exclusion

64

Thank You!

65

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