Final regulations provide guidance on the Section 199A passthrough deduction

Overview

The IRS and Treasury have released final regulations under Sections 199A and 643. The final regulations generally apply for tax years ending after the date the regulations are published in the Federal Register. The preamble provides that taxpayers may rely on the proposed regulations in their entirety for tax years ending in calendar year 2018. 

The final regulations added or amended a number of significant rules, including relaxing rules that treated certain businesses as specified service trades or businesses (SSTB) because of a relationship to an SSTB, and allowing relevant passthrough entities, such as partnerships and S corporations, as well as individual taxpayers to aggregate eligible trades or businesses.

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The takeaway

The Section 199A final regulations clarify a number of issues that were outstanding from the proposed regulations. Other than the clarifications, the final regulations generally adopt the proposed rules, with a few exceptions—applying the SSTB limitation to qualified PTP income; liberalizing or removing the special rules for treating trades or businesses as SSTBs; determining the UBIA of replacement property received in like-kind exchanges, after an involuntary conversion, and for partnerships; and allowing RPEs to aggregate trades or businesses. Many of the clarifications and changes are favorable to taxpayers, but may result in additional complexity.