On October 16, 2018, the Internal Revenue Service held a public hearing on proposed regulations under Section 199A (REG-107892-18) featuring two dozen witnesses calling for clarifications and interpretations regarding various aspects of the rules when they are made final. Section 199A allows pass-through entities a 20% deduction for "qualified business income" (QBI).

The Section 199A deduction was enacted as part of the Tax Cuts and Jobs Act (TCJA) in an effort to provide parity for pass-through businesses with the TCJA's corporate rate cut. It reduces the top effective tax rate on pass-through income. For higher-income individuals, there are limits on the amount of the deduction based on 50% of the W-2 wages paid by the trade or business (or alternatively, a combination of 25% of W-2 wages and 2.5% of the unadjusted basis of qualified property). Section 199A excludes businesses performing certain activities, "specified service trades or businesses" (SSTBs), from the definition of qualified trade or business, thereby eliminating the deduction completely above certain taxable income thresholds.

Under the statute, an SSTB is any trade or business involving the performance of services in one or more of the following fields: health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, investment and investment management, trading, dealing in securities, partnership interests, or commodities, or any trade or business whose principal asset is the reputation or skill of one or more of its employees or owners.

Witnesses listed for the hearing were:

1. David Dvorak, Dvorak CPA

2. Marc Gerson, Miller & Chevalier on behalf of the American Staffing Association

3. Troy Lewis, American Institute of CPAs

4. Donald Williamson, American University

5. Donald Kozusko, Kozusko, Harris Vetter Wareh Duncan, LLO behalf of the American College of

Trust and Estate Counsel

6. Damien Lewis BKD, LLP CPA & Advisors

7. Roger Harris, Padgett Business Services

8. Michael Brady

9. Crowe, LLP on behalf of the National Automobile Dealers Association

10. Larry Grey, National Association of Tax Professionals

11. Nick Passini, RSM US LLP

12. Arthur Davis, American Escrow Association

13. Tony Edwards, NAREIT

14. Arlene Schwartz, Todd Horager, Financial Executives International

15. Christopher Hesse, Randy Gordon, National Grain and Feed Association

16. Thomas Nichols, S Corporation Association

17. Courtney Brooks, National Federation of Independent Business

18. Kent Mason, TechServe Alliance

19. Charles Thurston, International Franchise Association

20. Iona Harrison, National Association of REALTORS

21. Thomas Wells, First American Bank

22. Guy Colado, Commerce National Bankshares of Florida, Inc.

23. Joseph Framptom, Paducah Bank and Trust Co.

24. Steve Lewis, Jefferson Bank

Multiple witnesses called for changes to the treatment of rental real estate under the rules: AICPA believes rental real estate should be considered a trade or business, and American University's Kogod School offered a targeted safe harbor "aimed at middle income Americans investing in real estate" to determine whether income from rental real estate is considered a trade or business. The National Association of REALTORS urged IRS to deem in final regulations all such rental property as a trade or business for purposes of the deduction.

NAREIT said the proposed regulations do not confirm whether the Section 199A deduction for qualified REIT dividends applies to both direct holders of REIT stock and indirect shareholders of REITs through mutual funds, as the group believes was intended. If the Section 199A deduction for qualified REIT dividends is not available to shareholders of REITs through mutual funds, the group said, those who hold mutual fund shares will be incentivized to sell their investments and purchase REIT shares separately.

Some witnesses addressed the example in the regulations providing that a service that provides advice regarding changes in a client's personnel structure is engaged in the performance of services in an SSTB in the field of consulting. One witness called for clarity that staffing services, which are not SSTBs, that provide employees, are distinguished from consultants that advise businesses on whether to hire temporary workers; another said it would be helpful for IRS to clarify that services that provide advice regarding the use of temporary workers but do not get paid for it, and then actually provide the workers, are not SSTBs.

There was also a focus on reasonable compensation, which is not treated as QBI, with one witness calling for a safe harbor with regard to what constitutes reasonable compensation.

This effectively completes the official Notice and Comment period for the proposed regulations.

———————————————