June 26, 2020
Final regulations allow RIC shareholders a 199A deduction for qualified REIT Dividends
The IRS and Treasury finalized regulations (TD 9899) on June 24, 2020, allowing shareholders of Regulated Investment Companies (RICs) an IRC Section 199A deduction for qualified Real Estate Investment Trust (REIT) dividends. The final regulations are substantially the same as the proposed regulations published on February 8, 2019.
RICs are not eligible for an IRC Section 199A deduction, as they are taxed as corporations. Instead, the regulations allow a RIC to pass through the deduction to shareholders, who may be eligible to claim a deduction on their personal returns, provided they held the RIC stock for the required 45-day holding period.
Qualified REIT dividends are dividends that are not capital gain dividends and are not qualified dividend income. Qualified REIT dividends also exclude dividends from REIT shares that do not meet the required holding period or for which the RIC is obligated to make related payments with respect to positions of substantially similar or related property.
The Preamble to the regulations noted that the IRS and Treasury received comments recommending this conduit treatment be extended to qualified PTP income earned by a RIC. They also received comments suggesting conduit treatment be extended to partnerships and S corporations that would generate qualified business income. The final regulations do not adopt this treatment, and the Treasury and IRS stated they would continue to evaluate whether it is appropriate and practical to provide conduit treatment for qualified PTP income or other RIC income to further the purposes of IRC Section 199A(b)(1)(B).
The final regulations are effective for tax years beginning after August 24, 2020. Taxpayers may choose to apply the final regulations or, alternatively, may choose to rely on the February 2019 proposed regulations for tax years beginning on or before August 24, 2020.
RICs that did not pay an IRC Section 199A dividend in the prior year, or did not otherwise follow the proposed/final regulations, may want to consider these rules further and the cost/benefit to their shareholders.