In the blog yesterday, Saturday, 8/4/18, we talked about 5 changes (or clarifications) from the 184 page proposed Treasury Regulations on just one aspect of the Trump Tax Plan, Section 199A, the 20% pass-through income reduction.
We’re still not through all the regulations, but I want to go over those 5 changes again and use some examples of when this may and may not be applicable to you. Make sure you keep coming back as we go through all of the changes one by one.
I’ll also post these all to the Taxmageddon Insider’s Only forum. Once you have your copy of Taxmageddon 2018: How to Brace for the Trump Tax Plan, turn to Chapter 16 for the password to use at www.Taxmageddon2018.com to register your book. You’ll find bonuses and an Insider’s Only forum to discuss this and other important aspects of the Trump Tax Plan.
If you don’t yet have your own copy of “Taxmageddon 2018: How to Brace for the Trump Tax Plan, you can pick up your copy at www.Taxmageddon2018.com.
Change #1: According to the Regs, Section 199A also allows individuals and some trusts and estates a deduction of up to 20% of their combined qualified real estate investment trust dividends and qualified publicly traded partnership (PTP) income. That’s the change. The 20% pass-through reduction has been added to some trusts & estates and to REIT and PTP income. That’s a huge benefit for people who run and sell REIT and PTP positions.
Change #2: The Regs further state that if you have similar real estate properties that are held in different entities (for example, separate LLCs for asset protection purposes) that these should be aggregated for calculation of the pass-through reduction. That’s another important change that has come from the Regulations. For businesses, we keep the income and loss separate (except see #5 later) but you have to add them together the real estate properties.
Change #3: For businesses that are not passive real estate, though, the income or loss is calculated separately. If you have multiple trades or businesses, you must calculate the qualified business income (QBI) from each activity separately. If one of the businesses has a loss, the amount of the loss will not be impacted by Section 199A. In other words, there is no 20% reduction on losses. The loss will carryover to subsequent years and be used to offset income for that trade or business for purposes of Section 199A. It does not effect your ability to take the loss against income in the current year, however.
If there is a loss from qualified REIT dividends and qualified PTP, it is rolled forward and offset against qualified REIT dividends and qualified PTP in subsequent years. It isn’t netted together with the other pass-through income.
Change #4: This change is applicable if your taxable income is above the income threshold amount.
If this is the case, you must apportion the net loss among the profitable businesses. Then, for purposes of applying the limitation based on W-2 wages and UBIA of qualified property, the net income after offset by the apportioned losses will be the QBI with respect to that business. The W-2 wages and UBIA of qualified property from the businesses which produced negative QBI are not taken into account and are not carried over into the subsequent year.
As an example, let’s say your taxable income is above the threshold. You have two non-service businesses, A and B. A has net qualified income of $10,000, while B has a loss of -$5,000. A paid $3,000 in W-2 wages, B paid $1,000 in W-2 wages, and neither business has tangible capital.
B’s loss of $5,000 offsets A’s income of $10,000 for a total of $5,000. The total possible pass-through reduction is $1,000 (20% of $5,000). After moving B’s wages to A, the total wage is $2,000 ($3,000 – $1,000). The total deduction remains $1,000 (50% of $2,000 is the wage limitation)
Change #5: The Section 199A pass-through reduction is applied by individual, not by business such as with a partnership or an S Corporation. The reduction has no effect on the partner’s or shareholder’s basis.
This was actually a clarification more than a change. And what that means for CPAs and other tax preparers is that the basis will now need to be tracked for regular federal income tax, for AMT, for Section 199A and possibly for state income tax as well. Good thing we have computers and computer programs!
We have covered just about 1/5 of the new proposed regulations in the last two blogs. The rest will be covered in the next few days. Remember to register your book at www.Taxmageddon2018.com in order to stay up-to-date on these changes!