We’re continuing to talk about the new definitions and rules from the Treasury Regulations released 8/8/18 regarding the 20% pass through reduction from the Trump Tax Plan. Make sure you also check out the previous 3 parts.
Change # 11 is regarding partnership allocation of UBIA & how bonus depreciation may impact UBIA.
In the case of qualified property of a partnership that does not produce tax depreciation during the year (for example, property that has been held for less than 10 years but whose recovery period has ended), each partner’s share of the UBIA of qualified property is based on how gain would be allocated to the partners pursuant to sections 704(b) and 704(c) if the qualified property were sold in a hypothetical transaction for cash equal to the fair market value of the qualified property.
This would indicate that if you capitalize and then use bonus depreciation, the depreciation period would have ended even though the life is longer. Therefore, this property cannot be used for UBIA.
Change #12 deals with net operating losses (NOL).
If an NOL is not attributable to a trade or business, it is not taken into account in computing QBI. If it is attributable to a trade or business, it will be part of QBI to the extent of the requirements of Section 199A. Basically, this refers to the separate NOL that will be carried forward when a loss impact QBI. Since not all losses won’t impact QBI, it’s going to be a matter of tracking multiple items forward. You have potentially a federal tax NOL, an AMT NOL, a state NOL and a Section 199A NOL.
Change #13 deals with a specific circumstance that sometimes is capital gains and sometimes ordinary income. Does the 20% pass-through income reduction count for that?
The IRS and Treasury Dept received numerous questions regarding QBI (qualified business income) that is eligible for the 20% pass-through income reduction. Income from a qualified business (Schedule C, partnership, S Corporation or real estate holdings) is QBI. Capital gains income is not. But what about Section 1231 property? This is property that is part of an involuntary conversion or a sales of business assets in a business asset sale. For example, inventory is Section 1231 property.
These kind of sales sometimes generate capital gains income/loss upon sale and sometimes generate ordinary income. How is that income treated? Is it QBI or not?
Specifically, if gain or loss is treated as capital gain or loss under section 1231, it is not QBI. Conversely, if section 1231 provides that gains or losses are not treated as gains and losses from sales or exchanges of capital assets, section 199A(c)(3)(B)(i) does not apply and thus, the gains or losses must be included in QBI (provided all other requirements are met).
That’s Change #13.
Change #14: This change talks about multiple businesses with expenses that are applicable to multiple businesses. The items can then be attributed to more than one business. The rules say that they must be attributed using a reasonable method that is consistently applied.
Change #15: If a business is a SSTB (and taxable income is over the second threshold), none of the wages or UBIA of qualified property can be used for wage limitation. None of the income from the SSTB is subject to the 20% pass-through reduction. For example, because the field of athletics is an SSTB, if a partnership owns a professional sports team, the partners’ distributive shares of income from the partnership’s athletics trade or business is not QBI, regardless of whether the partners participate in the partnership’s trade or business.
This has been the 4th blog regarding the new Treasury Regulation for the 20% pass-through reduction section of the Trump Tax Plan. This doesn’t cover every aspect of the Regulations. We’re going through the changes that are most likely going to impact US Taxpayers that have small businesses and/or real estate investments. In some cases, “changes” would be more accurately described as further descriptions.
The August 15th business coaching call dealt with the new Treasury Regulations and strategies you may want to change or implement to make sure you’re in compliance. If you’re not yet a coaching client, you can join at https://www.ustaxaid.com/coaching-program/
Please note that when you go to the page, you will have the option to listen to a sample coaching call from February. There is a LIVE session twice a month that comes with a Home Study Course. This is always on the first and third Wednesday of the month at 5 pm pacific time. You need to be a coaching member to participate in the live sessions, download the current Home Study Courses or listen to the current recording.
Once you sign up, you’ll receive an email with instructions on how to sign in to receive the Home Study Course and the number to dial on the day of the coaching call to listen in.
Make sure to check back for the rest of the Treasury Regulation blogs on the Trump Tax Plan.