April 09, 2019

The Honorable David J. Kautter The Honorable Michael J. Desmond

Assistant Secretary for Tax Policy Chief Counsel

Department of the Treasury Internal Revenue Service

1

Dear Messrs. Kautter and Desmond:

The American Institute of CPAs (AICPA) appreciates the efforts of the Department of the Treasury

(“Treasury”) and the Internal Revenue Service (IRS) to address the need for guidance related to

the new Internal Revenue Code section 199A

2

as enacted under Pub. L. No. 115-97, commonly

referred to as the Tax Cuts and Jobs Act (TCJA or “the Act”) and to consider our prior

recommendations.

Specifically, the AICPA submits comments in the following areas related to the regulations and

notice:

or to Treasury Regulations promulgated thereunder.

3

of the Internal Revenue Code,” submitted October 1, 2018.

more than 431,000 members in 137 countries and a history of serving the public interest since

1887. Our members advise clients on federal, state and international tax matters and prepare

Business Income Task Force, at (801) 523-1051 or [email protected]; Amy Wang, AICPA Senior

Manager – Tax Policy & Advocacy, at (202) 434-9264; or Amy[email protected]; or me at

(408) 924-3508 or [email protected].

Sincerely,

Annette Nellen, CPA, CGMA, Esq.

Chair, AICPA Tax Executive Committee

AMERICAN INSTITUTE OF CPAs

Guidance Concerning the Deduction for Qualified Business Income Under Section 199A of

Overview:

To minimize uncertainty related to rental real estate enterprises and section 199A,

4

proposed

revenue procedure Notice 2019-07 provides a safe harbor for when a rental real estate enterprise

is treated as a trade or business under section 162 for purposes of section 199A. Our comments

below seek additional clarity while also recommending options to reduce taxpayer burden in

complying with the provisions.

Recommendations:

would otherwise satisfy the requirements outlined in the revenue procedure;

3. Provide clarity around the taxpayer’s use of real property as a residence in which the

taxpayer rents a portion and resides in a portion of the real property;

4. Clarify that the time spent by a professional real estate management company would

qualify toward the 250-hour requirement;

5. Reduce the 250-hour requirement;

6. Reduce the requirements of contemporaneous documentation as it relates to independent

contractors and agents of the taxpayer; and

7. Provide additional clarity around reporting, specify what a taxpayer needs to include in the

reporting statement, and remove the signatory requirement.

as separate enterprises or treat all “similar” properties held for the production of rents as a single

enterprise. However, the safe harbor provides that taxpayers may not include commercial and

residential real estate together as part of the same enterprise.

4

Unless otherwise indicated, hereinafter, all section references are to the Internal Revenue Code of 1986, as amended,

or to Treasury Regulations promulgated thereunder.

There is no precedent for segregating commercial from residential property. This separation is

inconsistent with other areas of the Internal Revenue Code. For example, rental real estate is

5

the same piece of property, which is an increasingly common arrangement in the rental real estate

industry.

The revenue procedure specifically prohibits taxpayers from using the safe harbor if the taxpayer

rents or leases real estate under a triple net lease (defined as “an agreement that requires the tenant

or lessee to pay taxes, fees, and insurance and to be responsible for the maintenance activities for

courts and the IRS have found that a taxpayer’s rental activities did not rise to the level of a trade

or business, relied on the fact that there was a single property leased on a “net” basis to a single

tenant.

However, in cases where a trade or business was found, the courts gave the most weight

to the number of properties rented and level of activities with respect to the property.

For purposes of the safe harbor, Treasury and the IRS should consider the level of activities

performed rather than basing the application of the safe harbor solely on the type of lease.

the property and paying all taxes and insurance); Grier v. U.S., 120 F. Supp. 395 (D.C. Conn. 1954), aff’d, 218 F.2d

603 (2

Cir. 1955) (rental of a single property to a single tenant for entire duration of ownership; maintenance

generally handled by having tenant secure services and receive reimbursement); Rev. Rul. 73-522, 1973-2 C.B. 226

(triple net lease of a single property to a single tenant); P.L.R. 8350008 (Aug. 23, 1983) (triple net lease of a single

hotel property to a single tenant).

8

See, e.g., Pinchot v. C.I.R., 113 F.2d 718 (2

nd

Cir. 1940) (11 New York buildings; through agent, services were

presumed considerable as well as continuous and regular); Fackler v. C.I.R., 133 F.2d 509 (6

Cir. 1943) (single six-

commonly-shared wall.

4. Clarify that the time spent by a professional real estate management company qualifies

toward the 250-hour requirement.

The proposed revenue procedure provides eligibility only for taxpayers who perform 250 or more

hours of rental services related to the rental enterprise per year for tax years beginning prior to

January 1, 2023. Thereafter, taxpayers must meet the 250-hour requirement in any three of five

consecutive tax years, ending with the taxable year. In calculating the hour requirement, the safe

harbor allows for the inclusion of rental services performed by others, including employees,

agents, and independent contractors of the owners. Similarly, time incurred by a professional real

estate management company on the owner’s behalf should count towards the 250 hours. Please

confirm the treatment of a professional real estate management company.

Comm’r v. Groetzinger, 107 S.Ct. 980, 2/24/1987.

Thus, taxpayers relying on the safe harbor would have to require their agents and independent

contractors to provide detailed time in the invoices. This requirement may add additional burdens

on independent contractors and hinder taxpayers from finding competent service providers.

In order to utilize the safe harbor, taxpayers must include a statement noting that the requirements

of the revenue procedure are satisfied. The statement also requires a signature from the taxpayer

or authorized representative, and it must provide the following specific language:

“Under penalties of perjury, I (we) declare that I (we) have examined the statement,

and, to the best of my (our) knowledge and belief, the statement contains all the

relevant facts relating to the revenue procedure, and such facts are true, correct, and

complete.”

This signatory requirement adds burdens on taxpayers. Furthermore, Treasury and the IRS have

are redundant. We recommend that Treasury and the IRS remove the signatory requirement from

the final revenue procedure and clarify what specific statements the election attachment must

contain.

If Treasury and the IRS determine that the signatory requirement is necessary, clarity is needed on

exactly what the declaratory statement entails. Outside of including the penalties of perjury

language above, it is unclear what specific additional assertions the safe harbor statement must

contain. Guidance does not provide whether taxpayers may simply meet the requirements listed

in the statement or if they must also provide a detailed description of how the listed requirements

were satisfied. The penalties of perjury language implies that the statement must contain additional

Taxpayers may operate closely-held businesses through multiple legal entities for business

reasons, including separating assets from exposure to risks. However, taxpayers often may

manage these legal entities as one trade or business. Treasury Reg. § 1.199A-1(b)(14) recognizes

requirement on section 754 elections to aid electronic filing. See 82 Fed. Reg. at 47408.

this concept in deeming real estate operations commonly-owned with operating entities as trades

or businesses, even though the real estate operation would not otherwise rise to the level of a trade

or business. This deemed status does not depend upon aggregation under Treas. Reg. § 1.199A-

Treasury and the IRS should modify Treas. Reg. § 1.199A-1(b)(14) to include rentals to a

commonly-owned C corporation as a deemed trade or business for the rental activity. However,

aggregation under Treas. Reg. § 1.199A-4(b)(1)(i) should continue to deny aggregation with a

commonly-owned C corporation.

Analysis

The Preamble to the section 199A regulation (Treasury Decision (TD) 9847)

proposed regulations (REG-107892-18)

business” for purposes of sections 162 and 199A. Taxpayers often manage their trade or business

intangible property to a related trade or business, commonly controlled under Treas. Reg. §

1.199A-4(b)(1)(i). The Preamble to the regulations (at page 19) clarifies that the commonly

controlled entity must exist as an individual or relevant pass-through entity (RPE) or multiple

RPEs.

Treasury and the IRS recognize (by adopting the deemed treatment of rentals to related entities)

that one trade or business may operate across legal entity boundaries. Closely-held businesses,

whether operated in pass-through entity form or as a C corporation, are usually managed similarly.

A taxpayer, family group, or other group of owners may commonly own multiple entities, one or

more of which may exist as a C corporation. These owners may also commonly own real estate

participates in the other activity. This allowance is in recognition of taxpayers that operate

12

2018.

businesses across entity lines. Recognition, however, is also needed for taxpayers’ involvement

in multiple entities regardless of entity type.

To clarify, our recommendation does not include the aggregation of qualified business income

(QBI) components with C corporations. It also does not include any changes to the aggregation

rules under Treas. Reg. § 1.199A-4(b)(1)(i).

III. Allocation Based Upon Gross Receipts

Overview

Individual taxpayers may pay or incur deductions that apply to more than one business. Treasury

Reg. § 1.199A-3(b)(1)(vi) provides guidance for allocating the deductions between the taxpayer’s

trade or business, proportionately to the businesses based upon relative positive QBI – not gross

receipts.

Analysis

Self-employment income may generate from one or more sole proprietorships and partnerships.

One or more of the partnerships may generate QBI without self-employment income. For

example, a limited partner may receive QBI, but the income may not derive from self-employment

income. Also, a general partner of a specified service trade or business (SSTB) may generate self-

employment income, which is not QBI in the case where the taxpayer is fully phased-out of the

Section 162(l) allows a trade or business deduction for the self-employed person’s health insurance

paid or reimbursed by the business. A partnership reports the payment of the health insurance as

payment of the partnership, however, is not QBI. The wage income of the S corporation

shareholder is not QBI. Consequently, the only self-employed health insurance deduction to

reduce QBI is the deduction from a sole proprietorship. The determination of the deduction is

SP2 has gross receipts of $100,000. Under the final regulation, the 50% self-employment

tax deduction under section 164(f) is allocated 90% to SP1, even though SP1 did not

generate any self-employment tax.

Self-employment tax and qualified retirement plan contributions may result from multiple

activities and require allocation. Taxpayers should allocate the amount based on the relative self-

employment income or earned income on which qualified retirement plan contributions are based,

respectively.

Taxpayers should directly allocate the section 162(l) deduction to the business that paid or

Adjustment

Overview

The proposed section 199A regulations denied an increase in UBIA of qualified property for

adjustments under sections 734(b) and 743(b). The final regulations allow a limited adjustment

for excess section 743(b) adjustments, but not for similar adjustments under section 734(b). The

Preamble of the regulations notes that Treasury and the IRS continue to study the issue.

Recommendation

In the Preamble to the final regulations, Treasury and the IRS state that they do not believe a

section 734(b) adjustment is an acquisition of qualified property for purposes of section 199A.

However, we believe that a partnership should have treatment as acquiring the distributee partner’s