Slide 1

February 13, 2019

Section 199A Common Control and Aggregation

- Determinations, Computations, and Disclosures

Contact Information

• Kristine Tidgren

• [email protected]

• www.calt.iastate.edu

• @CALT_IowaState

Final Regulations

• Issued January 18, 2019.

• Considered 335 comments

• Conducted hearing on October 16, 2018

• Preamble responds to comments and explains

provisions

• https://www.calt.iastate.edu/blogpost/final-

199a-regulations-released provides a

summary of provisions and a link to the final

regulations.

Scope of Final Regulations

• Primarily limited to:

• Determining the amount of the deduction for

income from sole proprietorships, partnerships, S

corporations, and trusts or estates

• Many additional examples are included.

• No proposed or final regulations for cooperative

provisions.

• Separate “Safe Harbor” for rental real estate income

released.

• Separate final revenue procedure for W-2 wages

released.

Which Regulations Apply to 2018

Returns?

• Because they were issued in 2019, final regulations

are not binding on taxpayers for the 2018 tax year.

• Taxpayers may rely on the final rules, in their

entirety, OR on the proposed regulations issued on

August 16, 2018, in their entirety, for taxable years

ending in calendar year 2018.

• This presentation is discussing FINAL REGULATIONS,

EXCEPT WHERE PROPOSED REGULATIONS ARE

SPECIFICALLY REFERENCED.

COMMON CONTROL AND

AGGREGATION PROVISIONS

Where Do These Rules Matter?

• Common Control matters for special rule for self-

rentals.

• Applies to any taxpayers, regardless of income,

with a related party rental arrangement

• Common Control matters when determining

whether RPEs or individuals can aggregate trades or

businesses for purposes of maximizing the QBI

deduction

• Aggregation only matters to taxpayers above the

income threshold

RENTALS

Must be a “Trade or Business” for QBID

§ 1.199A-1(b)(14).

• Trade or business under IRC § 162, other than

the trade or business of performing services as

an employee [Plus special rule for commonly

controlled rentals].

• Reiterate that whether an activity rises to the

level of a trade or business is inherently a

factual question and specific guidance is

beyond scope of regulation.

Trade or Business

Preamble reviews -

• Higgins v. Commissioner: “Requires an examination of

the facts in each case.” 312 U.S. 212 (1941).

• Courts have developed two definitional requirements:

1. Profit Motive

2. Considerable, regular, and continuous activity

• Commissioner v. Groetzinger, 480 U.S. 23

(1987).

• Considerable v. Substantial (Material

Participation) – “Considerable” Not in Supreme

Court cases

Trade or Business (pages 14-15 preamble)

“Section 199A does not require that a taxpayer

materially participate in a trade or business in order to

qualify for the section 199A deduction.”

• Not based on taxpayer’s level of participation in a

trade or business.

• Dependent upon whether the individual has QBI

from a trade or business.

• Not appropriate to use “real estate professional”

standard.

Acknowledge Trade or Business

“Inconsistency” – Rentals

Declined many commenters’ suggestions that all rental

activity should be trade or business. List some

“relevant” factors in preamble:

• Type of rental property (commercial v residential)

• Number of properties rented

• Owner’s or agent’s day-to-day involvement

• Type and significance of ancillary services provided

• Terms (net lease v. traditional v. short-term v. long-

term)

Bright-line test is beyond scope of regulations.

Trade or Business Safe Harbor

• Notice 2019-07

• Proposed revenue procedure in response to difficulties

in determining whether “regular, continuous, and

considerable.”

• 250 hours of services for “enterprise”

• Rental real estate enterprise that satisfies proposed safe

harbor may be treated as trade or business for 199A

• Failure to meet proposed safe harbor “would not

necessarily preclude rental real estate activities from

being a section 162 trade or business.”

Final regulations eliminate examples of unimproved land.

Special Rule for Rentals to Related Parties

§ 1.199A-1(b)(14).

• In addition, rental or licensing of tangible or

intangible property (rental activity) that does not

rise to the level of a section 162 trade or business is

nevertheless treated as a trade or business for

purposes of section 199A, if the property is rented

or licensed to a trade or business conducted by the

individual or an RPE which is commonly controlled

under 1.199A-4(b)(1)(i) (regardless of whether the

rental activity and the trade or business are

otherwise eligible to be aggregated).

Final Regulations – Common Control

• Require the same person or group of person,

directly or by attribution through IRC §§ 267(b) or

707(b) to own 50 percent or more of each trade or

business.

• Note: A C corporation may constitute part of this

group.

Special Rule for Rentals to Related Parties

• Now limited to situations in which related party is an

individual or a relevant pass-through entity.

• Eliminates the ability to treat rental income from

related C corporation as trade or business under

this rule (proposed regulations allowed)

• Proposed: If the property is rented or licensed to

a trade or business which is commonly controlled

• Expands definition of related party to those

defined by IRC §267(b) or 707(b).

• Spouse, siblings, ancestors, lineal descendants

• Same persons or group of persons directly or by

attribution own 50 percent or more of each

Proposed Regulations – “Family

Attribution”

• “Individual is considered as owning the interest

owned directly or indirectly by his or her spouse,

children, grandchildren, and parents.”

• Did not include grandparents, siblings, or

adopted children.

• There were also questions regarding common

control and beneficial interests in trusts.

IRC 267(b) Related Parties

• Members of family under § 267(c)(4):

• Brothers and sisters (whether by the whole or half

blood), spouse, ancestors, and lineal descendants

(no in-laws or step-children, but includes adopted

children).

• Individual and corporation where individual owns

(directly or indirectly) more than 50 percent of stock

• Two corporations which are members of the same

controlled group (267(f))

• A grantor and a fiduciary of any trust

• A fiduciary of a trust and a fiduciary of another trust, if

the same person is a grantor of both trusts

IRC 267(b) Related Parties

• A fiduciary of a trust and a beneficiary of such trust

• A fiduciary of a trust and a beneficiary of another trust, if

the same person is a grantor of both trusts

• A fiduciary of a trust and a corporation more than 50

percent in value of the outstanding stock of which is

owned, directly or indirectly, by or for the trust or by or

for a person who is a grantor of the trust

• Except in the case of a sale or exchange in satisfaction of

a pecuniary bequest, an executor of an estate and a

beneficiary of such estate

IRC 267(b) Related Parties

• A corporation and a partnership if the same persons

own—

• more than 50 percent in value of the outstanding

stock of the corporation, and

• more than 50 percent of the capital interest, or

the profits interest, in the partnership

• An S corporation and another S corporation if the

same persons own more than 50 percent in value of

the outstanding stock of each corporation

IRC 267(b) Related Parties

• An S corporation and a C corporation, if the same

persons own more than 50 percent in value of the

outstanding stock of each corporation

• A person and an organization to which section 501

(relating to certain educational and charitable

organizations which are exempt from tax) applies

and which is controlled directly or indirectly by such

person or (if such person is an individual) by

members of the family of such individual

IRC 707(b) Related Parties

• A partnership and a person owning, directly or

indirectly, more than 50% of the capital interest, or

the profits interest, in such partnership

• Two partnerships in which the same persons own,

directly or indirectly, more than 50% of the capital

interests or profits interests

Applying Common Control Rules

• Look on both sides of the rental arrangement to

determine whose ownership is attributed to whom.

• Then determine whether 50% or more test is met.

Example One

• Sarah cash rents farm ground from her mother.

• This qualifies for the special rental rule because

Sarah’s ownership of her trade or business is

attributed to her mother.

• Same persons or group of persons directly or

by attribution own 50 percent or more of

each

Example Two

• Jim, Jordan, and Sam are siblings. They each own an undivided

share of a 500-acre parcel of farmland left to them by their

parents.

• Jim farms the ground and pays cash rent. The lease provides

that Jim is not materially participating in the lease (he does

not want to pay self-employment tax on the rental income).

• This arrangement qualifies for the special rental rule

because Jim’s ownership in his trade or business is

attributable to his siblings and visa versa.

• Rented to a trade or business that is 100 percent

commonly controlled.

• Note: Different result under proposed regs

Example Three

• S corporation operates a manufacturing business.

• LLC owns a building.

• LLC rents building to S corp under a triple net lease.

• S corp shareholders include Bob, Charles, and Dina

(each 1/3 owners)

• LLC (taxed as partnership) owned by Bob, Charles,

and Deanne (each 1/3 owners)

Yes, same persons or group of persons directly or by

attribution own 50 percent or more of each.

Example Four

• C corporation operates a manufacturing business.

• LLC owns a Building.

• LLC rents building to C corp under a triple net lease.

• C corp shareholders include Bob, Charles, and Dina

(each 1/3 owners)

• LLC (taxed as partnership) owned by Bob, Charles,

and Deanne (each 1/3 owners)

• Under proposed regulations, yes.

• Under final regulations, no.

Example Five

• S corporation operates a manufacturing business.

• LLC owns a business.

• LLC rents building to S corp under a triple net lease.

• S corp shareholders include Bob, Charles, and Dina

(each 1/3 owners)

• LLC (taxed as partnership) owned by Bob, Charles,

and C Corp (each 1/3 owners)

• Yes, same persons or group of persons directly or

by attribution own 50 percent or more of each. C

corp may constitute part of this group.

GENERAL AGGREGATION

DEFINITIONS AND RULES

Relevant Pass-Through Entity (RPE)

1.199A-1(b)(10)

• A relevant pass-through entity is a partnership or an

S corporation that is owned, directly or indirectly, by

at least one individual, estate or trust.

• A trust or estate is treated as an RPE to the extent

that it passes through QBI, W-2 wages, UBIA or

qualified property, qualified REIT dividends, or

qualified PTP income.

Disregarded Entities

• Entity with a single owner that is treated as

disregarded is also disregarded for purposes of 199A

provisions.

• Treated as though conducted directly by the owner

of the entity.

Aggregated Trade or Business

1.199A-1(b)(1)

• Two or more trades or businesses that have been

aggregated pursuant to 1.199A-4.

Aggregation

• A taxpayer can have more than one trade or

business.

• Multiple trades or businesses can be conducted

within one entity.

• A trade or business cannot generally be conducted

across multiple entities for tax purposes.

• Aggregation rules are intended to allow

aggregation of what is commonly thought of as a

single trade or business where the business is

spread across multiple entities. Common

ownership is essential here.

Aggregation

• Allows taxpayers to group trades or businesses for

purposes of applying W-2 wage and UBIA of

qualifying property limitations.

• Maximize QBID

• Particularly where all T or Bs do not have

adequate W-2 wages or UBIA or where one T or B

has a loss.

Aggregation

• For taxpayers with income above the threshold,

• Usually beneficial to aggregate to maximize

W-2 wages / UBIA.

• When aggregating, deduction is calculated

using combined QBI, W‐2 wages and UBIA.

• Aggregation is not in the statutory text, but was

added by IRS to enhance administrability by

taxpayers and the IRS where single trade or

business operated across multiple entities for

non-tax reasons.

• Aggregation rules changed with final regulations

AGGREGATION COMPUTATIONS

Example 7 – p. 170

Freda (unmarried) owns three businesses as a sole

proprietor (No aggregation, no qualified property).

• X: $1 million QBI and $500,000 W-2 Wages

• Y: $1 million QBI, No W-2 Wages

• Z: $2,000 QBI, $500,000 W-2 Wages

• Freda’s taxable income is $2,722,000.

Example 7 – p. 170

QBID Calculation

• X: $1 million QBI and $500,000 W-2 Wages =

$200,000

• Y: $1 million QBI, No W-2 Wages = $0

• Z: $2,000 QBI, $500,000 W-2 Wages = $400

• Freda’s taxable income is $2,722,000.

• Total QBID of $200,400 is not limited by 20

percent taxable income minus net capital gain.

Example 8 (aggregation) – p. 170

Freda (unmarried) owns three businesses as a sole

proprietor (no qualified property).

• X: $1 million QBI and $500,000 W-2 Wages

• Y: $1 million QBI, No W-2 Wages

• Z: $2,000 QBI, $500,000 W-2 Wages

• Freda’s taxable income is $2,722,000.

• Now Freda’s QBID is lesser of (.20 * 2,002,000) =

$400,400 or (.50 * 1,000,000) = $500,000.

• QBID not limited by taxable income limitation.

• Big Difference!

Example 9 (loss) – p. 171

Freda (unmarried) owns three businesses as a sole

proprietor (No aggregation, no qualified property).

• X: $1 million QBI and $500,000 W-2 Wages

• Y: $1 million QBI, No W-2 Wages

• Z: ($600,000) QBI, $500,000 W-2 Wages

• Freda’s taxable income is $2,122,000.

Example 9 (loss) – p. 171

Must apportion loss

• X: $1 million QBI ($700,000) and $500,000 W-2

Wages

• Y: $1 million QBI ($700,000), No W-2 Wages

• Z: ($600,000) ($0) QBI, $500,000 W-2 Wages

• Freda’s taxable income is $2,122,000.

Example 9 (loss) – p. 171

QBID Calculation

• X: $700,000 QBI and $500,000 W-2 Wages =

$140,000

• Y: $700,000 QBI, No W-2 Wages = $0

• Z: $0 QBI, $500,000 W-2 Wages = $0

• Freda’s taxable income is $2,122,000.

• Total QBID of $140,000 is not limited by 20

percent taxable income minus net capital gain.

Example 10 (aggregation with loss) – p.

171

Freda (unmarried) owns three businesses as a sole

proprietor (no qualified property).

• X: $1 million QBI and $500,000 W-2 Wages

• Y: $1 million QBI, No W-2 Wages

• Z: ($600,000) QBI, $500,000 W-2 Wages

• Freda’s taxable income is $2,122,000.

• Now Freda’s QBID is lesser of (.20 * 1,400,000) =

$280,000 or (.50 * 1,000,000) = $500,000.

• QBID not limited by taxable income limitation.

• Big Difference!

AGGREGATION DETERMINATIONS

Aggregation – Final Regulations

• Language was modified from proposed regulations to

clarify that real estate trades or businesses may be

aggregated (products, property, or services)

• RPEs may aggregate under final regulations, not

proposed regulations.

• Changed “family attribution” to 267(b) and 707(b)

common control.

• All T or B’s must have same tax year to aggregate.

• Same person or groups of persons must own interest

for majority of the year and on the last day of the

year. (proposed regulations did not have last phrase).

Aggregation by RPE

• Simplifies reporting and compliance efforts for

owners because the RPEs may more easily obtain

the information to determine whether trades or

businesses meet the test for aggregation and

whether it is beneficial to aggregate.

Aggregation Requirements

1. Same person or group must directly or by attribution

under sections 267(b) or 707(b) own 50% or more of

each trade or business (S corp = 50% or more of

shares, p’ship = 50% or more of capital or profits)

2. Ownership must exist for a majority of the year,

including the last day of taxable year

3. All items attributable to each trade or business must

be reported on returns with same taxable year

(exception for short taxable year)

4. None of the trades and businesses can be SSTBs

5. Individuals and trusts must show that the trades or

businesses meet two of three factors

Aggregation

Must meet two of the following three factors:

1. The businesses provide products, property, or services

that are the same or customarily offered together.

2. The businesses share facilities or significant centralized

business elements such as personnel, accounting, legal,

manufacturing, purchasing, human resources, or

information technology resources.

3. The businesses are operated in coordination with, or

reliance upon, other businesses in the aggregated group

(for example, supply chain interdependencies).

Aggregation by Individuals

• Individuals may aggregate directly or through an RPE

to the extent not inconsistent with aggregation of

RPE.

• May not subtract from T or Bs aggregated by RPE

• May aggregate additional trades or businesses

with the RPEs aggregation if rules are satisfied

Aggregation by RPEs

• May aggregate T or Bs operated directly or through

a lower-tier RPE to extent not inconsistent with

aggregation of lower-tier RPE.

• If RPE does not aggregate, individual owners need

not aggregate in the same manner

• If RPE aggregates multiple trades or businesses, the

RPE must compute and report QBI, W-2 wages, and

UBIA for the aggregated T or Bs

• An RPE may not subtract from T or Bs aggregated by

a lower-tier RPE, but may aggregate additional ones

if rules are otherwise satisfied

Example 1, page 211

• Amy owns a catering business and a restaurant

through separate disregarded entities.

• Share centralized purchasing, accounting, and

website.

• Amy uses the restaurant kitchen to prepare food

for catering, but catering business has it’s own

staff, equipment, and trucks.

Example 1

Same person or group of persons? Yes

SSTB? No

Meet two of the following three factors Yes

1. The businesses provide products, property, or services

that are the same or customarily offered together.

2. The businesses share facilities or significant centralized

business elements such as personnel, accounting,

legal, manufacturing, purchasing, human resources, or

information technology resources.

3. The businesses are operated in coordination with, or

reliance upon, other businesses in the aggregated group

(for example, supply chain interdependencies).

Example 2

• Same business, but restaurant and catering business

are owned by two partnerships.

• Amy, Bob, Callie, and David are each 25 percent

owners of each partnership.

• May individuals aggregate?

• Yes, same group of persons owns 50 percent of

more.

• Amy, Bob, and Callie own 90 percent of each

partnership, but David owns 10 percent.

• May David aggregate?

• Yes, same group of persons owns 50 percent or

more.

Example 8

• Gary owns 80% of the stock in S Corp and 80% of LLC1

and LLC2 (taxed as partnerships).

• LLC1 manufactures and supplies all widgets sold by

LLC2 through a retail store.

• S Corp owns the real property leased to LLC1 and LLC2

for its factory and store.

• Entities share common advertising and management.

Example 8

Same person or group of persons? Yes

SSTB? No

Meet two of the following three factors Yes

And S Corp is eligible under special rental rule.

1. The businesses provide products, property, or services that are

the same or customarily offered together.

2. The businesses share facilities or significant centralized

business elements such as personnel, accounting, legal,

manufacturing, purchasing, human resources, or information

technology resources.

3. The businesses are operated in coordination with, or reliance

upon, other businesses in the aggregated group (for example,

supply chain interdependencies).

Example 9

Same facts, but now ownership is as follows:

• S Corp – Gary 80%

• LLC1 – Gary 20%, Gary’s mother majority interest

• LLC2 – Gary 20%, Gary’s son majority interest

• Same result because Gary’s mother’s and son’s

interests are attributable to Gary, so majority owns

all entities.

Example 11

P1, P2, S corp1, S corp2, C corp, owned as follows:

• Harry-30%, Jane-20%, Keri-5%, Lori-45%

• Harry aggregates P1 and S corp1 / P2 and S corp2

together

• Jane aggregates P1, S corp1, and S corp2 together

and reports P 2 separately

• Keri aggregates the partnerships together and

the S corps together

• Lori aggregates S corp1, S corp2, and P2, but

reports P 1 separately

• Allowed? Yes. Just can’t aggregate C corp.

Example 13

• Charles owns a majority interest in a sailboat racing

team and a partnership that operates a marina.

• The marina is a trade or business, but the sailboat

racing team is not.

• No aggregation, both must be trades or

businesses, except for special rental rule.

Example 15

• Partnership 1 directly operates a food service T or B.

It owns 60 percent of Partnership 2, which directly

operates a movie theater and a food service T or B.

Partnership 1

Partnership 2

Food

Service

Food

Service

Movie

Theater

Owns

60% of

Food service businesses

provide products and

services that are the same

and share centralized

purchasing and shipping.

P2’s food service

and movie theater

operate in

coordination with

each other and

share human

resources, etc.

Example 15

• P2 can aggregate its food service and movie theater.

If it does, P1 cannot aggregate its food service

business with that aggregation. If P2 has not

aggregated, P1 may aggregate both food service

businesses.

Partnership 1

Partnership 2

Food

Service

Food

Service

Movie

Theater

Owns

60% of

Food service businesses

provide products and

services that are the same

and share centralized

purchasing and shipping.

P2’s food service

and movie theater

operate in

coordination with

each other and

share human

resources, etc.

Example 16-17

• Partnership owns 60 percent of commercial rental

office in state one and 80 percent of commercial

rental office in state two. Share centralized

accounting, legal and human resources.

• Aggregate?

• S corporation owns 100 percent of residential condo

building and 100 percent of commercial rental

office. Share centralized accounting, legal and

human resources.

• Aggregate?

Examples 16-17

• Partnership owns 60 percent of commercial rental

office in state one and 80 percent of commercial

rental office in state two. Share centralized

accounting, legal and human resources.

• Aggregate? Yes

• S corporation owns 100 percent of residential condo

building and 100 percent of commercial rental

office. Share centralized accounting, legal and

human resources.

• Aggregate? No, not the same type of property.

REPORTING AND DISCLOSURE

REQUIREMENTS

Reporting and Consistency - Individuals

• Once aggregation is chosen, must consistently

report in all subsequent taxable years (unless

significant change in circumstances).

• Failure to aggregate is not an aggregation. Thus,

later initial aggregation is not precluded.

• Initial aggregation may not generally be made on an

amended return, but it may be done on amended

return for 2018 taxable year.

• Individuals must report aggregated trades or

businesses of an RPE in which the individual holds a

direct or indirect interest.

Reporting and Consistency - Individuals

• For each taxable year, individual must attach a

statement to their returns identifying each trade or

business aggregated.

• The statement must contain:

• Description of T or B

• Name and EIN of each entity in which T or B is

operated

• Information identifying any T or B that was formed,

ceased operations, was acquired, or was disposed of

in taxable year

• Information identifying any aggregated T or B of an

RPE in which individual has an interest

Reporting and Consistency - Individuals

• If annual disclosures are not attached to the return,

IRS is permitted to disaggregate. The taxpayer would

not be permitted to re-aggregate for three years.

Reporting and Consistency - RPEs

• Once aggregation is chosen, must consistently report in

all subsequent taxable years (unless significant change

in circumstances, may add or subtract).

• Failure to aggregate is not an aggregation. Thus, later

initial aggregation is not precluded.

• Initial aggregation may not generally be made on an

amended return, but it may be done on amended

return for 2018 taxable year.

• RPEs must report aggregated trades or businesses of a

lower-tier RPE in which the RPE holds a direct or

indirect interest.

Reporting and Consistency - RPEs

• For each taxable year, RPEs must attach a statement

to each owner’s K-1 identifying each trade or

business aggregated.

• The statement must contain:

• Description of T or B

• Name and EIN of each entity in which T or B is

operated

• Information identifying any T or B that was formed,

ceased operations, was acquired, or was disposed of

during taxable year

• Information identifying any aggregated T or B of an

RPE in which RPE has an interest

Reporting and Consistency - RPEs

• If RPE fails to attach statement, IRS is permitted to

disaggregate. RPE would not be permitted to re-

aggregate for three years.