Final 199A Regulations Released

January 20, 2019 | Kristine A. Tidgren

On January 18, 2019, Treasury and IRS issued final IRC §199A regulations. Because they were issued in 2019, they are not binding on taxpayers for the 2018 tax year. However, 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. The new rules clarify a number of issues, but leave others unresolved. Below are initial highlights from the final rules.

No Rules for Agricultural Cooperatives and Patrons

Of particular concerns to producers and their tax professionals, the agencies issued no guidance with respect to § 199A(g), the new and complicated provisions related to agricultural and horticultural cooperatives and their patrons. Rather, they state they “intend to issue a future notice of proposed rulemaking describing proposed rules” for this provision. In the preamble to the proposed regulations, the agencies had stated such guidance would be issued later in 2018.

“Net Capital Gain” Defined for Taxable Income Limitation [§ 1.199A-1(b)(3)]

The IRC § 199A deduction is limited to 20 percent of taxable income minus “net capital gain.” The final regulations clarify that “net capital gain” means “excess of net long-term capital gain for the taxable year over the net short-term capital loss for such year, plus any qualified dividend income.”

“Trade or Business” [§ 1.199A-1(b)(14)]

Rental Safe Harbor

The § 199A deduction is available for “qualified business income” arising from a “qualified trade or business.” The final regulations continue to define “trade or business” as a trade or business under IRC § 162, other than the trade or business of performing services as an employee. Commenters asked for a regulatory definition, a bright-line test, or a safe harbor. The agencies maintain, however, that whether an activity rises to the level of a trade or business is inherently a factual question and specific guidance under § 162 is beyond the scope of the final regulations. The summary states that the courts have developed two definitional requirements for an activity to rise to the level of a trade or business:

  • Good faith intention to make a profit
  • Considerable, regular, and continuous activity (it is unclear where the word “considerable” arose. It does not appear in the Groetzinger[i] or Higgins[ii] cases)

In determining whether a rental real estate activity is a § 162 trade or business, the agencies state that relevant factors might include, but are not limited to, (i) the type of rented property (commercial real property vs. residential property), (ii) the number of properties rented, (iii) the owner’s or the owner’s agent’s day-to-day involvement, (iv) the types and significance of any ancillary services provided under the lease, and (v) the terms of the lease (net lease v. traditional; short-term v. long-term).

Recognizing the difficulties taxpayers and practitioners may have in determining whether a taxpayer’s rental real estate activities is sufficiently “regular, continuous, and considerable” for the activity to constitute a section 162 trade or business, the agencies concurrently released Notice 2019-07. This proposed revenue procedure details a proposed safe harbor under which a rental real estate enterprise may be treated as a trade or business for 199A purposes. Details of the proposed safe harbor are reviewed here. The regulations specify that those taxpayers who treat a rental activity as a trade or business for purposes of 199A should be consistent and comply with the information return filing requirements of IRC § 6041 (filing 1099s).

Self-Rental Rule

The final regulations continue to provide that rental activity that does not rise to the level of an IRC § 162 trade or business is nevertheless treated as a trade or business for purposes of § 199A, if the property is rented to a commonly controlled trade or business. In other words, self-rental activities do not have to rise to the level of a trade or business for the rental income to qualify as QBI. Common control under the final regulations means that the same person or group of persons, directly or by attribution under IRC §§ 267(b) or 707(b), owns 50 percent or more of each trade or business. Notably, the final rule was written to exclude self-rental income received from a C corporation from this special treatment. The final rule does expand the family attribution rules to include siblings and grandparents.

Computational Clarifications [§ 1.199A-1(d)(2)(iii)(A)]

IRS retained the netting rules set forth in the proposed rules. This rule provides that if an individual’s QBI from at least one trade or business is less than zero, the individual must offset the QBI attributable to each trade or business that produced net positive QBI with the QBI from each trade or business that produced net negative QBI in proportion to the relative amounts of net QBI in the trades or businesses with positive QBI.  Final regulations provide that for taxpayers with taxable income within the phase-in range, QBI from an SSTB must be reduced by the applicable percentage BEFORE the application of the netting rule.

The rules also clarify that trades or businesses conducted by a disregarded entity will be treated as conducted directly by the owner of the entity for purposes of § 199A.

W-2 Wages [Rev. Proc. 2019-11]

In conjunction with the final rules, the agencies issued Rev. Proc. 2019-11, final guidance for determining W-2 wages for purposes of 199A. The guidance clarifies that W-2 wages include elective deferrals to Simplified Employee Pensions, simple retirement accounts, and other qualified plans. It also specifies that amounts reported on W-2s for statutory employees (as checked in Box 13) should not be included in the calculation of W-2 wages. The summary also states that W-2 wages include amounts paid to S Corporation shareholders and common-law employees.

UBIA of Qualified Property [§ 1.199A-2(c)(3]

Property Contributed to Partnership or S Corporation in Non-Recognition Transfer

The final regulations specify that each partner’s share of UBIA is determined in accordance with how depreciation would be allocated for IRC § 704(b) book purposes on the last day of the taxable year.  For S Corporations, each shareholder’s share of UBIA of qualified property is a share of the unadjusted basis proportionate to the ratio of shares in the S corporation held by the shareholder on the last day of the taxable year over the total issued and outstanding shares of the S corporation.

The final regulations also state that qualified property contributed to a partnership or S corporation in a non-recognition transaction should generally retain its UBIA on the date it was first placed in service by the partner or shareholder. Solely for purposes of 199A, the rules provide that if qualified property is acquired in a transaction described in § 168(i)(7)(B), the transferee’s UBIA in the property is the same as the transferors’ UBIA in the property, decreased by the amount of money received by the transferred or increased by the amount of money paid.  This rule only applies to § 199A and not for purposes of determining gain, loss, basis or depreciation.

1031 Like-Kind Exchange

The final regulations revise the harsh UBIA rule that was proposed for qualified property undergoing a like-kind exchange. The final rule provides that the UBIA of qualified like-kind property that a taxpayer receives in an IRC § 1031 like-kind exchange is the UBIA of the relinquished property. This UBIA is adjusted, however, for boot paid or received in the exchange. UBIA is adjusted downward for excess boot received, and UBIA is adjusted upward for boot paid. This rule, as opposed to the one set forth in the proposed regulations, does not penalize taxpayers who engage in a like-kind exchange with respect to UBIA. For determining the depreciable period, the placed in service date of the replacement property is equal to the placed in service date of the relinquished property, to the extent that no boot is paid. If boot is paid, that portion of the replacement property is treated as separate qualified property with a placed in service date equal to the date the replacement property was first place in service.

743 Basis Adjustment

Final regulations also change course from the proposed regulations and provide that IRC § 743(b) basis adjustments should be treated as qualified property to the extent the adjustment reflects an increase in the fair market value of the underlying qualifying property.

Must be Held at End of the Year

The agencies state in the summary that the statute only allows UBIA for qualified property held at the close of the taxable year. UBIA is measured at the trade or business level. Therefore, if qualified property is held by a relevant pass-through entity (RPE), the applicable tax year is that of the RPE. If a shareholder transfers his or her interest in the RPE prior to the close of the RPE’s taxable year, that shareholder is not entitled to a share of the UBIA from the RPE for that tax year.

Inherited Property

The final regulations clearly state that where qualified property is acquired from a decedent and immediately placed in service, the UBIA of the property will generally be the FMV at the date of the decedent’s death under IRC § 1014. A new depreciable period also commences as of the date of the death.

Treatment of Losses [§ 1.199A-3(b)(1)(iv)]

The proposed rules provided that previously disallowed losses or deductions (under IRC §§ 465, 469, 704(d), and 1366(d)) allowed in the taxable year are taken into account for QBI if they were incurred in a tax year beginning after January 1, 2018. But previously disallowed losses incurred for taxable years beginning before January 1, 2018, cannot be taken into account for purposes of computing QBI. The final regulations provide an ordering rule for this provision. Consistent with prior DPAD rules, any losses disallowed, suspended, or limited under the provisions of §§ 465, 469, 704(d), and 1366(d) (or similar provisions) shall be used for purposes of 199A in order from the oldest to the most recent on a First in First Out basis.

Concurrent with the final regulations, the agencies published proposed regulations that treat previously suspended losses as losses from a separate trade or business for purposes of 199A.

The preamble to the final regulations reviews other loss issues—such as ordering rules for the use of suspended active business losses, methods for tracing losses to various trades or businesses, whether a loss retains its character, and whether a 199A deduction is a loss for calculating the loss limitation under IRC § 461(l)—for which taxpayers need further guidance. The agencies state that these issues are beyond the scope of the 199A regulations and will be addressed in future guidance.

The final regulations retain the proposed regulations' treatment of NOLs and excess business losses with respect to calculating QBI. While a deduction under § 172 for a net operating loss is generally not considered to be with respect to a trade or business and is not taken into account in determining QBI, an excess business loss under 461(l) is treated as a net operating loss carryover to the following taxable year and is taken into account for purposes of computing QBI in the subsequent taxable year in which it is deducted.

Certain Above-the-line Deductions and QBI [§ 1.199A-3(b)(1)(vi)]

The proposed regulations were silent as to the treatment of the deductible portion of the self-employment income tax under § 164(f), the self-employed health insurance deduction under § 162(l), and the deduction for contributions to qualified retirement plans under § 404 for purposes of calculating QBI. The final regulations clarify that these deductions are taken into account for purposes of computing QBI to the extent that the individual’s gross income from the trade or business is taken into account in calculating the allowable deduction, on a proportionate basis. The agencies declined to address whether deductions for unreimbursed partnership expenses, interest expense to acquire a partnership or S corporation interest, and state and local taxes are attributable to a trade or business for purposes of the QBI calculation.

Guaranteed Payments and QBI [§ 1.199A-3(b)(2)]

The final regulations did not adopt comments suggesting that guaranteed payments for the use of capital are generally attributable to a trade or business and should be QBI. The agencies state in the summary that guaranteed payments for the use of capital should be treated in a manner similar to interest income. Under the “unlikely fact pattern” that these payments are property allocated to a trade or business, they would constitute QBI. The final regulations do specify that payments to partners for services under section 707(a) are similar to guaranteed payments, reasonable compensation, and wages and are excluded from QBI.

Reasonable Compensation [§ 1.199A-2]

The final regulations do not impose any reasonable compensation requirement on non-S corporation entities. They do clarify that reasonable compensation is excluded from the definition of QBI, but that it is included as W-2 wages for the purposes of theW-2 wage limitation to the extent all other requirements of that provision are met. The agencies refused to provide any safe harbor or bright line guidance with respect to proper reasonable compensation.

Gains and Losses as QBI (1231, 1245, 1250) [§ 1.199A-3(b)(2)]

The final rules reiterate that for purposes of calculating QBI, taxpayers must net their section 1231 gains and losses from multiple trades or businesses to determine whether they have excess gain (which means no QBI) or excess loss (which means QBI loss). This includes incorporating the 1231(c) recapture rule.

Despite the rule, the final regulations remove the specific reference to § 1231 and provide that any item of short-term capital gain, short-term capital loss, long-term capital gain, or long-term capital loss, including any item treated as one under any other provision of the Code, is not taken into account when calculating QBI. Conversely, if an item is not treated as capital, it is taken into account as a qualified item of income, gain, deduction, or loss. This was meant to clarify that items of gain such as 1245 recapture, not treated as capital, are included in the QBI calculation. Rather than listing specific code provisions, the agencies opted for a definitional approach.

Allocation of QBI among Trades or Businesses [§1.199A-3(b)(5)]

The final regulations retain the rule in the proposed regulations that taxpayers may use “any reasonable method under all facts and circumstances” to allocate QBI among several trades or businesses. Once a method is chosen, however, it must be applied consistently with respect to that item until it is no longer reasonable under the facts and circumstances.

Aggregation [§ 1.199A-4]

The final regulations continue to allow aggregation of multiple trades or businesses for purposes of applying the W-2 wage and UBIA of qualified property limitations.

Aggregation Requirements

The final regulations generally retain the aggregation factors provided in the proposed regulations, with some modifications. For example, the language was modified to clarify that real estate trades or businesses may be aggregated. The requirements in the final regulations are as follows:

  1. Each trade or business is a trade or business (with a special exception for self-rentals)
  2. The same person or group must directly or indirectly (by attribution under IRC § 267(b) or 707(b)) own 50 percent or more of each trade or business to be aggregated for a majority of the year (ownership must exist for majority of year, including the last day of the year and all of the items must be reported on returns with the same taxable year) [NoteFamily attribution rules now include grandparents, adopted grandchildren and siblings, in addition to spouses, parents, and children.]
  3. None of the trades and businesses can be SSTBs
  4. Individuals and trusts must show that the trades or businesses meet two of the following three factors:
    1. The businesses provide products, property, or services that are the same or that are 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 on, other businesses in the aggregated group (for example, supply chain interdependencies)

RPEs May Aggregate

The final regulations also permit RPEs to aggregate trades or businesses if operated directly or through lower-tier RPEs. The resulting aggregation must be reported by the RPE and by all owners of the RPE. An individual or upper-tier RPE may not separate the aggregated trades or businesses of a lower-tier RPE, but instead must maintain the lower-tier RPE’s aggregation. An individual or upper-tier RPE, however, may aggregate additional trades or businesses with the lower-tier RPE’s aggregation as long as the aggregation rules are satisfied.

Aggregation Mechanics

The final rules specify that a taxpayer who does not aggregate may aggregate in future years. Once the taxpayer chooses to aggregate, however, the taxpayer must continue to aggregate unless there is a material change in circumstances that would cause a change to the aggregation. Moving forward, an aggregation decision may not be made on an amended return. However, the final regulations provide that taxpayer may make an initial aggregation decision on an amended return for the 2018 taxable year only. The final regulations retain the annual disclosure requirement provided in the proposed regulations. RPEs who choose to aggregate under the new rules must also follow reporting and disclosure rules. 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. The final regulations provide aggregation examples to illustrate the rules.

SSTB Clarifications [§ 1.199A-5]

The final regulations make some changes and clarifications with respect to the determination of specified service trades or businesses.


The summary of the final regulations clarify that the sale of pharmaceuticals or medical devices by a retail pharmacy is not by itself a trade or business performing services in the field of health. The final regulations also include an example of an assisted living facility that is not considered a health care facility. The summary specifies that radiologists, veterinarians, and physical therapists are providing services in the field of health. 


The final regulations specify that services provided by engineers and architects cannot be considered to be SSTB, even if their services would otherwise meet the definition of consulting services.

Financial Services

The final regulations summary states that the provision of investment services by insurance agents, to the extent they are ancillary to the commission-based sale of an insurance policy, will generally not be considered the provision of financial services for purposes of section 199A.


The final regulations specify that that the definition of dealing in commodities for purposes of 199A is limited to a trade or business that is dealing in financial instruments or otherwise does not engage in substantial activities with respect to physical commodities. As such, producers, processors, grain merchants, or handlers of commodities would not be SSTB. Similarly, income, deduction, gain, or loss from a hedging transaction entered in the normal course of a commodities business will not be SSTB. A sale by a trade or business of commodities held for investment or speculation is not a qualified active sale.

De Minimis Rule

The proposed regulations set forth a de minimis rule that allows trades or businesses that have very little SSTB activity to benefit from the deduction. The threshold for trades or businesses with less than $25 million of gross receipts is 10 percent, and for trades or businesses with more than $25 million of gross receipts it is 5 percent.  The final regulations retained the de minimis rule, but clarify that RPEs can have multiple trades or businesses and that each trade or business is separately tested to see if it is an SSTB. The de minimis threshold is applied separately to each trade or business, not in the aggregate.The regulations also seem to clarify that this rule operates as a cliff. If the gross receipts of the SSTB activity exceeds the threshold by a dollar, the entire trade or business is an SSTB.

The final regulations do remove the 80 percent rule set forth in the proposed regulations. This rule stated that an SSTB included any trade or business with 50 percent or more common ownership (directly or indirectly) that provided 80 percent or more of its property or services to an SSTB. The final regulations instead just provide that if a trade or business provides property or services to an SSTB and there is 50 percent or more common ownership of the trade or business, the portion of the trade or business providing property or services to the commonly-owned SSTB will be treated as a separate SSTB with respect to related parties.  

Reporting Requirements for RPEs [§ 1.199A-6]

An RPE that chooses to aggregate can report combined QBI, W-2 wages, and UBIA of all qualified property for the aggregated trades or businesses. This aggregation must then be maintained and reported by all direct and indirect owners of the RPE, including upper-tier RPEs.

The final regulations clarify that if an RPE fails to report one item to its owner, all items related to 199A should not be presumed to be zero. The RPE can report W-2 wages and not UBIA. It is only the unreported item that is presumed to be zero. This information can also be reported on an amended or late filed return for any open tax year.

The final regulations make several clarifications with respect to trusts and estates. For purposes of determining whether a trust or estate has income above the threshold, the taxable income of the trust or estate is determined after taking into account any distribution deduction. The final regulations continue to require trusts that are RPEs to allocate QBI (which may be negative) to its beneficiaries, based upon the relative portions of DNI distributed to them.

Non Calendar-Year RPE [§ 1.199A-6]

Section 199A(f)(1) provides that 199A applies at the partner or S corporation shareholder level and that each partner or shareholder takes into account such person’s allocable share of each qualified item. These include items included or allowed in determining taxable income from the taxable year. Section 199A applies to taxable years beginning after December 31, 2017. There is no statutory requirement under 199A that a qualified item arise after December 31, 2017. As such, the final regulations provide that income flowing to an individual from a partnership or S corporation is subject to the tax rates and rules in effect in the year of the individual in which the entity’s year closes. Thus, if an individual receives QBI, W-2 wages, UBIA of qualified property, and the aggregate amount of qualified REIT dividends and qualified PTP income from an RPE with a taxable year that begins before January 1, 2018 and ends after December 31, 2017, such items are treated as having been incurred by the individual during the individual’s tax year during which such RPE taxable year ends. 



[i] Commissioner v. Groetzinger, 480 U.S. 23, 35 (1987).

[ii] Higgins v. Commissioner, 312 U.S. 212 (1941)