September 2019

September 2019

Final 199A Safe Harbor for Rental Real Estate Changes Little

On September 24, 2019, IRS issued Rev. Proc. 2019-38, the final safe harbor under which a rental real estate enterprise will be treated as a trade or business for purposes of IRC § 199A. This revenue procedure finalizes rules proposed by the IRS on January 18, 2019, in Notice 2019-07.  After reviewing comments on the proposed revenue procedure, the IRS and Treasury made few changes when finalizing the guidance.  Below is a summary of the final revenue procedure. Language in the final rule that differs from that in the proposed guidance is in italics.

The IRS and Treasury created the safe harbor to address concerns that whether an interest in rental real estate rises to the level of a trade or business for purposes of section 199A is the subject of uncertainty for some taxpayers. The safe harbor is designed to “help mitigate this uncertainty.”

The revenue procedure states that the safe harbor is available to taxpayers who seek to claim the section 199A deduction with respect to a “rental real estate enterprise.” If the safe harbor requirements are met, the rental real estate enterprise will be treated as a single trade or business for purposes of the qualified business income deduction, including for the application of the aggregation rules set forth in Treas. Reg. § 1.199A-4. Relevant pass through entities (RPEs) may also use the safe harbor. If an enterprise fails to satisfy the requirements of the safe harbor, the taxpayer or the IRS may still establish that an interest in rental real estate is a trade or businesses for purposes of section 199A if it otherwise meets the definition of trade or business in Treas. Reg. § 1.199A-1(b)(14).  

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Employers May Offer Individual Coverage HRAs in 2020

On September 30, 2019, IRS released proposed regulations clarifying the application of the employer shared responsibility provisions and nondiscrimination rules to individual coverage HRAs, authorized by final regulations issued June 20, 2019 (effective August 19, 2019). The new proposed rules provide safe harbors for applicable large employer (ALEs) who choose to provide individual coverage HRAs to their employees in 2020. These individual coverage HRAs may provide new savings to some employees without employer-provided group health care coverage. They do, however, come at the cost of rendering employees ineligible for a premium tax credit (PTC).

The June regulations sought to implement President Trump’s October 12, 2017, Executive Order 13813, which directed the agencies to propose guidance to expand employers’ ability to offer HRAs to their employees. The rules sought to restore some employer health plan options that existed before the Affordable Care Act.

Before the ACA, many small businesses, including farming businesses, reimbursed their employees for the cost of coverage they purchased on their own. This reimbursement was tax free to the employee and deductible by the employer. The ACA imposed a number of new “market reforms” that had to be included in all group health insurance policies.

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Final Rule Repeals WOTUS

On Thursday, September 12, 2019, the Environmental Protection Agency and the Department of the Army released a final rule to repeal the embattled 2015 Clean Water Rule, also known as WOTUS. The repeal will be effective 60 days after the rule’s publication in the Federal Register.

This repeal finalizes step one of a two-step process the Trump administration began in 2017 to replace the 2015 Rule, which has been the subject of court challenges since its inception. Step two will be to finalize the replacement rule. Last December, the agencies released a proposed replacement rule, which has generated approximately 620,000 comments. It is expected that they will finalize the replacement rule in the near future.

The rule repealing the 2015 Rule “recodifies” pre-2015 “waters of the United States” regulations until such time as the replacement rule is finalized. This means that the agencies will again apply pre-2015 guidance, informed by U.S. Supreme Court decisions, on a nationwide basis. Because of ongoing litigation, more than half the states never were subject to the 2015 Rule. Pre-2015 rules remained in place because court injunctions blocked the enforcement of WOTUS. Twenty-two states, however, were subject to the 2015 Rule, establishing a patchwork system where landowners were treated differently depending upon the state in which they lived. The repeal of WOTUS means that all U.S. landowners will again be subject to the same rule.

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