A significant number of single-member and multi-member LLCs are S corporations, and many LLCs ought to be S corporations in order to maximize their IRC section 199A pass-through deductions. The post under the link below provides a brief but useful discussion of what an entity that ought to be an S corporation can do if it inadvertently allows its S election to terminate.
I recently published an article in the New Hampshire Bar News concerning the availability of section 199A deductions to New Hampshire lawyers. Since the article applies also to lawyers (and also to other professionals) in states besides New Hampshire, I’ve included a copy of the article at the link below:
A basic question for section 199A experts is when a business should elect to be a C corporation rather than a pass-through business. Below in quotes are the title, a listing about the author, and the first couple of paragraphs of an article in Tax Notes about C corporations and the Accumulated Earning Tax.
Now I Am a C Corp: What About the Accumulated Earnings Tax?
Cory J. Stigile
In this article, Stigile provides background on the accumulated earnings tax and explains the steps corporate taxpayers may be able to take if the government begins to more actively audit and litigate the accumulation of profits.
The Tax Cuts and Jobs Act reduced the corporate tax rate from 35 percent to 21 percent, providing an additional significant incentive to conduct business through a corporation. Shareholders may be tempted to keep additional earnings in the corporation, rather than declare a dividend or pay compensation subject to an additional layer of tax at the individual level. The accumulated earnings tax (AET) and other code provisions discussed below may now play a bigger role in curbing excessive accumulation of profits and some types of passive income in corporations without the payment of dividends. There are several steps taxpayers may take to prepare should the government begin more actively auditing and litigating these issues.
Below is a citation for an excellent article about the treatment of losses under section 199A, in the latest issue of the ABA’s Tax Lawyer:
72 Tax Law. 401
American Bar Association Section of Taxation
Copyright © 2019 by American Bar Association; American Bar Association Section of Taxation
COMMENTS CONCERNING THE TREATMENT OF LOSSES AND CERTAIN OTHER ISSUES REGARDING THE SECTION 199A DEDUCTION
Below is a link to an excellent post from the FarrellFritz law firm about selling a business to maximize its owners’ section 199A deductions.
You can access and print out the above forms, as released on April 16, under this link:
To access the long form directly from the IRS, click here:
To obtain the short form, use this link:
Under the link below is an web page from which you can download the overview of the section 199A pass-through deduction provided by the U.S. Congress Joint Committee on Taxation. Every legal and tax professional who represents owners of closely-held businesses should be familiar with these slides, and many of these professionals may want to provide copies of the slides to their business owner clients.
Here is the link: https://www.jct.gov/publications.html?func=startdown&id=5171
The IRS has just issued several corrections of the section 199A final regulations issued on February 8, 2019. The corrections are set forth below. Section 199A specialists should, of course, be aware of all of them, but none of them appears to me to correct important or non-obvious substantive errors.
ADVANCE RELEASE Documents
ADVANCE RELEASE Documents,T.D. 9847, Correction,Internal Revenue Service,(Apr. 17, 2019)
Itemized deductions: Qualified business income deduction: W-2 wages: Distributable net income: Corrections
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
Qualified Business Income Deduction; Correction
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final regulations; correction.
SUMMARY: This document contains corrections to final regulations (TD 9847) that were published in the Federal Register on Friday, February 8, 2019. The final regulations are concerning the deduction for qualified business income under section 199A of the Internal Revenue Code.
DATES: This correction is effective on [INSERT DATE OF PUBLICATION IN THE FEDERAL REGISTER] and is applicable on or after February 8, 2019.
FOR FURTHER INFORMATION CONTACT: Vishal R. Amin or Sonia K. Kothari at (202) 317-6850 or Robert D. Alinsky, Margaret Burow, or Wendy L. Kribell at (202) 317-5279.
The final regulations (TD 9847) that are the subject of this correction are issued under sections 199A and 643 of the Internal Revenue Code.
Need for Correction
As published, the final regulations (TD 9847) contain errors that may prove to be misleading and are in need of clarification.
Correction of Publication
Accordingly, the final regulations (TD 9847), that are the subject of FR Doc. 2019-01025, which published on February 8, 2019 (84 FR 2952), are corrected as follows:
|1.||On page 2954, second column, in the preamble, under the paragraph heading “2. Relevant Passthrough Entity”, the thirteenth line, the language “trust funds as described in §1.6032-T” is corrected to read “trust funds as described in §1.6032-1T”.|
|2.||On page 2955, second column, in the preamble, under the paragraph heading “b. Rental Real Estate Activities as a Trade or Business”, the fifth line from the bottom of the first full paragraph, the language “respect to any real estate rental of which” is corrected to read “respect to any rental real estate of which”.|
|3.||On page 2955, third column, in the preamble, the seventh line from the bottom of the first full paragraph, the language, “07, 2019-9 IRB,” is corrected to read “07, 2019-9 IRB 740,”.|
|4.||On page 2957, second column, in the preamble, the fourth line from the bottom of the last partial paragraph under the paragraph headings “C. Other Comments” , the language “section 199A and 1.199A-1 through” is corrected to read “section 199A and §§1.199A-1 through”.|
|5.||On page 2963, second column, in the preamble, the twelfth line, under the paragraph heading “8. Interaction of Sections 857(l) and 199A, the language “section 199A” is corrected to read “section 199A)”.|
|6.||On page 2963, third column, in the preamble, the fifth sentence of the second full paragraph, under the paragraph heading “8, the language “A rental real estate enterprise that meets the safe harbor described in Notice 2017-07, released concurrently with these final regulations, may also treated as trades or businesses for purposes of section 199A.” is corrected to read “A rental real estate enterprise that meets the safe harbor described in Notice 2019-07, released concurrently with these final regulations, may be also be treated as a trade or business for purposes of section 199A.”.|
|7.||On page 2968, second column, in the preamble, under section “ C. Aggregation by RPEs ”, the eleventh line from the bottom of the paragraph, the language “4(c)(1).” is corrected to read “4.”.|
|8.||On page 2969, third column, in the preamble, the eighth line from the bottom of the paragraph, the language “look to the definitions provided for in” is corrected to read “look to the definitions provided in”.|
|9.||On page 2969, third column, in the preamble, the fifteenth line, the language “engineering architecture, accounting,” is corrected to read “engineering, architecture, accounting,”.|
|10.||On page 2970, first column, in the preamble, the second line from the bottom of the last partial paragraph, the language “of the listed fields in section 199(d)(2)” is corrected to read “of the listed fields in section 199A(d)(2)”.|
|11.||On page 2976, third column, in the preamble, the second line under the paragraph heading “ C. Services or Property Provided to an SSTB , the language “special rules for service or property” is corrected to read “special rules for services or property”.|
|12.||On page 2979, second column, in the preamble, the second line under the paragraph heading “3. ESBTs”, the language “proposed regulation’s position on” is corrected to read “proposed regulation’s position on an”.|
|13.||On page 2988, first column, in the preamble, before the caption “ Drafting Information ” is amended by adding section III. to read as follows:|
III. Congressional Review Act
The Administrator of the Office of Information and Regulatory Affairs of the Office of Management and Budget has determined that this is a major rule for purposes of the Congressional Review Act (CRA) (5 U.S.C. 801 et. seq.) Under section 801(3) of the CRA, a major rule takes effect 60 days after the rule is published in the Federal Register. Notwithstanding this requirement, section 808(2) of the CRA allows agencies to dispense with the requirements of 801 when the agency for good cause finds that such procedure would be impracticable, unnecessary, or contrary to the public interest and that rule shall take effect at such time as the agency promulgating the rule determines.
Pursuant to section 808(2) of the CRA, the Treasury Department and the IRS find, for good cause, that a 60-day delay in the effective date is unnecessary and contrary to the public interest. Section 199A was enacted on December 22, 2017, and applies to taxable years beginning after December 31, 2017, and before January 1, 2026. This means that the statute is currently effective and that taxpayers may claim the deduction when filing their U.S. federal income tax returns for taxable years ending in calendar year 2018. The Treasury Department and the IRS have determined that the rules in this Treasury decision are generally applicable to taxable years ending after February 8, 2019, the date this Treasury decision was published in the Federal Register. Sections 1.199A-1(f), 1.199A-2(d), 1.199A-3(d), 1.199A-4(e), 1.199A-5(e), 1.199A-6(e), and 1.643(f)-1(b) are applicable for taxable years ending after August 16, 2018, the date that the proposed regulations were published in the Federal Register. However, taxpayers may rely on the rules set forth in §§1.199A-1 through 1.199A-6, in their entirety, or on the proposed regulations under §§1.199A-1 through 1.199A-6 issued on August 16, 2018, in their entirety, for taxable years ending in calendar year 2018. These final regulations provide crucial guidance for taxpayers on how to apply the rules of section 199A, correctly calculate their deduction under section 199A, and to accurately file their U.S. federal income tax returns.
Martin V. Franks
Publications and Regulations Branch
Legal Processing Division
Associate Chief Counsel
(Procedure and Administration)
Practical Tax Strategies, an excellent tax journal, has just published a very useful article about how to structure business operations between spouses. The title of the article and its first couple of paragraphs are below:
Business Operations Between Spouses
Copyright (c) 2019 RIA
James R. Hamill
BUSINESS OPERATIONS BETWEEN SPOUSES: PARTNERSHIP FILING OR DISREGARDED ENTITY?
The tax law provides both a statutory and an administrative exception to the requirement to file a partnership return where spouses are the only owners of the business.
*9 Section 6031 requires a partnership to file an annual information return to its members. When spouses operate a business together as the only owners of that business, there would not appear to be a need for a partnership tax filing as an information source because all income or loss is to be reported on the same tax return by way of a joint filing.
The tax law provides both a statutory and an administrative exception to the requirement to file a partnership return where spouses are the only owners of the business. The statutory exception applies only to joint ventures (but not a separate entity) between spouses and also requires that each spouse materially participate in the business of the joint venture and that both spouses elect disregarded entity (DE) treatment. Where spouses are the only owners of an unincorporated business entity and hold their interests as community property under state law, they may choose between partnership or DE status. The community property exception does not require that the operations rise to the level of a trade or business or that either spouse materially participate in the operations. It also applies if the spouses establish a separate entity such as a limited liability company (LLC).
The Joint Committee on Taxation has released a slide show about section 199A. I have not yet had time to review any of the 27 slides included in the show, and to my knowledge, the JCT has not yet released a link for the show; I know about it through the March 15th edition of the CCH daily tax information service. However, it is clear that every lawyer, accountant and other professional who advises clients under section 199A must be familiar with these 27 slides.