Section 199A Regulations

<div class="Section1">Yes. While the safe harbor generally does apply to residential rental real estate, taxpayers are not entitled to rely upon the safe harbor if the taxpayer uses the property as a residence during the tax year. This exclusion applies to vacation properties that the taxpayer rents when not using the property for personal reasons. Notably, if the real estate is rented or leased under a triple net lease, the safe harbor remains unavailable under the final rule.</div><br /> <div class="Section1"><br /> <br /> When satisfying the “hours of rental real estate services” criteria, only certain activities are counted toward the 250-hour threshold that must be met in order to qualify to use the safe harbor rule. Activities such as rent collection, advertising the rental, property maintenance, negotiating leases and managing the real property generally count toward the threshold. However, financing activities and the construction of capital improvements to the property, as well as hours spent traveling to and from the real property, are excluded (in other words, the taxpayer’s activities as an “investor” are not counted).<br /> <br /> If any property within the rental real estate enterprise is classified as a specified service trade or business, the safe harbor is unavailable for the entire business. Further, if the taxpayer rents the real property to a trade or business that is operated either by the taxpayer or an entity under common control, the safe harbor is unavailable.<a href="#_ftn1" name="_ftnref1">¹</a><br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.  Rev. Proc. 2019-38.<br /> <br /> </div>

<div class="Section1">Only pass-through entities that qualify as a “trade or business” are entitled to claim the new 20 percent deduction for qualified business income under Section 199A. Many business owners engaged in rental real estate activities had questioned whether their businesses would qualify for the deduction. In response, the IRS released proposed Revenue Procedure 2019-07, finalized by Revenue Procedure 2019-38, which provides a safe harbor so that rental real estate businesses will qualify as “trades or businesses” and can claim the 199A deduction if they satisfy certain criteria. For purposes of the safe harbor, “rental real estate enterprise” is defined to include any interest in real property held to generate rental or lease income, and can be comprised of an interest in a single property or multiple properties.</div><br /> <div class="Section1"><br /> <br /> To qualify under the safe harbor, the following requirements must be met:<br /> <blockquote>(1)  Separate books and records for each rental enterprise must be maintained,<br /> <br /> (2)  If the rental real estate enterprise has been in existence for less than four years, 250 or more hours of rental real estate services must be performed each year,<br /> <br /> (3)  If the rental real estate enterprise has been in existence for more than four years, at least 250 hours of rental real estate services must have been performed in at least three of the past five years (these services can be performed by employees or independent contractors of the business), and<br /> <br /> (4)  The taxpayer must maintain contemporaneous records regarding the rental real estate services that are performed each year, including time reports, logs or similar documents, with respect to (a) description of all services performed, (b) dates on which the services were performed and (c) who performed the<br /> services,<br /> <br /> (5)  The taxpayer must attach a statement to the relevant tax return indicating that the safe harbor is being relied upon.</blockquote><br /> To qualify under the safe harbor, the interest in real property must also be held directly by the taxpayer or through an entity disregarded as an entity separate from the owner (i.e., a single-member LLC).<a href="#_ftn1" name="_ftnref1">¹</a><br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.  Rev. Proc. 2019-38.<br /> <br /> </div>

<div class="Section1">The W-2 wage limitation and UBIA limitation only come into play if the taxpayer&rsquo;s income for the year exceeds the relevant threshold levels.&nbsp;Therefore, if the taxpayer&rsquo;s income for the year is $100,000, the QBI deduction is generally 20&nbsp;percent, or $20,000, depending upon the taxpayer&rsquo;s total taxable income for the year (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id=""></a> to Q <a href="javascript:void(0)" class="accordion-cross-reference" id=""></a>). However, in a more complicated situation, the deduction may be limited or phased out entirely, as discussed in detail in Q <a href="javascript:void(0)" class="accordion-cross-reference" id=""></a> and Q <a href="javascript:void(0)" class="accordion-cross-reference" id=""></a>, which explain how the QBI deduction is calculated if the taxpayer&rsquo;s income either exceeds the threshold levels, or is within the phase-out range.<div class="Section1"><br /> <blockquote><em>Example. </em>Ed, a sole proprietor, owns a business that generates $400,000 worth of QBI for the year. Ed pays $100,000 in W-2 wages and has $100,000 of qualified property. Ed&rsquo;s wife earns $200,000 for the year, bringing their total joint income to $600,000. Ed&rsquo;s income is technically below the relevant threshold for complete phase-out for joint returns, but, when combined with his wife&rsquo;s income, their total income exceeds the annual threshold amount.&nbsp;Therefore, the limitations apply, and the 20&nbsp;percent deduction no longer applies. Ed&rsquo;s deduction is limited to the greater of: 50&nbsp;percent of W-2 wages ($50,000) or the sum of 25&nbsp;percent of the W-2 wages of the business plus 2.5&nbsp;percent of the UBIA of all qualified property ($25,000 + $2,500 = $27,500). Ed&rsquo;s QBI deduction is therefore $50,000.</blockquote><br /> </div></div><br />

<div class="Section1">The Section 199A regulations impose certain reporting requirements on entities treated as “relevant pass-through entities” (RPEs). A RPE must identify on Schedule K-1 issued to owners, for any trade or business, the following information:</div><br /> <div class="Section1"><br /> <blockquote>Each owner’s share of QBI, W-2 wages and UBIA of qualified property attributable to each trade or business,<br /> <br /> Whether any of the trades or businesses is an SSTB, and<br /> <br /> On an attachment to Schedule K-1, the RPE must report each owner’s allocated share of any qualified REIT dividends or qualified PTP income or loss received by the RPE.</blockquote><br /> The entity must also report on Schedule K-1 any QBI, W-2 wages, UBIA of qualified property, or SSTB determinations that are reported to it by any other pass-through entity in which it owns a direct or indirect interest.<a href="#_ftn1" name="_ftnref1">¹</a><br /> <br /> If the RPE fails to satisfy these reporting requirements, the owner’s share of positive QBI, W-2 wages and UBIA of qualified property will be presumed to be zero.<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.  Treas. Reg. § 1.199A-6(b)(3)(ii).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.  Prop. Treas. Reg. § 1.199A-6(b)(3).<br /> <br /> </div>

<div class="Section1">The proposed regulations limit qualified trades or businesses for purposes of the Section&nbsp;199A deduction to trades or businesses that rise to the level of Section&nbsp;162 trades or businesses.&nbsp;This definition excludes the trade or business of being an employee.&nbsp;To qualify as a trade or business under Section&nbsp;162, the activity must be regular and continuous, and be carried on with a primary motive of generating income or profit.&nbsp;This definition would generally exclude rental real estate activities unless the individual can show that Section&nbsp;162 is satisfied (generally via a facts and circumstances analysis of the business owner&rsquo;s level of participation in the activity). <em><em>See</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8581">8581</a> for information about the IRS rules for rental real estate businesses.<div class="Section1"><br /> <br /> One exception to this rule applies with respect to rental or licensing of property that does not rise to the level of a Section&nbsp;162 trade or business, but where the property is rented or licensed to a commonly controlled business (i.e., 50&nbsp;percent ownership under&nbsp;Treasury Regulation Section&nbsp;1.199A-4(b)(1)(i)).<a href="#_ftn1" name="_ftnref1">¹</a><br /> <br /> </div><div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp; Treas. Reg. &sect;&nbsp;1.199A-1(b)(14). Also see IRS FAQs at https://www.irs.gov/newsroom/tax-cuts-and-jobs-act-provision-11011-section-199a-qualified-business-income-deduction-faqs.<br /> <br /> </div></div><br />

<div class="Section1">If a pass-through entity received income in a tax year that began before January 1, 2018, but after December 31, 2017 (i.e., a non-calendar year entity), the income is treated as though received or incurred in the year in which the entity’s tax year ends.<a href="#_ftn1" name="_ftnref1">¹</a> Therefore, these taxpayers will be entitled to claim the QBI deduction with respect to income received in 2017 if all other requirements for claiming the deduction are satisfied.</div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.  Treas. Reg. § 1.199A-1(f)(2).<br /> <br /> </div>

<div class="Section1">When the taxpayer’s income does not exceed the annual thresholds, the QBI deduction is calculated by adding:</div><br /> <div class="Section1"><br /> <blockquote>(1)  20 percent of the taxpayer’s total QBI amount, including QBI attributed to a specified service trade or business, and<br /> <br /> (2)  20 percent of the combined amount of qualified REIT dividends and 20 percent of qualified publicly traded partnership income.</blockquote><br /> This amount is then compared to 20 percent of the amount by which the taxpayer’s taxable income exceeds net capital gain. The lesser of the two amounts is the Section 199A deduction.<a href="#_ftn1" name="_ftnref1">¹</a><br /> <blockquote><em>Example</em>: Matt operates a qualified business that generates annually $100,000 from operations (the business’ QBI is $100,000) and has no capital gains or losses. After his allowable deductions that are not related to the business, his taxable income for the year is $81,000. Matt must compare 20 percent of his QBI for the year ($20,000) to 20 percent of his taxable income for the year ($16,200) (i.e., the amount by which his taxable income, $81,000, exceeds net capital gain for the year, $0). Matt’s Section 199A deduction is the lesser of the two, or $16,200.</blockquote><br /> If the total QBI amount is a negative amount, the portion of the 199A deduction related to QBI is zero for the year. In the next year, the negative amount is treated as negative QBI from a separate trade or business.<a href="#_ftn2" name="_ftnref2">²</a> If the REIT or PTP income is negative, that amount is treated as zero for the year, but must be carried forward to offset REIT dividends and qualified PTP income for the next year. W-2 and UBIA amounts from years where QBI was negative are not carried forward.<br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.  Treas. Reg. § 1.199A-1(c)(1).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.  Treas. Reg. § 1.199A-1(c)(2).<br /> <br /> </div>

<div class="Section1">The rules regarding aggregation under the Section&nbsp;199A regulations differ from existing rules regarding aggregation under the Section&nbsp;469 passive activity rules. Before aggregating, if the individual directly owns the entity, the taxpayer must first compute QBI, W-2 wages and UBIA for each business.&nbsp;The individual then combines those figures to apply the W-2 wage and UBIA limitations.<a href="#_ftn1" name="_ftnref1">¹</a><div class="Section1"><br /> <br /> Under the Section&nbsp;199A rules, businesses may be aggregated if the following specific requirements are satisfied:<br /> <ol><br /> <li>The same person or group of persons owns, directly or indirectly, 50&nbsp;percent or more of each business (family attribution rules apply to aggregate interests owned by spouses, children, grandchildren and parents<a href="#_ftn2" name="_ftnref2">²</a>) for the majority of the tax year;</li><br /> </ol><br /> <br /> <hr><br /> <br /> <strong>Planning Point:</strong>&nbsp;The individual who chooses to aggregate does not have to own 50&nbsp;percent or more of each business, so long as the ownership requirement is met by another person or group of persons.<br /> <br /> <hr><br /> <br /> <blockquote><em>Example</em>: Celia owns 60&nbsp;percent of three partnerships, and Larry owns 5&nbsp;percent of each of those three partnerships. Leslie owns 10&nbsp;percent of two of the partnerships.&nbsp;The entities satisfy all of the aggregation requirements listed below. Celia and Larry may aggregate all three partnerships. Leslie may aggregate the two partnerships in which she owns an interest.&nbsp;The partnerships are commonly controlled for purposes of all three individuals&mdash;it does not matter that only Celia owns more than a 50&nbsp;percent interest in the entities.</blockquote><br /> <ol start="2"><br /> <li>The &ldquo;control test&rdquo; is satisfied (i.e., 50&nbsp;percent common ownership test);</li><br /> <li>The entities share the same tax year so that all items to be aggregated are reported on returns within the same tax year (not taking into account short tax years);</li><br /> <li>None of the businesses to be aggregated are SSTBs;</li><br /> <li>Two of the following three requirements are satisfied: (a) the businesses must offer the same products or services (or those typically offered together), (b) the businesses must share facilities or other centralized functions (such as personnel, human resources, accounting, legal, purchasing, etc.), or (c) the businesses are operated in coordination with, or reliance upon, one or more businesses in the group.<a href="#_ftn3" name="_ftnref3">³</a></li><br /> <li>The business to be aggregated must qualify as a trade or business (i.e., under IRC Section&nbsp;162), rather than a hobby.</li><br /> </ol><br /> Activities are treated as a trade or business if the activity involves renting or licensing property to a commonly controlled entity (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id=""></a>).<br /> <br /> Aggregation must be reported consistently in all subsequent tax years. If the taxpayer acquires a new business that satisfies the above requirements, that new business may be aggregated with the existing group. If the aggregated group ceases to meet the above requirements, the aggregation will no longer apply.&nbsp;Taxpayers will be required to include certain information with their federal income tax returns each year regarding the aggregation requirements.<a href="#_ftn4" name="_ftnref4">⁴</a> Both the proposed and the final regulations provide that the choice as to whether to aggregate certain businesses is elective, but once the taxpayer makes the election, it cannot be revoked. However, newly acquired businesses may be added to an existing aggregation (either at the individual or entity level) if all of the regulations&rsquo; requirements are satisfied. Similarly, if an existing aggregation stops being permitted because of a change in circumstances, the businesses will no longer be aggregated.<a href="#_ftn5" name="_ftnref5">⁵</a><br /> <br /> <hr><br /> <br /> <strong>Planning Point:</strong> Aggregation for Section&nbsp;199A purposes takes place at the owner level under the proposed regulations.&nbsp;This means that one partner may choose to aggregate businesses, while another partner with ownership interests in the same businesses may not choose to aggregate those same businesses.<a href="#_ftn6" name="_ftnref6">⁶</a> Under the final regulations, aggregation is also permitted at the entity level.<a href="#_ftn7" name="_ftnref7">⁷</a><br /> <br /> <hr><br /> <br /> The choice as to whether to aggregate certain businesses is elective, but once the taxpayer makes the election, it cannot be revoked.<br /> <br /> <hr><br /> <br /> <strong>Planning Point:</strong> Aggregation can be useful in the case of business structures where one business may generate substantial income but has low W-2 wages, and the opposite is true for another business under common control.<br /> <br /> <hr><br /> <br /> Both the proposed and the final regulations provide that the choice as to whether to aggregate certain businesses is elective, but once the taxpayer makes the election, it cannot be revoked. However, newly acquired businesses may be added to an existing aggregation (either at the individual or entity level) if all of the regulations&rsquo; requirements are satisfied. Similarly, if an existing aggregation stops being permitted because of a change in circumstances, the businesses will no longer be aggregated.<a href="#_ftn8" name="_ftnref8">⁸</a><br /> <br /> </div><div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp; Prop.&nbsp;Treas. Reg. &sect;&nbsp;1.199A-4(b)(2).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp; Prop.&nbsp;Treas. Reg. &sect;&nbsp;1.199A-4(b)(3).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp; Prop.&nbsp;Treas. Reg. &sect;&nbsp;1.199A-4(b)(1),&nbsp;Treas. Reg. &sect;&nbsp;1.199A-4(b)(1).<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.&nbsp; Prop.&nbsp;Treas. Reg. &sect;&nbsp;1.199A-4(c).<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>.&nbsp; Treas. Reg. &sect;&nbsp;1.199A-4(b)(2).<br /> <br /> <a href="#_ftnref6" name="_ftn6">6</a>.&nbsp; Prop.&nbsp;Treas. Reg. &sect;&nbsp;1.199A-4(b)(2).<br /> <br /> <a href="#_ftnref7" name="_ftn7">7</a>.&nbsp; Treas. Reg. &sect;&nbsp;1.199A-4(a).<br /> <br /> <a href="#_ftnref8" name="_ftn8">8</a>.&nbsp; Treas. Reg. &sect;&nbsp;1.199A-4(b)(2).<br /> <br /> </div></div><br />

<div class="Section1">No. The regulations added a new provision that requires aggregation of two or more trusts if the trusts have substantially the same grantor or grantors, and substantially the same beneficiary or beneficiaries, if the principal purpose of forming the trust or contributing additional assets to the trust is the avoidance of income tax. A principal purpose of avoiding tax is presumed if significant tax benefits are created, unless a significant non-tax benefit can be shown.<a href="#_ftn1" name="_ftnref1">¹</a></div><br /> <div class="Section1"><br /> <blockquote><em>Example</em>: Amy owns and operates a pizzeria and several gas stations. Amy’s annual income from these businesses and other sources exceeds the Section 199A threshold amount, and the W-2 wages properly allocable to these businesses are not sufficient for her to maximize the QBI deduction. Amy reads an article that suggests that taxpayers can avoid the W-2 wage limitation of Section 199A by contributing portions of their family businesses to multiple identical trusts established for family members. Based on this advice, in 2018, Amy establishes three irrevocable, non-grantor trusts: Trust 1 for the benefit of Amy’s sister, Betty, and Amy’s brothers, Chuck and Dan; Trust 2 for the benefit of Amy’s second sister, Emily, and for Chuck and Dan; and Trust 3 for the benefit of Emily. Under each trust instrument, the trustee is given discretion to pay any current or accumulated income to any one or more of the beneficiaries. The trust agreements otherwise have nearly identical terms. But for the enactment of Section 199A and Amy’s desire to avoid the W-2 wage limitation of that provision, Amy would not have created or funded such trusts. Amy names her oldest son, Fred, as the trustee for each trust.<br /> <br /> Amy forms a family limited partnership, and contributes the ownership interests in the pizzeria and gas stations to the partnership in exchange for a 50-percent general partner interest and a 50-percent limited partner interest. Amy later contributes to each trust a 15 percent limited partner interest. Under the partnership agreement, the trustee does not have any power or discretion to manage the partnership or any of its businesses on behalf of the trusts, or to dispose of the limited partnership interests without the approval of the general partner. Each of the trusts claims the Section 199A deduction on its Form 1041 in full based on the amount of QBI allocable to that trust from the limited partnership, as if such trust was not subject to the wage limitation in Section 199A(b)(2)(B). Under these facts, for Federal income tax purposes under this section, Trust 1, Trust 2, and Trust 3 would be aggregated and treated as a single trust.<a href="#_ftn2" name="_ftnref2">²</a></blockquote><br /> <br /> <hr /><br /> <br /> <strong>Planning Point:</strong> Significant non-tax reasons often include aggregation of ownership within the family, centralized asset management, avoidance of repetitive asset transfers within the family, asset protection or to relieve a transferring family member of asset management burdens.<br /> <br /> <hr /><br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.  Treas. Reg. § 1.643(f)-1.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.  Treas. Reg. § 1.643(f)-1(c), Example 1.<br /> <br /> </div>

<div class="Section1">If the taxpayer&rsquo;s income exceeds the relevant thresholds, the Section&nbsp;199A deduction is calculated by adding:<div class="Section1"><br /> <blockquote>(1)&nbsp; The QBI component (<em><em>see</em></em> below), and<br /> <br /> (2)&nbsp; 20&nbsp;percent of the combined amount of qualified REIT dividends and qualified PTP income.</blockquote><br /> This amount is then compared to 20&nbsp;percent of the amount by which the taxpayer&rsquo;s taxable income exceeds net capital gain.&nbsp;The lesser of the two amounts is the Section&nbsp;199A deduction.<a href="#_ftn1" name="_ftnref1">¹</a> For a relatively simple business with no qualifying REIT dividends or PTP income, the calculation is fairly straightforward, as illustrated in Example 1.<br /> <blockquote><em>Example 1</em>: Kevin owns land that is leased as beach parking in a tourist town. His business generated $1&nbsp;million QBI for the year, and paid no wages. His UBIA for the year was zero, because the land he owns is not depreciable and, as such, is not qualified property. After unrelated deductions, his taxable income was $980,000. He exceeds the threshold limits, so must complete the calculations regarding the W-2 wage and QBI limits. However, because both of these figures are zero, his QBI deduction is zero.</blockquote><br /> Before calculating the &ldquo;QBI component,&rdquo; the taxpayer must take the following computational steps to determine the figures that will apply in calculating the QBI component itself:<br /> <blockquote>(1)&nbsp; <em>SSTB Exclusion.</em>&nbsp;The SSTB exclusion (<em><em>see</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id=""></a>) is applied first. If the SSTB&rsquo;s income is within the phase-in range (<em><em>see</em></em> below), then the relevant&nbsp;percentage of QBI, W-2 wages and UBIA is taken into account. If the SSTB&rsquo;s income is above the phase-in range, none of the taxpayer&rsquo;s QBI, W-2 wages or UBIA are taken into account in calculating the deduction.<br /> <br /> (2)&nbsp; <em>Aggregation.</em> If the taxpayer aggregates businesses, the QBI, W-2 wages and UBIA of all businesses must first be aggregated before applying the W-2 and UBIA limits below.<br /> <br /> (3)&nbsp; <em>Netting.</em> If QBI from any one business is negative, the taxpayer must offset QBI from other businesses that had positive QBI for the year with the QBI from each business with negative QBI.&nbsp;This is done in proportion to the relative amounts of net QBI in the businesses with positive QBI.&nbsp;This &ldquo;adjusted QBI&rdquo; is used in figuring the deduction, as indicated below.</blockquote><br /> <p style="padding-left: 80px;"><em><em>See</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id=""></a> for a discussion of the &ldquo;phase out range.&rdquo;</p><br /> <br /> <br /> <hr><br /> <br /> <strong>Planning Point:</strong> Any W-2 wages or UBIA of qualified property are not considered or carried over to subsequent years if the business&rsquo; QBI was negative.<br /> <br /> <hr><br /> <br /> <blockquote>(4)&nbsp; <em>Carryover.</em> If QBI from <em>all</em> businesses is negative, the QBI component is zero.&nbsp;The negative amount is treated as negative QBI from a separate trade or business in the next year. <a href="#_ftn2" name="_ftnref2">²</a></blockquote><br /> At this point, the &ldquo;QBI component&rdquo; is the lesser of:<br /> <blockquote>(a)&nbsp; 20&nbsp;percent of QBI (as adjusted above) with respect to the trade or business, or<br /> <br /> (b)&nbsp; the greater of (x) 50&nbsp;percent of W-2 wage income or (y) the sum of 25&nbsp;percent of the W-2 wages of the business plus 2.5&nbsp;percent of the unadjusted basis, immediately after acquisition, of all qualified property (UBIA).<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> <em>Example 2:</em> Frank (single) owns a 50&nbsp;percent interest in Z-Mart, an S corporation that conducts a single trade or business. In 2023, Z-Mart had QBI of $6 million. Z-Mart paid total W-2 wages of $2 million, and its total UBIA of qualified property is $200,000. For 2023, Frank had $3 million of QBI from Z-Mart. Frank is not an employee of Z-Mart and receives no wages or reasonable compensation. After allowable deductions unrelated to Z-Mart and a deductible qualified net loss from a PTP of ($10,000), Frank&rsquo;s taxable income is $1,880,000.<br /> <br /> Because Frank&rsquo;s taxable income is above the threshold amount, the QBI component of Frank&rsquo;s Section&nbsp;199A deduction will be limited to the lesser of (i) 20&nbsp;percent of his share of Z-Mart&rsquo;s QBI or (ii) the greater of the W-2 wage and UBIA of qualified property limitations. 20&nbsp;percent of Frank&rsquo;s share of QBI of $3 million is $600,000.&nbsp;The W-2 wage limitation equals 50&nbsp;percent of Frank&rsquo;s share of Z-Mart&rsquo;s W-2 wages ($1 million) or $500,000.<br /> <br /> The UBIA of qualified property limitation equals $252,500, the sum of (i) 25&nbsp;percent of Frank&rsquo;s share of Z-Mart&rsquo;s W-2 wages ($1 million) or $250,000 plus (ii) 2.5&nbsp;percent of Frank&rsquo;s share of UBIA of qualified property ($100,000) or $2,500.&nbsp;The greater of the limitation amounts ($500,000 and $252,500) is $500,000.&nbsp;The QBI component of Frank&rsquo;s Section&nbsp;199A deduction is thus limited to $500,000, the lesser of (i) 20&nbsp;percent of QBI ($600,000) and (ii) the greater of the limitations amounts ($500,000). Frank had a qualified loss from a PTP and has no qualified REIT dividend. Frank does not net the ($10,000) loss against QBI. Instead, the portion of Frank&rsquo;s Section&nbsp;199A deduction related to qualified REIT dividends and qualified PTP income is zero for 2023.<br /> <br /> Frank&rsquo;s Section&nbsp;199A deduction is equal to the lesser of (i) 20&nbsp;percent of the QBI from the business as limited ($500,000) or (ii) 20&nbsp;percent of Frank&rsquo;s taxable income over net capital gain ($1,880,000 x 20% = $376,000).&nbsp;Therefore, Frank&rsquo;s section 199A deduction is $376,000 for 2023. Frank must also carry forward the ($10,000) qualified loss from a PTP to be netted against his qualified REIT dividends and qualified PTP income in the next taxable year.</blockquote><br /> <em><em>See</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id=""></a> for a discussion of the results if the business&rsquo; income is within the phase-out range.<br /> <br /> </div><div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp; Treas. Reg. &sect;&nbsp;1.199A-1(d)(1).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp; Treas. Reg. &sect;&nbsp;1.199A-1(d)(2).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp; IRC &sect;&nbsp;199A(b)(2),&nbsp;Treas. Reg. &sect;&nbsp;1.199A-1(d)(2)(iv)(A).<br /> <br /> </div></div><br />