The Real Estate Roundtable, a national group representing a variety of real estate industry interests, has submitted comments on new proposed regulations under section 199A, the new 20 percent deduction for pass-through entities and sole proprietors. Along with others, Don Susswein, WNT Principal and National Leader of RSM’s Pass-through Tax Consulting Group, participated in the development and formulation of the comments as a member of the Roundtable’s Tax Policy Advisory Committee. The final comments included suggestions and insights from a number of other real estate and pass-through tax experts at RSM, including Ed Decker, Jacob Wilkinson, Nick Passini and Kyle Brown. Here are the key points made:
- UBIA Rules. Whether the taxpayer’s business property is a parcel of rental real estate or a factory, the qualifying tax basis (UBIA) of the property, and therefore the deduction in many cases, should not be limited or eliminated merely because it is contributed in a non-recognition transaction to a pass-through entity, or distributed by such an entity. The UBIA should simply carry-over, and be allocated in proportion to “book” depreciation, a result that is consistent with the statutory language.
- Single or Multiple Trades or Businesses. Given the importance of “trade or business” status to multiple issues under the statute, there needs to be clear rules for determining the “boundaries” of a trade or business — when multiple activities in a single entity are considered to be a single business or multiple businesses, and when activities conducted through multiple entities are considered to be multiple businesses or a single business.
- Aggregation Rules. Even if there are multiple businesses, particularly in the case of rental real estate, the wages and/or UBIA of multiple activities should be aggregated at the partner/shareholder/proprietor level, without regard to the taxpayer’s percentage of ownership of the activity or entity, similar to the workable approach to aggregating rental activities used by qualified real estate professionals.
- Rental Real Estate as a “Business.” Particularly in the case of rental real estate, importing the section 162 “trade or business” standard to section 199A is inappropriate. Congress did not intend rental activities, satisfying the qualifying basis or investment standard it created to serve in lieu of the wage test, to also have to demonstrate a minimum level of activity by employees or agents. Alternatively, regulations should specify what that standard is, since the law is quite unclear on how much activity is needed to qualify as a “trade or business” under section 162.
With the comment submission period now closed, attention has turned to the upcoming public hearing on the section 199A proposed regulations scheduled for the morning of Oct. 16. Stay tuned for more RSM insights as these highly anticipated proposed regulations continue through the rulemaking process on their way to final regulations.