United States

Final section 199A regs weigh actions for financial services firms

INSIGHT ARTICLE  | 

The Treasury Department and the IRS issued proposed regulation section 1.199A-3(d) Friday, Jan. 18, 2019, permitting registered investment companies (RICs) (mutual funds and business development companies (BDCs) that have elected and qualify for RIC tax treatment) that receive qualified real estate investment trust (REIT) dividends to pay section 199A dividends to their shareholders. As a result, individual (noncorporate) shareholders of a RIC may benefit from the 20 percent deduction provided by the 2017 tax law changes for dividends from REITs. To benefit, the shareholder must hold the RIC shares for more than 45 days during the 91-day period beginning 45 days before the ex-dividend date of the designated dividend. 

Taxpayers may rely upon this proposed regulation immediately.

The rules for computing and reporting a RIC’s designation of section 199A dividends to its shareholders are similar to the rules for capital gain and exempt interest dividends. As is the case with exempt interest dividends, the amount of a RIC's section 199A dividends for a taxable year is limited to the excess of the RIC's qualified REIT dividends for the taxable year over allocable expenses.

The proposed regulation provides the following example:

X is a corporation that has elected to be a RIC. For its taxable year ending March 31, 2019, X has:

        Qualified dividend income                                                      $      60,000                48%

        Taxable interest income                                                                    25,000                20%

        Qualified REIT dividends (a)                                                            25,000                20%

        Net short-term capital gain                                                              15,000                12%

                                                                                                                          $    125,000                100%

        Deductible expenses (b)                                                                  (15,000)

        Investment company taxable income                               $    110,000

        Net long-term capital gain                                                       $      25,000

        Qualified REIT dividend income:    

(a)   Qualified REIT dividends                                                        $      25,000

(b)   Less allocated deductions (20%)                                              (3,000)

        Maximum 199A designation                                                   $      22,000

On Dec. 31, 2018, X pays a single dividend of $100,000 and reports $20,000 of the dividend as a section 199A dividend in written statements to its shareholders.

On March 31, 2019, X pays a dividend of $35,000, and reports $5,000 of the dividend as a section 199A dividend in written statements to its shareholders. This $5,000 is a post-December reported amount.”

Since the maximum amount that may be designated to shareholders for the March 31, 2019, fiscal year is $22,000, the excess reported amount is $3,000 ($25,000-$22,000). The proposed regulation requires that the post-December reported amount ($5,000) be reduced by the excess reported amount ($3,000). Shareholders should be eligible to treat $20,000 as qualified REIT dividends in 2018 and $2,000 in 2019.

Assuming the ex-dividend dates for the dividends were Dec. 28, 2018, and March 28, 2019, only shareholders that held shares for more than 45 days during the period Nov. 13, 2018, through Feb. 12, 2019, may claim the 199A deduction with respect to the dividends paid Dec. 31, 2018. Shareholders must have held shares for more than 45 days during the period Feb. 11, 2019, through May 13, 2019, to claim the 199A deduction with respect to the dividends paid March 31, 2019.

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