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On-Demand: Tax Cuts & Jobs Act | Impact on Pass Through Entities

Oct 31, 2018

This webinar provides a framework for understanding and addressing the Tax Cuts and Jobs Act’s impact on pass-through entities.


Jeff Kelson: Thank you. And good afternoon, everyone. The 199A deduction has been in the news quite a bit and we have a lot to cover in the next 50 minutes. We're going to ask that the questions be at the end, so we can get through the materials. As everyone knows, the Tax Cuts and Jobs Act was signed into law in December 22nd of 2017, effective this year for most part. It created the new Section 199 CAP A, which allows owners, which includes trust and estate, sole proprietor ships, partnerships, S corps to deduct up to 20% of the qualified income earned by the business from the tax returns of their shareholders, partners, et cetera.

This provision sunsets. Scheduled to sunset in 2025 unless any changes to the law are made between now and then. So we might have this around forever, but we have it around for the foreseeable future. August 8, 2018 was an important day in the life of 199A because regulations were issued that dealt with a lot of the open questions that surrounded section 199A. These are proposed regs so they will become final one day and could change. But right now they can be relied upon. We find them to be generally tax payer friendly.

And they definitely provide clarification in operation rules while leaving still some items open, as we'll see at the very end. Let's see what we're going to cover today. The areas to be covered. I just want to move the ... We're going to expand on the definition of a specified service, trade, or business. Otherwise known as the SSTB. Although those types of businesses, they don't quality. The de minimus exception to be considered an SSTB when a business sells both a product and performs services and other special roles relating around.

We're also going to talk about how the treasury addressed the so called crack and pack rules when you break apart, existing businesses become under the QBI umbrella. The aggregation of commonly controlled businesses which is one of the highest priorities. The allocation of qualified business losses. Determining what are W2 wages and how does it apply in a situation where there's a employee leasing company, PEOs. Treatment of employees who turn independent contractors shortly thereafter. Miscellaneous provision and as I mentioned, areas where guidance is needed. So we got our first polling question.

Moderator: We have now reached polling question number one, what type of entity is your company currently? (A) C Corporation. (B) Subchapter S, (C) LLC or LLT, (D) Other. Please remember in order to qualify for your CPE certificate, you must remain logged on for at least 50 minutes and answer three out of the four polling questions. We'll give everyone a few more seconds to respond. Okay, we are now closing the poll and sharing the results.
Jeff Kelson: Lots of LLCs. We're going to now get into how does the deduction work from a computational standpoint. And it's a little more complicated than you might think, just listening or reading the bill itself. And Allyson Milbrod will take you through that.
Allyson Milbrod: Good afternoon everybody. We thought it would be a good idea to have a refresher on the mechanics on how to calculate the QBI deduction. First QBI or Qualified Business Income is trade of business income. It's not interest income, dividend income, or capital gains. It's not shareholder wages or guaranteed payments and must be in the form from domestic sources or from Puerto Rico.

For each pass through entities that a taxpayer has, you'll have to go through this calculation to come up with the QBI deduction. You have to take the lesser of 20% of QBI from the pass through entity, or the greater of the general rule which is 50% of the taxpayer's allocable share of W2 wages from the entity or the alternative method which is 25% of allocable share of W2 wages from the entity plus two and a half percent multiplied by the unadjusted cost of the entity's qualified property assets.

This will give you the taxpayer's tentative QBI deduction. Then you go on to test two. Which is your QBI deduction is limited to 20% of the taxpayer's taxable income without regards to the QBI deduction, excluding capital gains. This is important. It is taxable income, not adjusted gross income.

There are some exceptions to note. The first is the W2 limits, test one. This would not apply for taxpayers who are below certain thresholds. For married filing joint, it's fully phased out once you meet $415,000. And for all other taxpayers, at a $157,500.
Jeff Kelson: So fully phase out at $207,000.
Allyson Milbrod: Yes, sorry, thank you. Also income from an SSTB, or specified service business, which is normally not eligible for QBI would be eligible for QBI if you're under these threshold amounts.
Jeff Kelson: So I think that this ... This is an interesting differentiation between the type of entity you'd want to have, depending on the income from the entity. For instance, if you're a sole proprietor or a LLC that doesn't have the ability to pay yourself wages, if you're under this provision, you don't have to worry about wages, right Allyson? And that secondly, you don't have to worry about wages and it's beneficial because you don't have a reasonable compensation imputed for LLCs and sole proprietor ships. So if you're under those income levels, it's definitely beneficial to be a sole proprietor LLC.

If you're over, then it changes to be more beneficial to be an F corporation. Because an F corporation can pay wages to its owners. It has more control over how much of the deduction it can achieve. So it's funny how it's different depending on the income level.
Allyson Milbrod: Okay. So now to give you an example. A is married and files a joint return. A is allocated is $800,000 of QBI, $300,000 of wages and $200,000 of unadjusted cost basis from property placed in service last year from LLC1, which is not an SSTB. A spouse is allocated $500,000 of QBI, $100,000 of wages and zero cost basis from LLC2. Note, LLC2 is an SSTB. A's taxable income before any QBI deduction is $1,000,000, what is A's QBI deduction.

First, you need to do the calculation to come up with a tentative QBI deduction for both LLC1 and LLC2. So for LLC1, test one, you take the lesser of the $800,000 QBI times 20 percent which gives you the $160,000. Or the greater of the $300,000 of wages times 50% which is $150,000. Or the alternative test which is the $300,000 of wages times 25% which gives you $75,000 plus the $200,000 of unadjusted cost basis times 2.5% which is $5,000. That added together is $80,000. For LLC1, the tentative QBI is the lesser of the $160,000 or the $150,000 which is the $150,000.

Then you go on to LLC2. Since LLC2 is an SSTB, there would be no QBI. Note, that the taxable income is over the threshold for married filing joint, so we cannot get the QBI for the SSTB. Then you go on to test two which is a taxable income limitation. If you take the one million dollars of the taxable income times 20%, that gives you the $200,000. So in this case, A's QBI deduction is going to be the lesser of the tentative deduction of $150,000 from above or the taxable income limitation of the $200,000 above. So in this case, A's QBI deduction will be the $150,000.

SSTB and the catch all provision. As noted, the 20% QBI deduction is based on qualified business income. The statute listed a whole host of services known as SSTB. They defined it as any business involving the performance of services in the fields of health, law, accounting, consulting, athletics, financial services, brokerage services, or any other business which involves the performance of services which involve the performance of investing, investing management, trading, or dealing in securities, partnership interests or commodities.

The catch all provision which is highlighted in red is a business with a principle assets of such trade of business is a reputation or skill or one of more of its employees or owners. Well what did that really mean? If you had a plumber in a plumbing business, did that taint all the income? The proposed regulations address this situation and was very favorable to taxpayers.

In fact, the IRS took a narrow approach to this catch all provision. Under this provision, income will be considered an SSTB if a taxpayer receives fees, compensation or other income for endorsing products or services or appearing at events or receives fees for an individual's image, likeness, voice, or trademark. You can see from this they took a very narrow approach.
Jeff Kelson: Which is a taxpayer friendly part of these regs definitely.
Allyson Milbrod: To illustrate in an example. H is a well known chef and the sole owner of multiple restaurants, each of which is owned in a disregarded entity. Due H's skill and reputation as a chef. H receives an endorsement fee of $500,000 for the use of H's name on a line of cookware. In this example, is any of H's income eligible QBI? The income H receives from the restaurant will be considered eligible QBI because it's from a trade of business. However, the endorsement fee of $500,000 is a receipt of an endorsement fee for H's skill and/or reputation. And therefore is an SSTB under the catch all and is not eligible QBI. Note this income would quality for QBI is H's overall taxable income, however, was under the threshold.
Moderator: We have now reached polling question number two. The IRS took a narrow approach to the catch all definition of a specified service business. (A) True. (B) False. Please remember in order to receive your CPE certificate, you must remain logged on for at least 50 minutes and respond to three out of the four polling questions. We'll give you a few more seconds to respond. We are now closing the poll and sharing the results.
Allyson Milbrod: Okay yes. The answer is true. The IRS did take a narrow approach to the catch all definition of a specified service business which we all agree is very taxpayer friendly.
Jeff Kelson: Now in the regulations, they have something called special rules. And we're going to take them. The first one is de minimus role. How do you handle entities that have both SSTB and non SSTB or trade of business services or products? In the proposed regulations, there's a de minimus exception for the business to avoid being treated as a SSTB. And they have it based on gross receipts. Let's look at this for a second.

If you have gross receipts of 25 million dollars or less in a tax year and less than 10% of the gross receipts are attributable to a qualified service SSTB, less than 10, then you didn't taint the income there because it's a de minimus amount of SSTB income. If the gross receipts are 25 million or more, then the threshold goes from 10% to five percent. So you would need to keep your SSTB receipts under five percent of the total.

The example is XYZ has revenue of 20 million. So it's under the 25, right? 18.5 million of revenue is attributable to sales of computers which is not QBI income. Which is not SSTB, it's good income. And the remaining one and a half million which is seven and a half percent is attributable to consulting which is SSTB income. Because XYZ company's consulting services comprised of less than 10%, all the income will be treated as non SSTB and you're good.

If you had gone over that amount, if you had gone over two million dollars in SSTB income, it would have tainted all of the income as being disqualified and not able to enjoy the 20% QBI deduction.

The second special rule deals with services or property provided to an SSTB and it also addresses the crack and pack strategy which many were contemplating before these regs came out. Just quickly in the crack and pack, that's where you might have let's say a law firm that tries to break out its back office into a separate LLC to qualify it. And that was labeled a crack and pack and these regs have been pretty clear that that does not work. But let's go through it.

And there was also some questions around self rentals. So you have a business that rents to one of your other businesses and how does that get treated? The proposed regs that an SSTB includes any trad or business that provides 80% or more of its property to an SSTB. And the two business share 50% or more common ownership using the attribution rules in 267 and 707.

Let's take a ... So this would do away with the carving out of a business and trying to ... Where have 50% common ownership and 80% or more of its property or services are attributable to each other. They're crack and pack. And in this example, we're going to look at A and B who owned a law firm AB. And they purchase a building. So this is ... And they rent an entire building to the law firm. So we know the rental come under certain situations can qualify as QBI. What happens here?

Law firm AB, of course, is an SSTB. And any partner there or shareholder that has all of the limits in 315 or 415 during the phase out will not be able to enjoy the 20% QBI. And also, the AB LLC is also treated as an SSTB because it meets the 80% test and 50% test. Or another way to look at it, it fails both the 80% test and 50% test and that rental income would not qualify as QBI.

But if they only rented 40% of the building to the law firm, and the other 60 to unrelated tenants, the law firm, of course, is still not QBI income. But the AB LLC now goes under the 80% test because it's only rented 40% to the law firm. And therefore, 60% of its rental income would be eligible for QBI. Not the 40% to the law firm, but the remaining 60.

And there's a special rule that talks about items incidental to an SSTB. If a non SSTB, for instance, and an SSTB have both common ownership and they have shared expenses, wages and overhead. It's incidental to the SSTB where it's under five percent combined. If it's under five percent combined. And they talk about a dermatologist that has a 96% of the income of the business from its dermatology and four percent from the skin care that the sales of skin care. Skin creams. That is all SSTB and not qualified for the QBI because it's under the five percent.

So those are the special rules under the regs. Allyson will take you through the, I think, very important aggregation rules and something that every accountant and practitioner should be looking into and taxpayers about aggregating their businesses.
Allyson Milbrod: Okay, thank you Jeff. Section 199 CAP A requires the calculation of the tentative QBI deduction to be done separately for each entity. So just think about that. If a taxpayer has multiple pass through entities, those tests one and two that we had in the previous slides would have to be done for every single one of those entities.

Some other potential issues that arose. What happens if you have wages in one entity and income in another? Or if a taxpayer has a situation where they create multiple entities for legal or convenience reasons. Or if in a group of entities, you have loss companies. So the proposed regulations addresses a lot of these issues.

Under the proposed regulations, a taxpayer can elect to aggregate two or more entities. When you do this aggregation, as you're going to see later in the slides, there are certain tests that have to apply. So you can have a situation where you can have two groups. Let's say you have six entities, but under the various tests, all six don't qualify as one group. You can have a situation where you can have two groups to make sure that you meet the test that we're going to talk about.

If a taxpayer decides to aggregate, you're going to determine their share of the QBI, the W2 wages and the property basis by combining the amounts of the aggregated businesses. To me, that alone might be a reason to elect aggregation.

In order to aggregate, the same person or group of persons directly or indirectly must own 50% or more of each of the businesses. When they talk about indirectly, what that means is that the taxpayer alone doesn't have to mean the ownership test, the 50% test. They only need to prove that someone in the group meets that 50% ownership test.

For S corporations, the measurement is outstanding stock. And for partnerships, the measurement is interest and capital or profits in the partnership. For this 50% ownership test, you look at family attribution, but you only look at vertical attribution, not horizontal which means parents and children. And children, but not brothers and sisters.

None of the businesses can be an SSTB, and the business must be a section 162 trade of business. If you have an entity that meets the hobby loss rules and doesn't rise to the level of 162, then that entity cannot ... Is not eligible for aggregation. What happens if you have a rental activity? So you have a situation of self rental? The proposed regulations have a specific provision that allows an entity to be considered a section 162 business and therefore for aggregation.

Later on, Jeff is going to talk about some of the areas where we need additional guidance. And I think this is an area where we're going to need additional guidance that since the proposed regs have this specific provision that a self rental is a trade of business for aggregation, then it leads one to believe is that if you have entity that only has real estate and it's a triple net lease, does that not rise to 162 and therefore if you're not in an aggregate, a situation where you can aggregate, will that entity not be eligible for QBI?

In addition to the ownership test, there's another business test. The businesses to be aggregated must satisfy at least two of the following three provisions. Must provide products or services that are the same or offered together. So for instance if you have two entities that are both restaurants. Or the entities share facilities or significant centralized business elements such as personnel, IT, accounting, legal, manufacturing, or purchasing. Or the businesses are operated in coordination with or relies upon one or more of the businesses in the group.

For instance, when you have a situation with self rental. Some other things to note for aggregation. The aggregation is done at the owner level. Other owners are not bound by the election that the owners make. Aggregation is elective. A statement must be attached to the owner's tax return each year. All the income of the aggregated businesses must report income in the same tax year. So you need to be mindful of fiscal year businesses. Generally the election cannot be revoked without the approval of the commissioner.

A taxpayer can add newly acquired businesses into the group as they acquire new businesses. Or if an entity fails to meet any of the tests, then those can drop out of the group that you're electing. Also to note, this is a separate election so this is separate from any section 469 groupings that the taxpayer might already have in place or any real estate professional groupings that the taxpayer have in place.
Jeff Kelson: Can you think of any downsides to not aggregating if you're qualified?
Allyson Milbrod: No. I mean Jeff and I kind of talked about this. We cannot think of any reason why a taxpayer would not want to do this.
Jeff Kelson: So I think we have to be careful when we do the returns to make sure that we're aggregating all the businesses that qualify.
Allyson Milbrod: Okay. To give you an example to illustrate this. F owns a 75% interest in five different partnerships. G owns five percent interest in each of the same five partnerships. H owns 10% of only two of the partnerships. Each partnership is a restaurant and shares centralized functions and management. Can F, G, or H elect to aggregate all or a portion of five partnerships?

First you want to look to see if the business criteria is met. In this case, we have met at least two of the three criteria, because all of the partnerships are restaurants. And they have centralized management. Then you want to look to see if F, G, H meet the ownership test. So for F, F owns 75% in all five partnerships so they clearly meet the ownership test because they own more than 50%. G who owns only five percent of the five partnerships would be eligible to aggregate because if you remember, through the indirect ownership that as long as G can show that F meets the ownership test of owning more than 50%, that would make G eligible to aggregate.

And then H, the answer would be the same that yes, they can aggregate their two partnerships for the same reason as G because they can show that F owns more than 50% of the partnership.

See that's another example of a common situation that we find. G owns 80% of the stock of S1, an S corporation that manufactures and sells widgets. LLC1 and LLC2 lease property to S1. That is their only asset that they own. Go also owns 80% of LLC1 and LLC2. LLC1 and LLC2 have income but no wages. That alone means that their QBI without aggregation would be limited. Can G elect to aggregate S1 with LLC1 and LLC2 to maximize his QBI deduction?

Is LLC1 and LLC2 considered a trade of business under 162 to qualify to elect aggregation? The answer is yes. There is, under proposed reg 1-199 CAP A-113, LLC1 and LLC2, although the only asset they have is real estate would be treated as a trade of business for this purpose, since its leased to a commonly controlled business. Just note the difference here of one of the things that Jeff talked about under that crack and pack situation. Here because LLC1 and LLC2 are leasing to a trade of business and not an SSTB, we don't have the limitations with that 80% test. And the full amount under aggregation would qualify for QBI.

Okay. Treatment of QBI losses. The proposed regs give us guidance on the mechanical nature and handling of losses. Note that this only comes into play after a taxpayer passes all of the tests for at risk, basis and pass of loss rule. So what you look at it is you net all of the positive and the negative QBI and if you have a loss, no deduction is allowed in the current year.

The net loss is going to get carried forward to next year. Note however that this carryover rule, would not affect the deductibility of a loss for purposes of all the provisions of the code. So let's say you have an overall loss and it is non passive and the taxpayer is able to take that loss on their tax return. For regular tax purposes, you would have that loss. But for QBI purposes, you're going to have a separate loss carry forward.

Also to note that if you have an entity and you have an overall loss, those W2 amounts associated with that lost company does not carry forward. Which kind of seems unfair where you have to carry forward the loss which is not a good thing. But then again, you don't get those wages associated with that entity which could, remember in test one, you need those wages in order to maximize your QBI.

To illustrate in an example, in 2018, B is allocated $100,000 of QBI and $20,000 of wages from LLC1 and $150,000 loss and $10,000 of wages from LLC2. What is B's QBI deduction for 2018? And carry over, if any, for 2019?

What you have to do here is you have to net the positive and the negative QBI. So in this case, B's net QBI is a $50,000 loss. So you have $150,000 loss from LLC1 and $100,000 of income from LLC2. So that nets the $50,000. Therefore, in 2018, B will have no QBI deduction. The $50,000 loss is going to carry forward to 2019 and note that $30,000 of wages that we had from LLC1 and 2 will not carry forward to 2019.
Jeff Kelson: The loss carry forward can taint some of the next year's QBI but you don't get to, unfortunately, carry forward the wages that you didn't utilize into '18. So it's something to be aware of.
Allyson Milbrod: Okay. Now let's say that we have a situation where we have a taxpayer that has at least entities and we have overall positive QBI. So let's say two entities have positive QBI and one entity has a loss QBI. So the regulations, the proposed regulations go through what the computations you would do in this situation.

First, the loss must be allocated proportionately to each entity with positive QBI. And this is similar to how you allocate a passive loss under 469. Also note that in this situation, obviously the taxpayer is not aggregating.

Once you allocate the loss proportionately, then you do test one which is your W2 and your basis limitations. Note however that no part of the W2 amount or the basis of the property of the loss entity is taken into consideration for the positive QBI entities. So what that means is that the any wages or basis allocation for the loss company does no come into play when you're doing test one for the positive QBI.

To illustrate this, A is allocated $400,000 of QBI from LLC1 that pays $50,000 in wages. $400,000 of QBI from LLC2 that pays zero wages. And a $200,000 loss from LLC3 that pays $70,000 in wages. What is A's tentative QBI deduction?

First, you have to take LLC3's loss and proportionately allocate it to LLC1 and LLC2. In this case, both LLC1 and LLC2 each have $400,000 of QBI. That means that 50% of LLC3's loss or $100,000 is going to get allocated proportionately to LLC1 and LLC2. Then you go on to test one to come up with a tentative QBI.

So for LLC1, you take the lesser of $300,000 which is the $400,000 of QBI less the allocated loss of $100,000 times 20%, which gives $60,000. Or the alternative test which if $50,000 or 50% of $50,000 of wages which gives you $25,000. So for LLC1, the tentative QBI is $25,000.

For LLC2, you take the lesser of $300,00 which is $400,000 of the QBI minus $100,000 loss times 20% which is $60,000. Or the alternative method which 50% of zero wages which is zero. So for LLC2, your tentative QBI is zero. That means that for A, if you add the two together, their tentative QBI is $25,000. One thing to note here is again that the $70,000 in wages from LLC3 does not come into play in this calculation.

Let's all assume that A was eligible to and elected to aggregate LLC1, LLC2, and LLC3. And what you'll see in this example is how or you'll see the benefit of the aggregation specifically when you have loss companies and you have wages in all your entities.

So A would compute one section 199A deduction by combining the amounts. So A is going to have $600,000 of QBI, which is the $400,000 from LLC1, $400,000 from LLC2 and the loss of $200,000 from LLC3. A is going to have $120,000 in wages which is $50,000 from LLC1 and the $70,000 from LLC3. So then you do your test one for your tentative QBI. Which is lesser of the $600,000 of QBI times 20% which is $120,000. Or the alternative test where you take the $120,000 of wages times 50% and you get $60,000. So in this case, A's tentative QBI is going to be $60,000. If you note from the previous example without aggregation, A's tentative QBI would be $25,000. But with aggregation, their tentative QBI would be $60,000.

We thought at this time it was just good to note that although not in the proposed regulations but kind of is applicable here when we talk about QBI and losses that business losses from a sole proprietorship, partnership or S Corporation is limited. So if you're married filing joint, you could only take $500,000 of loss and all others $250,000 per year.
Moderator: We have now reached polling question number three. A is allocated $100,000 of QBI from LLC1 and $50,000 loss from LLC2. How much of the $50,000 loss from LLC2 will offset LLC1? (A) $50,000. (B) None. (C) Not enough information to determine. Please remember in order to qualify for your CPE certificate, you must remain logged on for at least 50 minutes and respond to three out of four polling questions. We'll give you a few more seconds to respond. We are now closing the poll and sharing the results.
Allyson Milbrod: Okay so it was actually pretty close and the answer is not enough information to determine. We need to know what the wages are and the overall taxable income of A to sufficiently determine how much of a loss we can take.
Jeff Kelson: Okay. One of the nagging questions coming out of the 199A in tax reform was how would this apply to employee leasing companies. And how would it apply to common pay masters of groups. So the regs took this straight on and what they've come out with is that taxpayers who utilize and pay a PEO, an employee leasing company can use those wages for the wage test. So even though that technically an employee E of another company for all intents and purposes is their employee and they can use those wages in calculating how much of a QBI they would enjoy. So that was another taxpayer friendly one, except that your PEO, perhaps a lot of those ... They'll have the same situation.

Commonly controlled entities that utilize a common pay master. So this was a very big one. Hey, I have a management company that has all my wages, but all the income's in another company. If I can't use those wages against that income, I'm really in a bad way. Again, you can use the wages of common controlled ... Whatever common pay masters are offset or to be determined in calculating the wage limitation for QBI of another commonly controlled entity.

There was also a IRS notice 2018-64 that gave you three methods to determine the total amount of wages to be allocated because what is ... What are wages? It could be the unmodified box method. It's the lesser of the entries of Box one of five. That's wages or Medicare wages and tips, user the lower of. And then there's the modified box method that just makes you look at box one modified for certain items. Not subject to federal withholding. And yet a third method called the tracking wages method which is similar to the modified box method above except the taxpayer simply tracks wages subject to federal income tax penalty.

Even in something as maybe straightforward as wages, you have to consult the regs to see which method gives you the best result for optimizing the amount of wages that you can use in determining the wages for the year.

Another area the regulations address is if people suddenly not being deemed to be employees. Maybe setting up single member LLCs or other types of entities and claiming that they are an independent contractor and because if the employee turned independent contractor. And under the provision, of course, employees are not eligible for the QBI deduction. The proposed regs have the presumption that any former employee is still an employee even thought they might have changed their entity that they're working through. It's a substance of a form test.

So you can't just merely convert. If in 2017, you were an employee, you can't present form an LLC and all of a sudden if you're doing the same exact services be deemed, under the QBI rules, to be a independent contractor. You can rebut it through, of course if you show that the individual is performing services in a capacity other than as employee. I mean if you really truly been operating as an independent contractor. Or if something has changed.

You were an employee but now you're not. And so the federal employment tax classification of that is immaterial. So C is an attorney who's an employed as an associate in law firm one. Seeing the other associates have taxable income below the threshold. And the reason why that's important because law firms are SSTBs and you don't qualify for the QBI. But law firms, accounting firms, medical, all those qualify if you're under the 315 limitation and phased out of 415.

Even those SSTB entities, certain shareholders or partners can qualify. But here law firm one terminates his employment relationship with C, these other associates and then they form a new partnership in law firm two. Contract services to law firm one and his clients through law firm two. Because C was formerly an employee of law firm one and continues to provide substantially the same services, he's presumed to be in the trade of business of being an employee of law firm one. Unless that presumption is rebutted, the share of income even though it's coming out on a K1, as ordinary income, it will be treated as wages and not QBI so you can't transform through enough of these restructurings if in substance was, you were an employee.

The miscellaneous provisions. Going to kind of go through them quickly. 1231 gain is treated as a capital gain so capital gains are not QBI. So that's pretty much makes sense. 1231 losses are treated as ordinary losses and they reduce QBI. So the same benefit it gives you on regular taxes, it takes it away in the QBI.

Hot assets on partnerships in 751 that's ordinary income. That's good. Ordinary income is qualified and that would enjoy QBI treatment. Section 754 step ups on the 743 or 734 is not treated as a qualifying asset for the UBIA where you get the two and a half percent of your asset basis as originally purchased. So the 754 does not give you an immediate new asset that you can use for those purposes.

Also, the unadjusted basis for qualified properties determined before both bonus section 179 which is a very favorable reg provision because it allows you to use a much greater unadjusted base.

Fiscal year partnerships to S Corps with year beginning before 1/18 can get the full the QBI deduction. That's good. And they also have some anti abuse provisions for the use of trusts solely to increase QBI. There was some people speculating about using certain types of trusts to gain the benefit.

Some of the miscellaneous provisions related to the UBIA which is that unadjusted base of immediately upon acquisition. Also, QBI deductions does not reduce your income subject to self-employment tax.

The QBI deduction does not reduce the income subject to the net investment income tax. Also, and this sort of makes sense. It does not reduce a shareholder's or partner's basis because by doing so, would eventually subject it to tax when you liquidate or take distribution so it's kind of keeping it in sync. And real estate agents, excuse me, brokers, insurance agents, are not SSTB. Excuse me.

So we're up to the last polling question and then we'll take some questions if we have time.
Moderator: We have now reached polling question number four. Given the impact of TCJA, is your company (A) fully prepared to address the pass through provisions. (B) Somewhat prepared to address the pass through provisions. (C) Only beginning to prepare. (D) Not sure, not applicable. Please remember in order to qualify for your CPE certificate, you must remain logged on for at least 50 minutes and respond to three out of the four polling questions. We'll give you a few more seconds to respond. We are now closing the poll and sharing the results.
Jeff Kelson: Okay. Somewhat prepared. It took us a few readings of the regs ourselves. They're very ... You get into the weeds on a lot of issues. And there's a lot of detail. I think there was 187 pages or something. 184. Just some questions, somebody asked about reaped dividends, does that qualify as a QBI? It does. Somebody asked does qualified property access include lease owed improvements? Yes, it's all assets. It would qualify for that two and half percent rule which you can use in conjunction with the 25% W2.
Allyson Milbrod: Someone asked a question on a proposed reg saying the narrow definitions, does that not change the excluded services or really just clarify the other? That is correct. I mean that just clarifies what we call that catch all. It does not make any distinction on the services that are disqualified.

Yeah. I just want to go into some areas of additional guidance that's needed. Can passive owners of business qualify? We believe they do. And we believe the regs say that. But some people have contended that they would like to see a little more explicit. But yes, passive owners qualify. What is a trade of business on the 199A? So it's sort of open. Define individuals with income effectively connected with the United States trade of business qualify? That's still an open question.

The next one, are professional sports teams considered an SSTB? The regs actually say they are even though they get most of their revenue from ticket sales and television. And advertising. But there's been some discussion whether the final regs will overturn that and change that.

Are mortgage brokers considered excluded from SSTB? And it's interest in capital. Partnership, is that SSTB? Excuse me, is that QBI or is that guaranteed payment for purposes of QBI. So those are some of the open questions. I think there's the other one is real estate's the biggie. While rental real estate does qualify as QBI, is it really trade of business if it is a triple net lease?

If you don't perform any services, you have a management company performing the services? Didn't really get answered in these regulations. Some people thinking that they are. Some people thinking that they are not. But that's still an open question. Obviously if you have rental real estate with a real estate professional, undoubtedly that will qualify. And also where you're very active into real estate. Maybe not up to the level of a professional, that would qualify. But how about when you start drilling it down to where your engage with the real estate is minimal and I think that's really where the questions lie.
Allyson Milbrod: There's a question here. Does a sole proprietor lawyer without wages to others under the threshold qualify for QBI? The answer is yes. So as long as you're under those thresholds, so 415 married filing joint and the 207,500 for all others. Even though you're an SSTB, you would qualify for QBI.
Jeff Kelson: That's one of the thing. It's better to be a sole proprietor or an LLC if you're under those thresholds because you don't have to worry about any W2 limitations. And you don't have to impute any reasonable comp yourself so all the income is subject QBI. So the S Corps are at a little bit of a disadvantage under those thresholds because it has to impute wages to shareholder that are active. But once you get over that $415,000, it's better to be an S, because you can control how much wages you pay yourself in just like an algebraic expression where you can kind of optimize, assuming that it's reasonable how much that would give you the greatest benefit.

And then the sole proprietors and LLCs get hurt because they cannot pay wages to themselves. They would have to have others to pay wages to to qualify.

There's a question here. It's different fiscal year ends ending in same calendar year, can you combine? I would say the answer is yes as long as that all the income is being reported on the same taxable year, then those entities are eligible to aggregate.

Okay. So I think somebody asked about oil and gas, would that qualify? So many of the SSTBs do not qualify so you have to ... If you're in some where you had somebody ask questions about in health care, it might make a difference if you're a nursing home. Or an assisted living because the medical, depending on how much of the receipts come from the provision of medical services so there's still unanswered questions within the definition of SSTB. But I think the regs did a good job in at least addressing many of the outstanding questions but not all. Thank you everybody.
Allyson Milbrod: Thank you.
Moderator: We hope you enjoyed today's webinar. Please look out for a follow email with a link to the survey and presentation. For those who meet the criteria, you will receive a CPE certificate from within 14 business days of confirmed course attendance. Thank you for joining us today.

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