Internal Revenue Bulletin 2018-35 (PDF rendition): IRS Notices

Preserve advance releases and the authoritative Internal Revenue Bulletin rendition; directory timestamps are file-publication metadata, not legal effective dates. HTML bulletins begin June 2003; earlier available issues require full PDF parsing. Whole bulletin rendition: numbered items are identified below; other legal material and publisher context remain included. This is not a new standalone advance release.

# INTERNAL REVENUE BULLETIN

IRS

## HIGHLIGHTS OF THIS ISSUE

These synopses are intended only as aids to the reader in
identifying the subject matter covered. They may not be
relied upon as authoritative interpretations.

## ADMINISTRATIVE

### T.D. 9839, page 325.

These final regulations provide guidance regarding how a part-
nership can designate a partnership representative under the
new centralized partnership audit regime enacted by section
1101 of the Bipartisan Budget Act of 2015. The regulations
provide guidance on eligibility requirements for a partnership
representative, authority of the partnership representative, res-
ignation of a partnership representative, and revocation of a
partnership representative. These regulations also finalize the
temporary regulations regarding how partnerships can elect
into the centralized partnership audit regime for tax years
ending between November 2, 2015 and December 31, 2017.

## Employee Plans

### Notice 2018-65, page 350.

This notice sets forth updates on the corporate bond monthly
yield curve, the corresponding spot segment rates for August
2018 used under § 417(e)(3)(D), the 24-month average seg-
ment rates applicable for August 2018, and the 30-year Trea-
sury rates, as reflected by the application of § 430(h)(2)(C)(iv).

## Income Tax

### Notice 2018-64, page 347.

This notice contains a proposed revenue procedure that pro-
vides guidance on methods for calculating W-2 wages for
purposes of section 199A of the Internal Revenue Code (Code)
and proposed §§ 1.199A-1 through -6 of the Income Tax
Regulations (26 CFR part 1) which are being published contem-
poraneously with this notice. Specifically, this notice provides
methods for calculating W-2 wages (1) for purposes of section

Bulletin No.

2018-35

August

27, 2018

199A(b)(2) which, for certain taxpayers, provides a limitation,
based on W-2 wages, to the amount of qualified business
income subject to the deduction under section 199A; and (2)
for purposes of section 199A(b)(7) which, for certain specified
agricultural and horticultural cooperative patrons, provides a
reduction to the section 199A(a) deduction based on W-2
wages.

### REG-107892-18, page 353.

Section 199A provides that, for taxable years beginning after
December 31, 2017 and before January 1, 2026, taxpayers
other than C corporations may deduct 20 percent of the
qualified business income from the taxpayer's qualified trades
or businesses, which can be operated through a partnership, S
corporation, trust, estate, or sole proprietorship. The deduc-
tion is subject to multiple limitations based on the type of trade
or business, the taxpayer's taxable income, the amount of W-2
wages paid with respect to the qualified trade or business, and
the unadjusted basis of qualified property held by the trade or
business. Taxpayers other than C corporations generally may
also deduct 20 percent of aggregate qualified REIT dividends
and qualified publicly traded partnership income. Special rules
apply to specified agricultural or horticultural cooperatives.
The proposed regulations provide computational, definitional,
and anti-abuse guidance necessary to apply these rules.

Finding Lists begin on page ii.

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## The IRS Mission

Provide America's taxpayers top-quality service by helping
them understand and meet their tax responsibilities and en-
force the law with integrity and fairness to all.

## Introduction

The Internal Revenue Bulletin is the authoritative instrument of
the Commissioner of Internal Revenue for announcing official
rulings and procedures of the Internal Revenue Service and for
publishing Treasury Decisions, Executive Orders, Tax Conven-
tions, legislation, court decisions, and other items of general
interest. It is published weekly.

It is the policy of the Service to publish in the Bulletin all
substantive rulings necessary to promote a uniform application
of the tax laws, including all rulings that supersede, revoke,
modify, or amend any of those previously published in the
Bulletin. All published rulings apply retroactively unless other-
wise indicated. Procedures relating solely to matters of internal
management are not published; however, statements of inter-
nal practices and procedures that affect the rights and duties
of taxpayers are published.

Revenue rulings represent the conclusions of the Service on
the application of the law to the pivotal facts stated in the
revenue ruling. In those based on positions taken in rulings to
taxpayers or technical advice to Service field offices, identify-
ing details and information of a confidential nature are deleted
to prevent unwarranted invasions of privacy and to comply with
statutory requirements.

Rulings and procedures reported in the Bulletin do not have the
force and effect of Treasury Department Regulations, but they
may be used as precedents. Unpublished rulings will not be
relied on, used, or cited as precedents by Service personnel in
the disposition of other cases. In applying published rulings and
procedures, the effect of subsequent legislation, regulations,
court decisions, rulings, and procedures must be considered,
and Service personnel and others concerned are cautioned

against reaching the same conclusions in other cases unless
the facts and circumstances are substantially the same.

The Bulletin is divided into four parts as follows:

### Part I .- 1986 Code.

This part includes rulings and decisions based on provisions of
the Internal Revenue Code of 1986.

### Part II .- Treaties and Tax Legislation.

This part is divided into two subparts as follows: Subpart A, Tax
Conventions and Other Related Items, and Subpart B, Legisla-
tion and Related Committee Reports.

Part III .- Administrative, Procedural, and Miscellaneous.
To the extent practicable, pertinent cross references to these
subjects are contained in the other Parts and Subparts. Also
included in this part are Bank Secrecy Act Administrative Rul-
ings. Bank Secrecy Act Administrative Rulings are issued by
the Department of the Treasury's Office of the Assistant Sec-
retary (Enforcement).

### Part IV .- Items of General Interest.

This part includes notices of proposed rulemakings, disbar-
ment and suspension lists, and announcements.

The last Bulletin for each month includes a cumulative index for
the matters published during the preceding months. These
monthly indexes are cumulated on a semiannual basis, and are
published in the last Bulletin of each semiannual period.

The contents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.

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## Part I. Rulings and Decisions Under the Internal Revenue Code of 1986

26 CFR 301.6223-1, 301.6223-2, 301.9100-22

T.D. 9839

DEPARTMENT OF THE
TREASURY
Internal Revenue Service
26 CFR Part 301

Partnership Representative
under the Centralized
Partnership Audit Regime and
Election to Apply the
Centralized Partnership Audit
Regime

AGENCY: Internal Revenue Service
(IRS), Treasury.

ACTION: Final regulation and removal of
temporary regulations.

SUMMARY: This document contains fi-
nal regulations regarding the designation
and authority of the partnership represen-
tative under the centralized partnership
audit regime, which was enacted into law
on November 2, 2015 by section 1101 of
the Bipartisan Budget Act of 2015 (BBA).
These final regulations affect partnerships
for taxable years beginning after Decem-
ber 31, 2017. This document also contains
final regulations and removes temporary
regulations regarding the election to apply
the centralized partnership audit regime to
partnership taxable years beginning after
November 2, 2015 and before January 1,
2018 under section 1101(g)(4) of the
BBA. These final regulations affect part-
nerships for taxable years beginning after
November 2, 2015 and before January 1,
2018.

DATES: Effective date: These regulations
are effective on August 9, 2018.

Applicability Date: For dates of appli-
cability, see §§ 301.6223-1(h), 301.6223-
2(f), and 301.9100-22(e).

FOR FURTHER INFORMATION CON-
TACT: Concerning the regulations under
§§ 301.6223-1 and 301.6223-2, Joy E.
Gerdy Zogby of the Office of Associate
Chief Counsel (Procedure and Adminis-

tration), (202) 317-4927; concerning
§ 301.9100-22, Jennifer M. Black of the
Office of Associate Chief Counsel (Proce-
dure and Administration), (202) 317-6834
(not toll-free numbers).

SUPPLEMENTARY INFORMATION:

### Background

This document contains final regula-
tions to amend the Procedure and Admin-
istration Regulations (26 CFR Part 301)
under Subpart - Tax Treatment of Part-
nership Items to implement the rules for
the partnership representative under the
centralized partnership audit regime en-
acted by section 1101 of the BBA, Public
Law 114-74. Section 1101 of the BBA
was amended on December 18, 2015, by
the Protecting Americans from Tax Hikes
Act of 2015, Public Law 114-113, and on
March 23, 2018 by the Tax Technical
Corrections Act of 2018, which was en-
acted into law as part of the Consolidated
Appropriations Act of 2018, Public Law
115-141. Section 301.6223-1 provides
the rules regarding the designation of the
partnership representative, § 301.6223-2
provides the rules regarding the authority
of the partnership representative, and
§ 301.9100-22 provides the rules for
making the election under section 1101(g)
(4) of the BBA with respect to returns
filed for partnership taxable years begin-
ning after November 2, 2015 and before
January 1, 2018.

On August 5, 2016, the Treasury De-
partment and the IRS published in the
Federal Register (81 FR 51795) tempo-
rary regulations (TD 9780) regarding the
time, form, and manner for making an
election to apply the centralized partner-
ship audit regime to partnership taxable
years beginning after November 2, 2015
and before January 1, 2018. On the same
day, the Treasury Department and the IRS
published in the Federal Register (81 FR
51835) a notice of proposed rulemaking
(REG-105005-16) cross-referencing the
temporary regulations. No comments
were received in response to the pro-
posed regulations, and no hearing was
requested or held.

On June 14, 2017, the Treasury De-
partment and the IRS published in the
Federal Register (82 FR 27334) a notice
of proposed rulemaking (REG-136118-
15) regarding a number of provisions of
the centralized partnership audit regime, in-
cluding section 6223, relating to the partner-
ship representative (June 14 NPRM). A
public hearing regarding the proposed reg-
ulations was held on September 18, 2017.
The Treasury Department and the IRS also
received written public comments in re-
sponse to the proposed regulations, includ-
ing comments regarding the partnership rep-
resentative under section 6223.

On November 30, 2017, the Treasury
Department and the IRS published in the
Federal Register (82 FR 56765) a notice
of proposed rulemaking (REG-119337-
17) regarding international rules under the
centralized partnership audit regime. On
December 19, 2017, the Treasury Depart-
ment and the IRS published in the Fed-
eral Register (82 FR 27071) a notice of
proposed rulemaking (REG-120232-17)
regarding certain procedural rules under
the centralized partnership audit regime,
including proposed § 301.6231-1 regard-
ing notices that are required to be mailed
to partnerships (December 19 NPRM). On
January 2, 2018, the Treasury Department
and the IRS published in the Federal
Register (82 FR 28398) final regulations
for electing out of the partnership audit
regime. On February 2, 2018, the Trea-
sury Department and the IRS published in
the Federal Register (83 FR 4868) a no-
tice of proposed rulemaking (REG-
118067-17) regarding rules for adjusting
tax attributes under the centralized part-
nership audit regime.

After careful consideration of all writ-
ten public comments and statements made
during the public hearing relating to sec-
tion 6223, the portions of the June 14
NPRM relating to section 6223 are ad-
opted as amended by this Treasury Deci-
sion. These amendments are discussed in
the next section. Examples were revised to
conform to the amendments discussed in
the next section, and clarifying and edito-
rial revisions were also made. The Trea-
sury Department and the IRS received

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no comments with respect to proposed
§ 301.9100-22 and made no substantive
revisions to the proposed regulations. Ac-
cordingly, the final regulations adopt the
proposed regulations without any substan-
tive change. Minor editorial changes were
made. The temporary regulations are re-
moved.

## Summary of Comments and Explanation of Revisions

### 1. Partnership Representative

In response to the June 14 NPRM, the
Treasury Department and the IRS re-
ceived 33 written comments, and five
statements were provided at the public
hearing. All comments (both written and
provided orally at the public hearing)
were considered, and written comments
are available for public inspection at
www.regulations.gov or upon request.
This preamble addresses only the com-
ments or portions of comments relating
to the proposed regulations under sec-
tion 6223, which are the proposed reg-
ulations from the June 14 NPRM being
finalized in this Treasury Decision.
Comments, or any portion of a com-
ment, that relate to other aspects of the
proposed regulations in the June 14
NPRM that have not yet been finalized
will be addressed when final regulations
regarding those provisions are pub-
lished. The comments relating to the
proposed regulations under section 6223
cover a broad range of topics, including
eligibility to serve as the partnership
representative, designating and chang-
ing a partnership representative, and the
binding effect and authority of the part-
nership representative. These comments
were considered and revisions to the
regulations were made in response to the
comments.

### A. Eligibility to Serve as the Partnership Representative

Proposed § 301.6223-1(b)(1) provided
that a partnership may designate any per-
son that has a substantial presence in the
United States and that has the capacity to
act to be the partnership representative. If
an entity is designated as the partnership
representative, the partnership must ap-
point a designated individual to act on the

entity's behalf. See proposed § 301.6223-
1(b)(2), (3), and (4).

One comment recommended that
§ 301.6223-1(b)(1) explicitly provide that
a disregarded entity can serve as the part-
nership representative. This comment has
been adopted. Any person as defined in
section 7701(a)(1), including an entity,
can serve as the partnership representative
provided that person meets the require-
ments of § 301.6223-1(b). Therefore,
§ 301.6223-1(b)(1) has been revised to
clarify that a disregarded entity can be a
partnership representative. Because a dis-
regarded entity is not an individual and is an
entity partnership representative, the part-
nership must appoint a designated individ-
ual to act on behalf of the disregarded entity
in accordance with § 301.6223-1(b)(3). In
addition, both the disregarded entity and the
designated individual must have substantial
presence as described in § 301.6223-
1(b)(2).

Section 301.6223-1(b)(1) has also
been revised to clarify that a partnership
may designate itself as its own partnership
representative. The rules regarding eligi-
bility to serve as a partnership representa-
tive are designed to permit the partnership
to designate the person it believes is most
appropriate to serve as partnership repre-
sentative, provided that person meets the
requirements of § 301.6223-1(b)(2) (sub-
stantial presence) and § 301.6223-1(b)(3)
(designated individual). Therefore, a part-
nership may serve as its own partnership
representative if the partnership has sub-
stantial presence in the United States and
also appoints a designated individual that
has a substantial presence in the United
States to act on the partnership's behalf in
the partnership's role as partnership rep-
resentative.

One comment recommended that the
regulations confirm that, in the case of an
entity designated as partnership represen-
tative, the designated individual does not
have to be an employee of that entity.
Nothing in the regulations requires that
the designated individual be an employee
of the entity partnership representative. As
explained in part 4.F. of the preamble to
the June 14 NPRM, an entity with no
employees is permitted to be the partner-
ship representative provided the partner-
ship appoints a designated individual to
act on behalf of that entity and both the

entity and the designated individual have
substantial presence in the United States.
Because the plain language of the regula-
tion does not require the designated indi-
vidual to be an employee of the entity
partnership representative, no clarification
is necessary and the comment was not
adopted.

Another comment suggested that a
partnership should not be required to ap-
point a designated individual to act for an
entity partnership representative until the
IRS issues a notice of administrative pro-
ceeding (NAP) or the partnership files a
valid administrative adjustment request
(AAR) under section 6227. This comment
was not adopted. The purpose of the des-
ignated individual requirement is to have
an individual identified who can act on
behalf of the entity partnership represen-
tative prior to the beginning of an admin-
istrative proceeding under subchapter C of
chapter 63 (administrative proceeding). If
no designated individual is appointed and
the IRS initiates an administrative pro-
ceeding, neither the partnership nor the
IRS will know who has the authority to
act on behalf of the entity partnership rep-
resentative. This could delay the begin-
ning of the proceeding and consequently
slow down the administrative proceeding.

As explained in part 2.D. of the pream-
ble to the June 14 NPRM, these types of
delays frequently occurred under TEFRA.
Under TEFRA, partnerships and the IRS
often spent a significant amount of time
establishing that a person designated as
the tax matters partner (TMP) was quali-
fied to be the TMP or, in the case of an
entity TMP, identifying and locating an
individual to act on the entity's behalf.
Also as explained in part 2.D. of the pre-
amble to the June 14 NPRM, the introduc-
tion of the partnership representative con-
cept under the centralized partnership
audit regime was intended to address the
shortcomings of the TMP rules. Accord-
ingly, the proposed regulations required
the partnership to identify and appoint a
designated individual prior to the start of
an administrative proceeding to avoid a
delay related to locating and confirming
the identity of an individual to act on
behalf of an entity partnership representa-
tive. With that objective in mind, the final
regulations maintain the rule that in the
case of an entity partnership representa-

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tive, the partnership must appoint a des-
ignated individual at the time the partner-
ship representative is designated.

Another comment suggested that the
entity partnership representative itself,
rather than the partnership, should appoint
the designated individual. The partnership
makes the initial designation of the part-
nership representative on the partnership's
return. When an entity is chosen, the part-
nership must appoint a designated individ-
ual to act on behalf of the entity partnership
representative. See § 301.6223-1(c)(2).
While this rule requires that the partnership
appoint the designated individual, nothing
in the regulations precludes the entity part-
nership representative from identifying who
the designated individual should be and
communicating that decision to the partner-
ship. Ultimately, however, the partnership
must determine who will be the partnership
representative. Determining who will be the
designated individual to act on behalf of an
entity partnership representative is part of
that determination. Therefore, the final reg-
ulations retain the rule that the partnership
must appoint the designated individual on
its partnership return for the relevant taxable
year.

This rule ensures that designation of
the entity partnership representative and
appointment of the designated individual
occur simultaneously on the partnership
return with the result that it will be clear to
both the partnership and the IRS at the
time the partnership return is filed who
has the authority to act on behalf of the
partnership for the taxable year for which
the return is filed for purposes of the cen-
tralized partnership audit regime. As dis-
cussed previously in this section of the
preamble, under TEFRA, the IRS spent
significant time and resources determining
who was the TMP. If that TMP was an
entity, the IRS and taxpayers spent addi-
tional time and resources determining
who could act on behalf of the entity TMP
under state law. Moreover, in cases where
state law permitted an entity to act on
behalf of an entity TMP, the IRS and the
partnership had to identify an individual
who could act on behalf of that entity to
determine someone who could ultimately
act on behalf of the entity TMP. The rule
under § 301.6223-1(c)(2) allows the IRS
and the partnership to readily identify who
can act on behalf of the partnership rep-

resentative without having to inquire into
who has the state law authority to act on
behalf of the entity partnership represen-
tative. Because the partnership makes the
designated individual appointment under
the final regulations, the rule eliminates
the time spent determining who can act
for the partnership.

This rule is also necessary because un-
der the centralized partnership audit re-
gime an entity partnership representative
can only act through a designated individ-
ual. To achieve this, the partnership must
appoint the designated individual for the
entity partnership representative to take
action under the centralized partnership
audit regime. Prior to the appointment of a
designated individual, the entity partner-
ship representative does not have the ability
to act under the centralized partnership audit
regime. Accordingly, the comment recom-
mending the partnership representative make
the designated individual appointment was not
adopted, and § 301.6223-1(b)(3)(ii) has been
modified to clarify that the partnership
must appoint the designated individual.

#### i. Substantial presence

Section 6223(a) provides that a part-
nership representative must have a sub-
stantial presence in the United States. Pro-
posed § 301.6223-1(b)(2) provided that a
person has substantial presence in the
United States for purposes of section 6223
if the person is able to meet in person with
the IRS in the United States at a reason-
able time and place, has a United States
street address and telephone number
where the person can be reached during
normal business hours, and has a United
States taxpayer identification number
(TIN). Several comments suggested that
the first two criteria for substantial pres-
ence were too vague and recommended
clarification of what is considered reason-
able with respect to the time and place for
meetings between the partnership repre-
sentative and the IRS and whether the
reference to normal business hours is de-
termined based on the IRS's business
hours or based on the partnership's busi-
ness hours.

Section 301.6223-1(b)(2) is designed
to allow the partnership and the IRS max-
imum flexibility to determine mutually
convenient times to meet, to schedule

phone calls, and to share information,
while at the same time ensuring that the
partnership and its books and records are
available to the IRS during the adminis-
trative proceeding. Because what consti-
tutes a reasonable time and place depends
on the facts and circumstances, providing
specific rules by regulation applicable to
every circumstance that could arise in an
administrative proceeding is not feasible
and, even if it were, doing so would in-
terfere with rather than facilitate a produc-
tive environment for the administrative
proceeding. There are existing regulations
relating to the reasonable time and place
for an examination in § 301.7605-1 that
are applicable to the centralized partner-
ship audit regime. Section 301.7605-1(a)
states: "The time and place of examina-
tion ... are to be fixed by an officer or
employee of the Internal Revenue Service,
and officers and employees are to en-
deavor to schedule a time and place that
are reasonable under the circumstances."
To address the comment, the regulations
under § 301.6223-1(b)(2) have been clar-
ified to include a cross-reference to these
provisions.

With respect to the comment regarding
the meaning of "normal business hours,"
the Treasury Department and the IRS
agree that this terminology is confusing.
In addition, cross-referencing the rules for
the time and place of examination under
§ 301.7605-1 makes this term unnecessary.
Therefore, the final regulations remove the
reference in § 301.6223-1(b)(2)(ii) to nor-
mal business hours. The partnership repre-
sentative still must have a telephone number
with a United States area code, but the ref-
erence to normal business hours has been
removed to avoid confusion regarding what
constitutes normal business hours.

The Treasury Department and the IRS
also revised the phrase in § 301.6223-
1(b)(2)(i) - "The person is available to
meet in person with the IRS" - to read -
"The person makes themselves available
to meet in person with the IRS." This
change was made to distinguish between a
partnership representative who is gener-
ally available to meet and works with the
IRS to facilitate communications and a
partnership representative who is gener-
ally available but refuses to meet with the
IRS. Examples have also been added un-

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der § 301.6223-1(b)(4) to illustrate this
clarification.

Another comment recommended that
regulations under proposed § 301.6223-
1(b)(2) establish a "safe harbor" for sub-
stantial presence that would allow the
partnership to designate a location in the
United States for purposes of communica-
tions between the partnership representa-
tive and the IRS, similar to how busi-
nesses designate a registered agent and an
address for accepting service of process.
Section 301.6223-1(b)(2)(ii) requires the
partnership to provide a United States
street address and phone number where
the partnership representative can be
reached by United States mail and tele-
phone. This rule already allows the part-
nership to designate a location within the
United States for communications be-
tween the partnership representative and
the IRS, including receipt of formal doc-
uments from the IRS. However, in addi-
tion to having a United States street
address and telephone, a partnership rep-
resentative must also make themselves
available to meet in person with the IRS.
As discussed in part 2.D of the preamble
to the June 14 NPRM, the purpose of the
substantial presence requirement is to "en-
sure that the person selected to represent
the partnership will be available to the
IRS in the United States when the IRS
seeks to communicate or meet with the
representative." Because the partnership
representative must make themselves
available to meet with the IRS, the part-
nership representative may have any tele-
phone number with a United States area
code and a street address in any location
in the United States, provided the tele-
phone number and street address allow the
IRS to contact the partnership representa-
tive. Consequently, an explicit "safe har-
bor" for substantial presence is unneces-
sary, and the comment has not been
adopted.

#### ii. Capacity to Act

One of the components of eligibility to
serve as a partnership representative or
designated individual under the proposed
regulations was the capacity to act. Pro-
posed § 301.6223-1(b)(4) described five
specific events that cause a person to lose
the capacity to act for purposes of section

6223 and included a catch-all provision
for any unforeseen circumstances in
which the IRS reasonably determined a
person may no longer have the capacity to
act. If a partnership representative lost the
capacity to act under proposed § 301.6223-
1(b)(4), the IRS could determine that the
designation of the partnership representative
or appointment of a designated individual
was not in effect. See proposed § 301.6223-
1(f). Additionally, where all general part-
ners lost the capacity to act, a partner other
than a general partner could sign a revoca-
tion of the partnership representative. See
proposed § 301.6223-1(e).

In response to the capacity-to-act re-
quirements in the proposed regulations, one
comment recommended that the list of cir-
cumstances under proposed § 301.6223-
1(b)(4) be expanded to include other spe-
cific situations such as when the person has
been convicted of a felony or a crime that
involves dishonesty or breach of trust, when
the person is in bankruptcy or receivership,
or when the person is known to be under
criminal investigation for a violation of the
Code. The same comment recommended
that standards or limitations be included
within the catch-all provision under pro-
posed § 301.6223-1(b)(4)(vi), which pro-
vides that a person loses the capacity to act
in "any similar situation where the IRS rea-
sonably determines the person may no lon-
ger have capacity to act." Another comment
suggested that if a partnership becomes
aware that the partnership representative
lacks the capacity to act, the regulations
should require the partnership to revoke that
partnership representative's designation.

The capacity-to-act requirement was
intended to correspond to situations where
the person would not be able to represent
the partnership during the administrative
proceeding, for instance, when the person
died, was legally incapacitated, or was
otherwise unable to act during the admin-
istrative proceeding. After reviewing the
comments regarding capacity to act, the
Treasury Department and the IRS reeval-
uated whether such a requirement is
needed. Rather than creating a regulatory
requirement for who should be the part-
nership representative or a designated in-
dividual, the Treasury Department and the
IRS believe that partnerships are in the
best position to make the decision as to
who can best represent them before the

IRS. For the reasons discussed below, the
Treasury Department and the IRS have
determined that regulations regarding ca-
pacity to act would provide an unneces-
sary limitation on the partnership's choice
of who it believes is the best person to act
on the partnership's behalf. Therefore, the
comments have not been adopted, and the
capacity-to-act requirement has been re-
moved from the final regulations.

Under the proposed regulations, the
partnership had complete control over
who is designated as the partnership rep-
resentative and appointed as a designated
individual so long as the person desig-
nated or appointed satisfies the substantial
presence requirement. Further, the part-
nership had the unilateral power to revoke
the partnership representative for any rea-
son. Therefore, the partnership can ade-
quately protect itself if the concept of ca-
pacity is removed since it can revoke the
partnership representative.

Beyond requiring a partnership repre-
sentative to have a substantial presence in
the United States, the Treasury Depart-
ment and the IRS have determined that it
is not the proper role of the IRS to make
further inquiries into whether, in the view
of the IRS, the designated partnership rep-
resentative or designated individual is the
right person to represent the partnership.
For example, some partnerships may not
wish to be represented by a partnership
representative that has filed for bank-
ruptcy. But, in other cases, the partnership
may determine that the partnership repr-
esentative's bankruptcy status is not rele-
vant to whether the person can serve as
partnership representative.

By setting forth specific capacity fac-
tors, like bankruptcy, for making someone
ineligible to act on behalf of the partner-
ship, the regulations would be unnecessar-
ily supplanting the partnership's judgment
with that of the government. Accordingly,
the final regulations remove the capacity-
to-act requirement entirely because the
partnership should have as much flexibil-
ity as possible in determining a partner-
ship representative so long as the person
meets the substantial presence require-
ments. Because this section has been re-
moved, the cross-reference to that section
in § 301.6223-1(e) has also been re-
moved. In addition, because this section
has been removed, the comment suggest-

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ing that the IRS clarify that the partnership
must require a revocation if it becomes
aware that one of the capacity-to-act cir-
cumstances applies to its partnership repre-
sentative is inapplicable and therefore is not
adopted.

Although the capacity-to-act section
has been removed from the final regula-
tions, the IRS may still determine that a
designation of the partnership representa-
tive is not in effect due to circumstances
that would have resulted in a partnership
representative not having capacity to act
because at least some of the capacity-to-
act requirements overlapped with substan-
tial presence. For instance, the IRS may
determine that a partnership representa-
tive designation is not in effect if the
partnership representative is incarcerated
because that partnership representative
cannot make herself available to the
IRS, which means the partnership rep-
resentative does not satisfy the substan-
tial presence requirement. Having a sep-
arate capacity-to-act requirement was
duplicated in these circumstances.

Two of the specified circumstances
listed in proposed § 301.6223-1(b)(4) in-
volve determinations by a court that re-
strict a partnership representative's or des-
ignated individual's ability to serve. These
circumstances would likely arise very
rarely, and the IRS would likely not know
these circumstances exist unless they were
brought to the IRS's attention by a partner
or the partnership itself. In the case of a
court order stating that a person does not
have capacity to manage his or her estate,
the IRS may not know about this issue
because the very nature of such a proceed-
ing is sensitive and may not be made
public. In the case of a court order in
which an injunction was sought, the most
likely parties to seek such an injunction
would be partners or the partnership itself.
The partnership, generally through its re-
viewed year partners, may revoke a part-
nership representative designation without
the need for a court order, which would
alleviate the need for a partnership or part-
ner to pursue a court-ordered injunction.
Even if such a court order existed, the IRS
would need to review the court order to
determine to what degree it inhibited a
partnership representative from acting on
behalf of the partnership. Because these
circumstances would be rare, and because

there would need to be actual knowledge
of the court order as well as at least some
interpretation of that court order, the Trea-
sury Department and the IRS have re-
moved these circumstances, which were
previously listed in proposed § 301.6223-
1(b)(4), from the regulations.

### B. Designating or Changing a Partnership Representative or a Designated Individual

Multiple comments recommended
changes to the timing and mechanics for
designating, appointing, and changing a
partnership representative and designated
individual. The comments included sug-
gestions about the timing of when a
change should occur, the effective date of
such a change, notice requirements sur-
rounding the change, and who can revoke
a designation.

One comment suggested clarification
regarding whether a partnership that has
elected out of the centralized partnership
audit regime under section 6221(b) must
designate a partnership representative. A
partnership that has elected out of the cen-
tralized partnership audit regime is not
required to designate a partnership repre-
sentative. The partnership representative
is the person who has the sole authority to
act on behalf of the partnership under the
centralized partnership audit regime. If a
partnership is not subject to the central-
ized partnership audit regime, a partner-
ship representative has no authority with
respect to the partnership. Nothing in the
regulations requires a partnership that has
elected out of the regime to designate a
partnership representative. Therefore, the
comment was not adopted.

### i. Time for Changing the Partnership Representative

Under proposed § 301.6223-1(d)(2)
and (e)(2), a partnership representative des-
ignation can only be changed after the IRS
mails a NAP or in conjunction with the
filing of a valid AAR by the partnership
under section 6227. Several comments sug-
gested that proposed § 301.6223-1(d)(2)
and (e)(2) be revised to allow for changes to
the partnership representative at any time
after the original designation. One comment
specifically recommended that the IRS

adopt a system to monitor designations of
and changes to partnership representatives
in the same way that the IRS monitors the
last known address of taxpayers.

Allowing partnerships to change the
partnership representative designation with
the IRS at any time after the original desig-
nation is unnecessary and burdensome from
a tax administration perspective and may
increase burden for partnerships that are not
selected for an administrative proceeding
and have not filed an AAR. This is because
the responsibilities and authority of a part-
nership representative are generally applica-
ble only if a partnership is selected for
examination as part of an administrative
proceeding or the partnership files an AAR.
In many cases, allowing partnerships to
change the partnership designation before
an administrative proceeding begins or be-
fore the partnership files an AAR means that
the partnership would be filing a request to
change a partnership representative that
never takes, or plans to take, any action
under the centralized partnership audit re-
gime.

Further, preparing and filing a request
to change a designation of a partnership
representative requires partnerships to
expend time and resources. Because the
partnership representative designation
may differ each year, tracking which part-
nership representatives were listed on
which returns, and if a change were made,
tracking those changes, can become com-
plex. A partnership agreement requiring
consultation with the partners (which may
differ from year to year) when there is a
change in the partnership representative
adds further complexity.

For its part, the IRS would have to
process requests to change a designation
and associate that change with the correct
partnership account even if the IRS never
selects the partnership taxable year for an
administrative proceeding and, therefore,
never interacts with the partnership repre-
sentatives. Currently, the IRS does not
have a system to process these changes
outside of the administrative proceeding
process or when an AAR is filed.

A comment recommended that the IRS
develop a system to track changes in the
designation of the partnership representa-
tive that is similar to the system used to
monitor a taxpayer's last known address.
Development of such a system would be

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very costly with little benefit to be gained
because, as discussed above, the majority
of changes would be for partnerships
whose partnership representatives would
never take any action on behalf of such
partnerships.

Accordingly, the final regulations
maintain the rule that a partnership rep-
resentative may only be changed in the
context of an administrative proceeding
or in conjunction with the filing of a
valid AAR. As the IRS gains experience
with the centralized partnership audit
regime, and methods are identified to
alleviate the administrative and regula-
tory burden created by changes to a partner-
ship representative designation before the
commencement of an administrative pro-
ceeding, the rules may be revisited in future
forms, instructions, or other guidance.

To address the aspect of the comments
that reflect a desire to be able to change
the partnership representative prior to the
beginning of the administrative proceed-
ing, § 301.6223-1(e)(2) has been revised
to allow the partnership to change the
partnership representative through revoca-
tion when the partnership is notified that
the partnership return is selected for ex-
amination as part of an administrative pro-
ceeding, in addition to when the NAP is
mailed. In general, the IRS will issue the
partnership, but not the partnership repre-
sentative, a notice of selection for exami-
nation prior to mailing the NAP to inform
the partnership that it is being selected for
examination. Under the proposed regula-
tions, the partnership was not able to
change the partnership representative until
it received the NAP.

This rule will provide the partnership an
opportunity to change its partnership repre-
sentative before an administrative proceed-
ing commences, allowing the partnership to
be represented by the partnership represen-
tative of its choice throughout the adminis-
trative proceeding. Because the notice of
selection for examination is only issued to
the partnership, and not the partnership rep-
resentative, this rule allows the partnership
to make a change to the partnership repre-
sentative without the involvement of the
partnership representative (whom the part-
nership may be removing for cause). As a
result of the revised rule, the NAP can be
sent to the partnership's preferred partner-
ship representative at the time the adminis-

trative proceeding begins. The rule also al-
lows the partnership to change a designated
individual prior to the beginning of the ad-
ministrative proceeding.

Other comments suggested that the
designation of the partnership representa-
tive should be required on an annual basis,
that the currently designated partnership
representative should have the sole au-
thority to represent the partnership for all
open years, and that partnerships should
be required to designate one partnership
representative for all years in the context
of a multi-year administrative proceeding.

Under § 301.6223-1(c), a partnership
must designate the partnership representa-
tive on the partnership return for that part-
nership taxable year, that is, Form 1065,
U.S. Return of Partnership Income. Iden-
tification of a partnership representative
on an annual basis with the return pro-
vides certainty regarding who is the part-
nership representative for a particular tax-
able year. The other systems suggested in
the comments would be difficult to admin-
ister and could result in the IRS having to
determine that no designation of a part-
nership representative is in effect because
of this uncertainty.

Designation of a partnership represen-
tative on the return for that taxable year is
also not an undue burden on the partner-
ship. The identification, selection, and
designation of the partnership representa-
tive is wholly within the discretion of the
partnership (provided the person desig-
nated meets the requirements under
§ 301.6223-1(b)). Nothing in the pro-
posed regulations prevents a partnership
from designating the same partnership
representative on each partnership return
it files or, once administrative proceedings
with respect to more than one taxable year
have commenced, designating one part-
nership representative (through the revo-
cation procedures described in proposed
§ 301.6223-1(e)) to act for the partnership
for all years subject to the administrative
proceeding.

Further, the partnership representative
plays an important role in representing the
interests of the partnership and, by exten-
sion, the partners for the taxable year sub-
ject to an administrative proceeding. The
make-up of the partners in a partnership
may change from tax year to tax year, and
the economic arrangements within the

partnership and between partners may
also change. The partnership and its part-
ners for each particular taxable year are in
the best position to determine who the
partnership representative should be if
that particular taxable year is subject to an
administrative proceeding. For these rea-
sons, the comments have not been ad-
opted.

#### ii. Resignation

Proposed § 301.6223-1(d) provided
the rules for resignations of partnership
representatives and designated individu-
als. Proposed § 301.6223-1(d)(1) pro-
vided that a resignation by a partnership
representative "may" include a designa-
tion of a successor partnership represen-
tative. However, when the resignation was
made with the filing of an AAR, proposed
§ 301.6223-1(d)(2) provided that the part-
nership representative "must" designate a
successor partnership representative. Pro-
posed § 301.6223-1(d)(3) provided that a
resigning designated individual "may, but
is not required to," designate a successor.

One comment noted the differences in
the quoted language of these provisions
and recommended that the final regula-
tions be clarified to explain the conse-
quences, if any, of those differences. The
comment also questioned why the pro-
posed regulations required designation of
a successor partnership representative in
the case of an AAR resignation, but not in
the case of resignation that occurs during an
administrative proceeding. The comment
suggested that the rules should require des-
ignation of a successor for all resignations.
In contrast, another comment recommended
that a partnership representative never be
permitted to designate a successor partner-
ship representative and suggested that the
partnership have a 30-day window after a
resignation to designate a successor partner-
ship representative.

After considering these comments, the
final regulations remove the ability of a
resigning partnership representative or
designated individual to designate a suc-
cessor. Under the proposed rule, a resign-
ing partnership representative had the
power to designate a partnership represen-
tative even though the partnership might
not approve of the new partnership repre-
sentative. For instance, this could occur in

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a situation where the partnership represen-
tative is resigning due to an adverse rela-
tionship with the partnership. To avoid
this result, the resignation of a partnership
representative or designated individual
should be the final action of that person
for purposes of the centralized partnership
audit regime.

For similar reasons, a resigning part-
nership representative should not be able
to resign by filing an AAR. The partner-
ship representative or designated individ-
ual may be revoked simultaneously with
the filing of an AAR, though an AAR may
not be filed solely for that purpose. See
proposed § 301.6227-1(a). However, it is
unfair to the partnership to allow a resign-
ing partnership representative to request
adjustments to items of a partnership. Ac-
cordingly, the final regulations have been
revised to prohibit a resignation at the
time of the filing of an AAR.

Proposed § 301.6223-1(d)(3) provided
that a resignation of a designated individual
is "subject to the time of resignation restric-
tions described in [proposed] § 301.6223-
1(d)(2)," that is, the timing rules that apply
to a resignation of a partnership representa-
tive. One comment requested clarification of
whether the ability of a designated individ-
ual to resign is subject to all of the restric-
tions in proposed § 301.6223-1(d)(2) or
whether the quoted language means some
restrictions do not apply. As discussed
above, the final regulations have been re-
vised to remove the ability of a partnership
representative to resign with the filing of an
AAR; a partnership representative may re-
sign only after a NAP has been issued by the
IRS, or at such other time as prescribed by
the IRS in other guidance. The final regu-
lations have also been revised to provide
that the rules governing when and how a
partnership representative may resign
also apply to designated individuals.
Section 301.6223-1(d) provides specific
rules explaining how a designated indi-
vidual resigns. Therefore, clarification is
not necessary, and the comment was not
adopted.

## iii. Revocation

Proposed § 301.6223-1(e)(3)(i) pro-
vided that a revocation must be signed by
a person who was a general partner at the
close of the taxable year for which the

partnership representative designation is
in effect as shown on the partnership re-
turn for that taxable year. One comment
suggested that the language "as shown on
the partnership return" be deleted to make
clear that a partnership is not limited to
revoking only the initial partnership rep-
resentative designated on the partnership
return.

The purpose of the quoted language
was to describe how to determine whether
a person was a general partner at the close
of the taxable year, that is, by looking to
the partnership return for that taxable
year. It was not intended to describe what
type of partnership representative desig-
nation can be revoked by the partnership.
A partnership can revoke any designation
of a partnership representative, including
a designation made by the IRS, provided
permission is granted by the IRS. See
§ 301.6223-1(e)(6). Sections 301.6223-
1(e)(1) and (e)(4) have been revised to
clarify this point.

The comment also suggested that any
partner of the partnership, instead of only
a general partner, should be able to sign a
revocation provided that partner certifies
the partner has the authority to do so. This
comment was adopted in the final regula-
tions. The final regulations allow any part-
ner who was a partner during the partner-
ship taxable year to which the revocation
relates, not just a general partner, to sign a
revocation. Allowing any partner for the
taxable year to which the revocation re-
lates to sign the revocation provides max-
imum flexibility to the partnership to de-
termine which partners should have that
authority.

The rules under proposed § 301.6223-
1(e)(3)(ii) made clear that for purposes of
determining who may sign a revocation
for a limited liability company (LLC), a
member-manager is treated as a general
partner and any other member is treated as
a non-general partner. These rules were
necessary to clarify in the context of LLCs
which members can sign a revocation. As
discussed above in this section of the pre-
amble, however, the proposed regulations
have been revised to permit any partner
during the taxable year to which the revo-
cation relates, not just a general partner, to
sign a revocation. Therefore, § 301.6223-
1(e)(3)(ii) has been removed from the
regulations because the rule equating

member-managers with general partners
is no longer necessary.

The comment also recommended that
the "catch-all" provision under proposed
§ 301.6223-1(b)(4)(vi) (regarding capac-
ity to act) also apply in determining
whether partners other than a general part-
ner can sign a revocation. Proposed
§ 301.6223-1(b)(4) has been removed
from the final regulations and is no longer
referenced in § 301.6223-1(e); therefore,
this comment was not adopted. The refer-
ences to capacity to act were necessary
when only certain partners could revoke
the designation. Because the regulations
have been revised to allow any partner for
the partnership taxable year to which the
revocation relates to sign the revocation,
there is no need to describe situations in
which general partners do not have the
capacity to act and no need for the asso-
ciated catch-all provision.

Lastly, the comment recommended
that the regulations explicitly provide that
a partnership can revoke a partnership
representative designation for any reason.
As discussed in section 2.C. of this pre-
amble, nothing in the regulations requires
the partnership to have a specific reason,
or any reason at all, for a revocation.
However, this comment was adopted to
clarify that neither a revocation nor a res-
ignation requires any particular reason.
The final regulations also clarify that a
revocation may occur regardless of when
and how the designation was made, except
with respect to a designation made by the
IRS. See § 301.6223-1(e)(6).

Proposed § 301.6223-1(e)(3)(ii) ap-
plied the rules for signing a revocation to
LLCs and provided that for purposes of
the proposed regulations the term LLC
means an organization that, among other
things, "is classified as a partnership for
Federal tax purposes." A comment recom-
mended that the phrase "is classified as a
partnership for Federal tax purposes" be
removed from the definition of LLC be-
cause the quoted language creates confu-
sion about whether the LLC has to be
currently classified as a partnership for the
proposed rules regarding revocation to ap-
ply. As discussed in this section of the
preamble, § 301.6223-1(e)(3)(ii) has been
removed from the regulations because the
paragraph is no longer necessary in light
of the changes to the revocation process.

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While considering these comments, the
Treasury Department and the IRS had the
opportunity to reevaluate the portion of
the rule in proposed § 301.6223-1(e)(3)
that required a person revoking a designa-
tion to be a partner at the close of the taxable
year and determined that this rule is unnec-
essarily restrictive. This is because being a
partner on the last day of the taxable year is
not meaningful so long as the person is a
partner during the taxable year. For in-
stance, a person who is a partner on the last
day of the taxable year could be a partner
with a small interest in the partnership or
could have acquired their interest in the part-
nership on the next to last day of the part-
nership taxable year, whereas a person who
is a partner during the year but not on the
last day of the year could have owned a very
large interest in the partnership or could
have been a partner for all days during the
year, except the last day.

Further, while the partnership return
identifies partners during the taxable year,
it is not readily apparent from the face of
the return or the Schedules K-1 who was a
partner on the last day of the partnership
taxable year. Therefore, the IRS could not
easily determine if the partner signing the
revocation was a partner on the last day of
the taxable year.

Finally, there may be more partner
turnover during a partnership's taxable
year as a result of fewer partnership short
taxable years after the repeal of technical
terminations under section under 708(b)(1).
See section 13504 of "[a]n Act to provide
for reconciliation pursuant to titles II and V
of the concurrent resolution on the budget
for fiscal year 2018," Public Law 115-97.
Generally, under a technical termination un-
der section 708(b)(1)(B), when 50 percent
or more of a partnership's capital and profits
are sold or exchanged during any 12 month
period, the partnership taxable year ended,
causing a short partnership taxable year.
However, after repeal of the technical ter-
mination rule, there can be significant part-
ner turnover during a partnership's full tax-
able year without resulting in an early close
of the partnership taxable year. Thus, part-
ners who dispose of their partnership inter-
est, and who would have been partners for a
full taxable year at the close of a short
partnership taxable year when there was a
technical termination, are now partners for

only part of a full 12 month partnership
taxable year.

Accordingly, the final regulations have
been revised to allow any person who was
a partner at any time during the taxable
year to which the revocation relates to
sign the revocation. The final regulations
were also revised to provide that the Trea-
sury Department and the IRS may in the
future provide forms, instructions, or
other guidance that would allow the part-
nership to revoke the designation of a
partnership representative if there are no
reviewed year partners (as defined in pro-
posed § 301.6241-1(a)(9)) at the time of
revocation.

One comment also suggested that a
partnership should be able to revoke an
appointment of a designated individual
without first revoking the entity partner-
ship representative designation. This com-
ment was adopted in § 301.6223-1(e).
However, to ensure that the IRS has a
contact point for the partnership, the reg-
ulations under § 301.6223-1(e)(1) have
also been revised to provide that if a part-
nership revokes the appointment of a des-
ignated individual and not the entity part-
nership representative, the partnership
must appoint a successor designated indi-
vidual at the same time of the revocation.
Similar to the rules under the regulations
with respect to the partnership representa-
tive resignation, failure to follow the rules
of § 301.6223-1(e), including failure to
appoint a successor designated individual,
results in an invalid revocation of the des-
ignated individual.

### iv. Effective Date of a Resignation or Revocation

The proposed regulations provided that
a resignation or revocation of the partner-
ship representative (or designated individ-
ual, if applicable) is effective 30 days
from the date on which the IRS receives
written notification of the resignation or
the revocation. See proposed § 301.6223-
1(d)(1), (e)(1). One comment recom-
mended that the IRS refrain from requir-
ing time-sensitive actions or responses
from the partnership during this 30-day
period. Another comment recommended
that a resignation or revocation of a part-
nership representative be immediately ef-
fective in certain situations, including

when the partnership representative is the
subject of a court order determining the
partnership representative is incompetent
or enjoining the partnership representative
from serving as the partnership represen-
tative, the partnership representative is in-
carcerated, the partnership representative
has become the subject of a criminal tax
investigation, the partnership representa-
tive has been convicted of a felony or of a
crime that involves dishonesty or breach
of trust, or the partnership representative
has become the subject of bankruptcy or
receivership proceedings.

In response to these comments,
§ 301.6223-1(d) and (e) are revised to
provide that generally a partnership rep-
resentative resignation or revocation is
effective immediately upon receipt by
the IRS. In cases where there is a revo-
cation of a partnership representative
designated by the IRS, the final regula-
tions provide that the revocation is ef-
fective on the date the IRS sends noti-
fication that it determined that the
revocation is valid.

The comment requesting that the revo-
cation or resignation be immediately ef-
fective on the date it is signed or sent was
not adopted. Until it is received by the
IRS, the IRS cannot be aware of a revo-
cation or resignation to give it effect. Be-
fore the revocation or resignation is re-
ceived, the IRS will continue to work with
the person designated to represent the
partnership as the partnership representa-
tive. Nothing in the regulations prevents a
partnership or partnership representative
from providing a revocation or resignation
directly to the IRS employee handling the
administrative proceeding to ensure that
the IRS has received prompt notification
of the change.

Proposed § 301.6223-1(d)(1) and
(e)(1) provided that the IRS will notify
the partnership and other affected persons
(the resigning partnership representative
or designated individual or the partnership
representative (and designated individual,
if applicable) whose status is being re-
voked) when the IRS receives a resigna-
tion or revocation. To provide assurance
that the IRS has received and processed a
resignation or revocation, these sections
of the final regulations have been revised
to provide that, no later than 30 days after
receipt of a valid notification of a revoca-

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tion or resignation, the IRS will notify the
partnership and the resigning partnership
representative or designated individual or
the partnership representative (and desig-
nated individual, if applicable) whose sta-
tus is being revoked of its acceptance.

Proposed § 301.6223-1(e)(4) provided
that a partnership cannot revoke the des-
ignation of a partnership representative
designated by the IRS unless the partner-
ship receives permission from the IRS.
The final regulations under § 301.6223-
1(e)(6) are clarified to provide that the IRS
will not unreasonably withhold such per-
mission. To avoid confusion, § 301.6223-
1(e)(3) and (6) have been revised to provide
that when permission is granted, the IRS
will send the notification described in para-
graph § 301.6223-1(e)(1). The effective
date of the revocation is the date of that
notification, which, if the IRS is granting
permission for the revocation of the IRS-
designated partnership representative, will
be sent no later than 30 days after receipt of
the revocation.

### v. Notification of Change

Proposed § 301.6223-1(d)(1) provided
that a resigning partnership representative
must notify the partnership and the IRS of
the resignation, and proposed § 301.6223-
1(e)(1) provided that when a partnership
revokes a partnership representative des-
ignation, the partnership must notify the
partnership representative and the IRS.
Proposed § 301.6223-1(e)(3)(iii)(A)(2)
required a notification of revocation to
include a certification from the partner
signing the revocation that the person has
provided a copy of the revocation to the
partnership and to the partnership repre-
sentative whose designation is being re-
voked. Failure to include that certification
rendered the revocation invalid. One com-
ment recommended clarification on how
this certification should be made when the
partnership representative is deceased or
dissolved or the partnership is no longer in
contact with the partnership representa-
tive. The comment suggested that sending
the copy of the revocation to the last
known address should be sufficient. The
comment also suggested that the regula-
tions clarify whether there are any other
restrictions on the method of notifying the

partnership representative, such as proof
of delivery or electronic delivery.

State law and any contractual arrange-
ment between the parties generally control
the terms of the relationship between the
partnership and the partnership represen-
tative. Except as necessary to carry out the
statute, the regulations implementing the
centralized partnership audit regime attempt
not to impose requirements with respect to
interactions between the partnership and the
partnership representative. The require-
ments in proposed § 301.6223-1(d)(1) and
(e)(1) that the partnership notify the partner-
ship representative and that the partnership
representative notify the partnership were
not consistent with this approach. Therefore,
the Treasury Department and the IRS
believe that including these requirements
would unnecessarily create regulatory bur-
dens on partnerships and partnership repre-
sentatives without any significant benefit to
tax administration. Accordingly, the final
regulations have been revised to remove
these requirements. Consequently, a resign-
ing partnership representative and a partner-
ship making a revocation must now only
notify the IRS of the change in designation.
As long as they notify the IRS as required
under the regulations, the partnership and
the partnership representative may agree to
other notification requirements and are in
the best position to determine if such re-
quirements are necessary.

Another comment suggested that, in
the case of an entity partnership represen-
tative, notification by the IRS of a revo-
cation (as well as other notifications)
should also be required to be sent to the
designated individual. This comment was
not adopted. In the case of a change to an
entity partnership representative, the IRS
will only send one notification and plans
to adopt procedures under which such a
notification will be sent to the partnership
representative and addressed to the atten-
tion of the designated individual. This
procedure should avoid the need to send
duplicate notifications, which is burden-
some for the IRS, while also allowing the
partnership, the entity partnership repre-
sentative, and the designated individual to
arrange their affairs in a way to ensure
that important notifications from the IRS
are received by the appropriate persons.

Proposed § 301.6223-1(e)(1) required
the IRS to notify the partnership and the

affected partnership representative of a re-
vocation. This requirement has been re-
vised to provide that the IRS will only
give notification of a revocation made af-
ter the issuance of a notice of selection for
examination or a NAP. In contrast, the
final regulations do not require the IRS to
give notification of a revocation made si-
multaneously with an AAR. This change
is warranted because in some cases, the
IRS might accept an AAR as filed without
further interaction with the partnership or
communication with the partnership rep-
resentative. Requiring the IRS to provide
notification of a change in partnership rep-
resentative when an AAR is filed is un-
necessary unless the IRS selects the part-
nership for an examination as part of an
administrative proceeding, in which case
the partnership and the new partnership
representative will receive a NAP, which
is confirmation that the IRS received the
change made on the AAR. The partner-
ship can also confirm with the IRS at that
time of receipt of the notice of selection
for examination that the IRS received the
change of partnership representative.

In addition, the final regulations clarify
that the failure of the IRS to send any
notifications under §§ 301.6223-1(d) and
(e) to acknowledge receipt of a valid res-
ignation or revocation does not invalidate
the resignation or revocation. The noti-
fication provides the partnership with
information about when the change in part-
nership representative became effective.
However, the mere fact that a party does not
receive an IRS notification does not mean
that the resignation or revocation is not a
valid change in partnership representative.
A resignation or revocation that is valid
under paragraph (d) or (e) of § 301.6223-1
is valid regardless of whether the IRS sends
notification of receipt.

### C. IRS Designation of Partnership Representative

i. Determination that a Designation Is
Not in Effect

Proposed § 301.6223-1(f) provided the
IRS may determine a designation is not in
effect under certain circumstances. Under
proposed § 301.6223-1(f)(1), if the IRS
makes a determination that a designation
is not in effect, the IRS will notify the

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partnership and "the most recent partner-
ship representative for that partnership
taxable year" of that determination. One
comment noted that there may be circum-
stances where there was never a partner-
ship representative for the taxable year
and recommended the regulations be clar-
ified on this point. The comment describes
an example where the partnership repre-
sentative designated on the partnership re-
turn lacks substantial presence and con-
cludes that there would be no partnership
representative in that case.

This conclusion is incorrect. A part-
nership representative designated under
§ 301.6223-1 is in effect unless and
until the IRS determines otherwise. See
§ 301.6223-1(b)(1). Therefore, a person
designated on a partnership return as the
partnership representative is the partner-
ship representative for that taxable year
even if the person lacks substantial pres-
ence as defined in § 301.6223-1(b)(2)
unless and until the IRS makes a determi-
nation, in accordance with § 301.6223-1(f),
that the designation is not in effect. Accord-
ingly, prior to the issuance of a notification
from the IRS under § 301.6223-1(f)(1) that
the partnership representative designation is
not in effect, the designation of the partner-
ship representative on the partnership return
is in effect, even if the person designated
lacks substantial presence in the United
States.

Because a designated partnership rep-
resentative is in effect unless and until the
IRS determines otherwise, the vast major-
ity of partnerships will have a partnership
representative designation in effect be-
cause they will have designated the part-
nership representative on the return as re-
quired under § 301.6223-1(c). As a result,
in most cases there will be a partnership
representative to whom the notification
must be sent. However, there may be sit-
uations in which the partnership failed to
make a valid designation in accordance
with § 301.6223-1(c). To address these
situations, the comment was adopted and
§ 301.6223-1(f)(1) has been revised to
clarify that the IRS is not required to
notify the most recent partnership repre-
sentative if the partnership failed to des-
ignate one.

Another comment recommended that
any determination that a designation is not
in effect should not be made effective

until a new partnership representative has
been designated, either by the partnership
or the IRS. This comment was not ad-
opted. If there has been a determination
that a partnership representative designa-
tion is not in effect for a taxable year, the
IRS has determined that the partnership
representative is no longer a valid partner-
ship representative for purposes of con-
ducting an administrative proceeding of
that partnership with respect to that tax-
able year. To keep the designation in place
would run counter to this determination
and would hinder the partnership admin-
istrative proceeding. If, for example, the
partnership representative no longer meets
the substantial presence requirements un-
der § 301.6223-1(b) because the partner-
ship representative has left the country
and, as a result, is unreachable, neither the
partnership nor the IRS benefits from hav-
ing that partnership representative desig-
nation remain in place until a new part-
nership representative is designated. The
best result for both the partnership and the
IRS is for the partnership to designate a
new partnership representative who can
move the administrative proceeding for-
ward, which the partnership will have the
opportunity to do prior to the IRS desig-
nating one under the rules in § 301.6223-
1(f). Delaying the effective date of the
determination that no partnership repre-
sentative is in effect slows down the ad-
ministrative proceeding, which does not
benefit the partnership or the IRS.

Proposed § 301.6223-1(f)(2) provided
a list of reasons why the IRS might deter-
mine that a partnership representative des-
ignation is not in effect. Proposed
§ 301.6223-1(f)(2) provided that the IRS
may determine a designation is not in ef-
fect when, among other circumstances,
the IRS has received multiple revocations
within a 90-day period. See proposed
§ 301.6223-1(e)(7). One comment sug-
gested that the regulations should limit the
discretion of the IRS to determine that a
designation is not in effect under proposed
§ 301.6223-1(f)(2) to situations where the
IRS determines the multiple revocations
represent an effort to delay or obstruct the
administrative proceeding.

While there may be benign reasons for
multiple revocations, the practical effect is
the same regardless of the reason. The
IRS's receipt of multiple revocations and

designations will delay the administrative
proceeding and prevent the IRS from ef-
fectively conducting an administrative
proceeding. The administrative proceed-
ing should not be delayed, intentionally or
unintentionally, due to an inability to set-
tle on a partnership representative.

Additionally, requiring the IRS to de-
termine if multiple revocations were due
to inadvertence or a desire to delay or
obstruct the administrative proceeding
adds additional burden that would be
costly for both the partnership and the IRS
to resolve. It would also inevitably lead to
disputes between the IRS and partnerships
regarding factually intensive questions
underlying the intent of revocations. Any
time and resources devoted to discerning
the purpose behind each revocation ulti-
mately delays the entire administrative
proceeding. There may be situations in
which partners genuinely disagree as to
who had authority to appoint the partner-
ship representative or who the partnership
representative should be. However, these
disputes are best resolved by the partners
themselves. The IRS should not be the
arbiter of disputes between partners. Con-
sequently, this comment has not been ad-
opted.

There may be circumstances, however,
when multiple revocations are necessary
due to circumstances outside of the part-
nership's control, such as death or serious
health issues or due to a ministerial error.
To accommodate these types of circum-
stances, the proposed regulations pro-
vided the IRS with the discretion to keep
the partnership designation in effect even
though multiple revocations were re-
ceived within a 90-day period. The pro-
posed regulations did not require the IRS
to make a determination that the designa-
tion is no longer in effect, but rather pro-
vided the IRS with the ability to make
such a determination when appropriate. In
retaining this rule, the final regulations
accommodate situations where multiple
revocations are not the result of bad faith
and the IRS determines that allowing such
revocations does not interfere with the
IRS's ability to conduct the administrative
proceeding.

Section 301.6223-1(f)(5) of the
proposed regulations provided that the
multiple-revocation rule was triggered if
the IRS receives more than one revocation

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for the same partnership taxable year
within a 90-day period. The final regula-
tions remove the language "signed by dif-
ferent partners" from that provision. The
fact that multiple revocations are received
within 90 days is all that is required for
the IRS to exercise its discretion under
§ 301.6223-1(f)(2). The number of part-
ners involved is not relevant to whether
multiple revocations are received and
whether that could slow down the admin-
istrative proceeding. Accordingly, the reg-
ulations have been revised to make clear
that the receipt of multiple revocations,
not the receipt of multiple revocations
signed by different partners, is what is
required for the provision in § 301.6223-
1(f) to be satisfied.

In addition, the rule in the proposed
regulations allowing the partnership the
option to appoint a partnership represen-
tative before one is designated by the IRS
has been revised in the case of multiple
revocations. The final regulations provide
that if the IRS determines a designation is
not in effect in the case of multiple revo-
cations, the IRS will designate a partner-
ship representative, and unlike the general
rule for IRS designation of a partnership
representative, the partnership will not be
given 30 days to designate a partnership
representative. The stricter rule in the case
of multiple revocations is necessary be-
cause providing the partnership another
opportunity to designate a partnership rep-
resentative would only perpetuate the ex-
isting problem and may delay the admin-
istrative proceeding. The final regulations
also make clear that the multiple revoca-
tions rule applies to multiple revocations
of a designated individual as well. Al-
though the IRS may designate a new part-
nership representative in the case of mul-
tiple revocations, like any other IRS
designation of a partnership representa-
tive, the partnership may revoke that part-
nership representative designation with
the consent of the IRS.

In order to clarify the operation of the
90-day period under the multiple revoca-
tion rule, § 301.6223-1(e)(7) was revised
to provide that if the IRS receives a revo-
cation (the current revocation), and,
within the 90-day period prior to receiving
the current revocation, the IRS had re-
ceived another revocation for the same
partnership taxable year, the IRS may de-

termine that a designation is not in effect.
This change clarifies that the multiple re-
vocation rule may apply to any revocation
received by the IRS. When the IRS re-
ceives a revocation, the IRS may look
back to the preceding 90 days and deter-
mine whether it had received a prior re-
vocation for the same taxable year. If it
had, the multiple revocation rule applies.

A time limitation for the IRS to notify
the partnership that the designation is not
in effect was also added to the multiple
revocation rule in § 301.6223-1(e)(7)(ii).
That time limitation provides that if the
IRS plans to determine a designation is
not in effect due to receipt of multiple
revocations, the IRS must do so within 90
days of the receipt of the current revoca-
tion the IRS is considering. For example,
assume the partnership files two revoca-
tions with respect to the same taxable year
\- one on May 31, 2019 and one on August
25, 2019. With respect to the August 25th
revocation, the IRS received the May 31st
revocation within the 90-day period prior
to August 25, 2019, meaning the multiple
revocation rule under § 301.6223-
1(e)(7)(i) applies. Under the time limita-
tion provided in § 301.6223-1(e)(7)(ii),
the IRS would then have 90 days from
August 25, 2019 to determine a designa-
tion is not in effect. If, during that 90-day
period starting with August 25, 2019, the
IRS received another revocation, the mul-
tiple revocation rule under § 301.6223-
1(e)(7)(i) would again be triggered, and
pursuant to § 301.6223-1(e)(7)(ii), the
IRS would have another 90 days from that
additional revocation to determine a des-
ignation is not in effect. The time limita-
tion under § 301.6223-1(e)(7)(ii) pro-
vides certainty for the partnership and the
IRS regarding when the IRS may deter-
mine that a designation is not in effect
after multiple revocations have been filed.

Another comment recommended that a
partnership that makes a "technically
faulty" designation and receives notifica-
tion from the IRS that no designation of a
partnership representative is in effect
should be given an opportunity to cure
that designation before the IRS designates
a new partnership representative. Nothing
in the regulations prevents the IRS from
providing the partnership with an oppor-
tunity to cure a defective designation prior
to the IRS making its own designation.

The IRS will provide additional guidance
to its agents regarding designation of a
partnership representative, and the IRS in-
tends to generally recommend providing
an opportunity to cure a defective desig-
nation. The IRS, however, may not allow
for such an opportunity in all cases due to
time restraints, multiple revocations, or
the particular circumstances. Accordingly,
this comment was not adopted. However,
as the Treasury Department and the IRS
develop more experience in this area, ad-
ditional guidance may be issued.

Proposed § 301.6223-1(f)(2) has also
been amended to add a new paragraph
(vii), which provides that the IRS may
determine that a designation is not in ef-
fect for any other reason described in pub-
lished guidance. This paragraph was
added to allow flexibility to add other
circumstances that may require the IRS to
determine the designation is not in effect
as the Treasury Department and the IRS
gain more experience with the centralized
partnership audit regime.

The final regulations also provide that
the IRS is under no obligation to search
for information about whether any of the
circumstances listed in § 301.6223-
1(f)(2) exists. In addition, the final regu-
lations clarify that even if the IRS has
knowledge that one of the circumstances
listed in § 301.6223-1(f)(2) exists, the
IRS is not required to determine that a
designation is not in effect. This clarifica-
tion was added for the reasons stated
above in this section of the preamble. For
instance, partners may have filed multiple
revocations within 90 days, but if there
was a valid reason for the multiple revo-
cations, the IRS may not need to deter-
mine the partnership representative desig-
nation is not in effect.

## ii. IRS Designation

Numerous comments recommended
changes to the rules under proposed
§ 301.6223-1(f) governing IRS designa-
tion of a partnership representative when
no designation is in effect. Several com-
ments recommended that the regulations
impose restrictions on whom the IRS may
designate to serve as the partnership rep-
resentative. Two comments suggested
prohibiting the IRS from designating an
IRS employee, agent, or contractor as the

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partnership representative. The Treasury
Department and the IRS agree that an IRS
employee, agent, or contractor who has no
affiliation with the partnership subject to
an administrative proceeding should not
be designated as the partnership represen-
tative. An IRS employee, agent, or con-
tractor may be a partner in the partnership
subject to an administrative proceeding,
however. Provided this interest in the part-
nership is unrelated to the individual's
affiliation with the IRS, the individual's
affiliation with the IRS should not pre-
clude designation as the partnership rep-
resentative. Accordingly, § 301.6223-
1(f)(5) was revised to provide that the IRS
may not designate an IRS employee,
agent, or contractor as the partnership rep-
resentative unless the individual is a part-
ner in the partnership subject to an admin-
istrative proceeding. Even if the IRS
employee, agent, or contractor is a partner
in such partnership, however, the IRS in-
tends to avoid designating such an indi-
vidual as the partnership representative if
another suitable person is available.

Several comments recommended that
the IRS be required to select a current
partner to serve as the partnership repre-
sentative. Another comment recom-
mended that the IRS be required to select
the partner with the largest profits interest.
Another comment requested that the reg-
ulations include an ordering rule (that is,
the IRS selects a partner first; if no partner
is available, an employee, etc.). Another
comment recommended that where the
partnership is in bankruptcy, the IRS
should select the trustee to serve as the
partnership representative.

Imposing regulatory restrictions on
whom the IRS can designate as the part-
nership representative could adversely af-
fect the IRS's ability to select a suitable
partnership representative, which harms
both the IRS and the partnership. In some
cases, a current partner might be the ap-
propriate selection. In other cases, a for-
mer partner or an employee of the part-
nership might be more appropriate. For
example, a current year partner might be
more appropriate in a case where the cur-
rent year partner is the person with access
to the books and records of the partner-
ship. However, a former partner has the
advantage of being a partner from the year
subject to an administrative proceeding

and may be able to communicate with
reviewed year partners more efficiently
when seeking to modify the imputed un-
derpayment. In the context of a partner-
ship in bankruptcy, a non-member man-
ager of the partnership, more familiar with
the partnership's day-to-day business
might be a more appropriate partnership
representative than the bankruptcy trustee
hired during the administrative proceed-
ing. The Treasury Department and the IRS
do not yet have experience with the new
centralized partnership audit regime. As
such, it would be unwise at this time to
restrict whom the IRS may designate to be
the partnership representative (other than as
described earlier in this section). Conse-
quently, comments recommending these
types of restrictions were not adopted.

One comment asked that the final reg-
ulations clarify that the IRS may select an
entity partnership representative and that
if it does so, the IRS must provide the
partnership with the contact information
of the designated individual. This com-
ment was adopted. Therefore, if the IRS
does designate an entity to be the part-
nership representative, the IRS will also
appoint a designated individual and pro-
vide the contact information of the des-
ignated individual to the partnership.
See § 301.6223-1(f)(5)(i).

Proposed § 301.6223-1(f)(5)(ii) pro-
vides a list of factors the IRS "may" con-
sider when designating a partnership rep-
resentative. A comment suggested that
proposed § 301.6223-1(f)(5)(ii) be re-
vised to provide that the IRS "will ordi-
narily" consider "one or more" of those
factors. The IRS intends to consider these
factors when designating a partnership
representative. Because the suggested lan-
guage "will ordinarily" more accurately
reflects the IRS's intent this comment has
been adopted. However, the final regula-
tions have also been revised to clarify that
the IRS is not obligated to search for
information about the factors to be con-
sidered and that IRS knowledge of any of
the factors does not obligate the IRS to
select a particular person as partnership
representative. This clarification is partic-
ularly important in the case of a partner-
ship that is nonresponsive because the IRS
may not be able to consider certain factors
where the partners are unreachable and
certain information is not readily attain-

able. The IRS, therefore, will ordinarily
consider these factors, but the IRS may
not consider the factors in every case.

The final regulations have also been
revised to clarify that these factors are not
the equivalent of requirements for eligi-
bility to be designated by the IRS as a
partnership representative. Only one fac-
tor may be applicable to the person des-
ignated as partnership representative and
yet that person may be the one who is
appropriate to designate based on who is
available and willing to serve and the unique
facts and circumstances of the partnership,
the administrative proceeding, or other is-
sues. Accordingly, § 301.6223-1(f)(5)(ii)
has been revised to clarify that the IRS will
ordinarily consider one or more of the fac-
tors when determining whom to designate
as partnership representative, no single fac-
tor is determinative, and a person may be
designated by the IRS as partnership repre-
sentative even if none of the factors is ap-
plicable.

Several comments requested changes to
the factors listed in proposed § 301.6223-
1(f)(5)(ii). One comment recommended that
the IRS generally consider the profits inter-
ests of the partners. Considering the profits
interest of a partner is reasonable because
profits interest can in some circumstances
directly affect how the results of an admin-
istrative proceeding will affect an individual
partner. Additionally, because profits inter-
est is a factor that can be determined from
the face of the partnership return for most
partnerships, consideration of a partner's
profits interest when designating a partner-
ship representative is administrable for the
IRS. Therefore, § 301.6223-1(f)(5)(ii) has
been revised to adopt this comment.

One comment suggested that the IRS
should consider the person's involvement
in the partnership's business in determin-
ing whether to designate that person as the
partnership representative. The regula-
tions already contain factors that consider
the person's overall knowledge of the
partnership and its books and records.
These factors already incorporate consid-
eration of the person's involvement in the
partnership's business. Because the pro-
posed factor duplicates those already in-
cluded, this comment was not adopted.

Several comments made suggestions
with respect to the partnership's inability
to revoke a partnership representative des-

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ignation made by the IRS without having
IRS consent of that revocation. One com-
ment disagreed in general with this rule
and recommended that the partnership be
able to revoke a partnership designation
made by the IRS without the consent of
the IRS. Another comment stated that the
partnership should be involved in the
IRS's designation of a partnership repre-
sentative. Another comment suggested
that the partnership should be able to re-
voke a partnership representative desig-
nated by the IRS if there is a bona fide
dispute over the capacity of the partner-
ship representative designated by the IRS.

The rule that the partnership must seek
the IRS's permission before revoking an
IRS-designated partnership representative
is premised on the fact that the partnership
has not properly designated a partnership
representative on its own. If the IRS has to
make a designation, the partnership has
either failed to designate its own choice
for partnership representative or has made
multiple revocations.

Allowing the partnership to unilater-
ally revoke a partnership representative
that had been designated by the IRS un-
dermines the purpose of the IRS designa-
tion. For an administrative proceeding to
function properly and without delay and
for the partnership to be represented in
that administrative proceeding, a person
who can act for the partnership and who is
an eligible partnership representative must
be designated. Additionally, because the
IRS only designates a partnership repre-
sentative when a partnership has failed to
properly make its own designation, the
partnership is ultimately in control over
whether the IRS will need to designate a
partnership representative. Consequently,
the final regulations retain the rule that a
partnership may revoke a partnership rep-
resentative designated by the IRS only
with the consent of the IRS, and the com-
ments were not adopted.

## D. Authority of the Partnership Representative

i. Binding Effect of Actions Taken by
the Partnership Representative

One comment suggested that, given
that partnerships are formed under state
law, state law should control the designa-

tion and authority of the partnership rep-
resentative. Another comment suggested
that the final regulations should clarify
that the principles of agency law apply to
the partnership representative, and that the
partnership representative "will be operat-
ing as the agent on behalf of the partner-
ship subject to the same control by the
partnership as any principal would have
over an agent." These comments relate to
proposed § 301.6223-2(c), which pro-
vided that no state law, partnership agree-
ment, or other document could limit the
authority of the partnership representa-
tive. Because the authority of the partner-
ship representative under federal law pre-
empts any state law requirements these
comments were not adopted. The lan-
guage of § 301.6223-2(d) (which corre-
sponds with proposed § 301.6223-2(c))
has been revised to clarify that this rule is
applicable only with respect to the central-
ized partnership audit regime. Accord-
ingly, the final regulations provide that the
failure to adhere to state law requirements
has no effect on actions taken by the part-
nership representative with respect to the
centralized partnership regime.

The regulations are drafted to provide
significant flexibility to the partnership to
determine who will represent it and for the
partnership and the partnership represen-
tative to negotiate the terms of their rela-
tionship. The Treasury Department and
the IRS have attempted to refrain from
creating unnecessary regulatory burdens.
The partnership and the partnership repre-
sentative are free to enter into contractual
agreements to define the scope and limits
of their relationship. However, because
the IRS is not a party to these agreements,
it is not bound by them. Any remedy the
partnership would have against the part-
nership representative if the partnership
representative failed to act in accordance
with those agreements would be under
state law with respect to the partnership
representative.

Section 301.6223-2(d) is not intended
to prevent partnerships from taking ad-
vantage of state law remedies for partner-
ships who wish to restrict a partnership
representative's authority under state law.
Rather, the regulations leave the enforce-
ment of such restrictions to the relevant
parties, which simplifies the administra-
tive proceeding consistent with the design

of the centralized partnership audit
regime. Under TEFRA, significant re-
sources were often expended by the IRS
and the partnership to determine what
state law restrictions might affect who
could act for the partnership and under
what circumstances. The centralized part-
nership audit regime removes this aspect
of TEFRA.

## ii. Authority

One comment recommended that
where there is a question regarding a per-
son's authority to serve as the partnership
representative, the partnership should pro-
vide a notice signed by all the partners in
the partnership as conclusive evidence
that a particular person has the authority
to serve as the partnership representative.
This comment was not adopted because
under section 6223 the authority of a per-
son to act as partnership representative is
based on whether the person was properly
designated as the partnership representa-
tive in accordance with section 6223 and
the regulations, not on whether state law
or notice from the partners confirms such
authority.

One comment suggested that clarifying
language be added to the end of a sentence
in § 301.6223-2(a) providing that a notice
of final partnership adjustment is final
when not contested by the partnership rep-
resentative "on behalf of the partnership."
The Treasury Department and the IRS
agree that as drafted § 301.6223-2(a) was
confusing. It is the partnership that con-
tests the notice of final partnership adjust-
ment, even if it does so through the part-
nership representative. Accordingly, the
final regulations clarify this language by
revising § 301.6223-2(a) to remove the
reference to the partnership representa-
tive.

### E. Other Comments and Changes

A comment recommended that pro-
posed § 301.6223-2 be clarified to pro-
vide that a partnership representative may
engage a person to act on behalf of the
partnership representative under a power
of attorney during the administrative pro-
ceeding (referred to as a “POA") and that
the POA can participate in meetings or
receive copies of correspondence. Noth-

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ing in the regulations prevents the partner-
ship representative from engaging a POA
for this purpose. Language has been
added to § 301.6223-2(d) to clarify this
issue. Language has also been added to
§ 301.6223-1(a) to clarify that appoint-
ment of a POA does not designate the
POA as partnership representative.

A new paragraph (c) has been added to
the final regulations to address the effect
of withdrawal of a NAP on actions taken
by a partnership representative. Proposed
§ 301.6231-1(f) (December 19 NPRM)
allows the IRS to withdraw a NAP after it
has been issued. Proposed § 301.6231-
1(f) further provides that the withdrawn
NAP has no effect for purposes of the
centralized partnership audit regime.

The partnership representative may
have taken actions before withdrawal of
the NAP. In addition, after the NAP has
been issued, but before the NAP has been
withdrawn, the partnership representative
may have changed. Section 301.6223-
2(c) has been added to the final regula-
tions to clarify that even though the with-
drawn NAP has no effect, any actions
taken by a partnership representative (or
successor partnership representative after
a change in partnership representative that
occurred after the issuance of the NAP
and before the NAP was withdrawn) are
binding on the partnership, even though
the NAP has been withdrawn. An example
was also added to illustrate this clarifica-
tion under § 301.6223-2(c) regarding
withdrawal of the NAP. See § 301.6223-
2(e), Example 6. As a result of this new
paragraph (c), proposed § 301.6223-2(c)
was moved to § 301.6223-2(d).

One comment suggested that a partner-
ship representative should have to affirm
that he or she will serve as the partnership
representative by checking a box on the
partnership return where the designation
is made. The comment suggested that hav-
ing such an affirmation will save time at
the beginning of the administrative pro-
ceeding.

Adopting this comment would not save
time at the beginning of the administrative
proceeding because even if the box was
checked by the partnership representative
at the time the return is filed, by the time
the IRS commences the administrative
proceeding, the partnership representative
may no longer be available or willing to

serve. Similarly, a partnership representa-
tive might erroneously not check the box
at the time the return is filed but be willing
to serve at the time the administrative
proceeding commences. Whether the part-
nership representative checked the box at
one point in time is not the right proxy for
whether the partnership representative is
willing to serve as the partnership repre-
sentative at some other point in time.
Rather than add this unnecessary require-
ment, the regulations provide that the per-
son designated as the partnership repre-
sentative is the partnership representative
until there is a resignation, revocation, or
the IRS determines no designation is in
effect. Once the administrative proceeding
begins, an unwilling partnership represen-
tative may resign or the partnership may
revoke the partnership representative and
designate a successor. Accordingly, this
comment was not adopted.

One comment suggested that the part-
nership representative be required to no-
tify partners of significant developments
(for example, extensions of the period
of limitations, settlements, petitioning a
court, etc.). There is no requirement in the
statute for the partnership representative
to notify any partner of significant devel-
opments. This is a departure from TE-
FRA, which required certain notifications
and provided participation rights for cer-
tain partners. The proposed regulations
adhered to the legislative judgment that
the partnership representative is the sole
representative of the partnership, and the
actions of the partnership representative
bind the partners. Nothing in the proposed
regulations prevents the partnership from
contracting with the partnership represen-
tative to require the partnership represen-
tative to notify the partnership or the part-
ners of any developments, significant or
otherwise.

The Treasury Department and the IRS
have determined that the government
should not mandate how and when the
partnership representative communicates
with partners or other persons. By remain-
ing silent on this issue, the regulations
allow a partnership, its partners, and the
partnership representative to arrange their
own affairs without unnecessary regula-
tory requirements that interfere with these
relationships. Accordingly, this comment
was not adopted.

Proposed § 1.6223-1(a) provided that a
partnership representative must update the
partnership representative's contact infor-
mation when such information changes as
required by forms, instructions, and other
guidance prescribed by the IRS. One com-
ment requested that a partnership repre-
sentative only be required to update its
contact information upon the selection of
the partnership for an examination or the
filing of an AAR. At this time, there is no
requirement that the partnership represen-
tative update contact information prior to
selection for examination or the filing of
an AAR. Experience with the new regime
may inform the Treasury Department and
the IRS that updating contact information
prior to selection for an examination or
filing an AAR is helpful or important. The
final regulations have been clarified to
provide that contact information must be
updated if required by forms, instructions,
or other guidance published by the IRS.

### 2. Election into Centralized Partnership Audit Regime

The Treasury Department and the IRS
received no comments with respect to pro-
posed § 301.9100-22 and made no sub-
stantive revisions to the proposed regula-
tions. Accordingly, the final regulations
adopt the proposed regulations without
any substantive change. Minor editorial
changes were made. The temporary regu-
lations are removed.

## Special Analyses

This regulation is not subject to review
under section 6(b) of Executive Order
12866 pursuant to the Memorandum of
Agreement (April 11, 2018) between the
Department of the Treasury and the Office
of Management and Budget regarding re-
view of tax regulations. Therefore, a reg-
ulatory impact assessment is not required.

It is hereby certified that these rules
will not have a significant economic im-
pact on a substantial number of small en-
tities. Although these rules may affect a
substantial number of small entities, the
economic impact is not substantial because
these rules merely provide clarifying guid-
ance on the statutory requirements to desig-
nate a partnership representative. These
rules reduce the existing burden on partner-
ships to comply with the statutory require-

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ments by providing clear rules and guidance
regarding the statutory requirements for
partnerships required to designate a partner-
ship representative under section 6223 and
for partnerships to make an election for the
centralized partnership audit regime to ap-
ply to taxable years beginning after Novem-
ber 2, 2015 and before January 1, 2018. For
the reasons stated, the final rules will not
have a significant economic impact on a
substantial number of small entities. Ac-
cordingly, a regulatory flexibility analysis
under the Regulatory Flexibility Act (5
U.S.C. Chapter 6) is not required.

Pursuant to section 7805(f) of the
Code, the notice of proposed rulemaking
preceding these regulations was submitted
to the Chief Counsel for Advocacy of the
Small Business Administration for com-
ment on its impact on small business, and
no comments were received.

### Statement of Availability of IRS Documents

IRS Revenue Procedures, Revenue
Rulings, Notices and other guidance cited
in this preamble are published in the In-
ternal Revenue Bulletin (or Cumulative
Bulletin) and are available from the Su-
perintendent of Documents, U.S. Govern-
ment Publishing Office, Washington, DC
20402, or by visiting the IRS website at
www.irs.gov.

#### Drafting Information

The principal authors of these final reg-
ulations are Joy E. Gerdy Zogby of the
Office of the Associate Chief Counsel
(Procedure and Administration) and Jen-
nifer M. Black of the Office of the Asso-
ciate Chief Counsel (Procedure and Ad-
ministration). However, other personnel
from the Treasury Department and the
IRS participated in their development.
* * * * *

### Adoption of Amendments to the Regulations

Accordingly, 26 CFR part 301 is
amended as follows:

## PART 301-PROCEDURE AND ADMINISTRATION

Paragraph 1. The authority citation for
part 301 continues to read in part as fol-
lows:

Authority: 26 U.S.C. 7805 * * *

Par. 2. Section 301.6223-1 is added to
read as follows:

§ 301.6223-1 Partnership
representative.

(a) Each partnership must have a part-
nership representative. A partnership sub-
ject to subchapter C of chapter 63 of the
Internal Revenue Code (subchapter C of
chapter 63) for a partnership taxable year
must designate a partnership representa-
tive for the partnership taxable year in
accordance with this section. There may
be only one designated partnership repre-
sentative for a partnership taxable year at
any time. The designation of a partnership
representative for a partnership taxable
year under this section remains in effect
until the date on which the designation of
the partnership representative is termi-
nated by valid resignation (as described in
paragraph (d) of this section), valid revo-
cation (as described in paragraph (e) of
this section), or a determination by the
Internal Revenue Service (IRS) that the
designation is not in effect (as described
in paragraph (f) of this section). A desig-
nation of a partnership representative for a
partnership taxable year under paragraphs
(e) or (f) of this section supersedes all
prior designations of a partnership repre-
sentative for that year. If required by
forms, instructions, and other guidance
prescribed by the IRS, a partnership rep-
resentative must update the partnership
representative's contact information when
such information changes. Only a person
designated as a partnership representative in
accordance with this section will be recog-
nized as the partnership representative under
section 6223. A power of attorney (includ-
ing a Form 2848, Power of Attorney) may
not be used to designate a partnership rep-
resentative. See § 301.6223-2(a), (b), and
(c) with regard to the binding effect of ac-
tions taken by the partnership representa-
tive. See § 301.6223-2(d) with regard to the
sole authority of the partnership representa-
tive to act on behalf of the partnership. See

paragraph (f) of this section for rules regard-
ing designation of a partnership representa-
tive by the IRS.

(b) Eligibility to serve as a partnership
representative-(1) In general. Any per-
son (as defined in section 7701(a)(1)) that
meets the requirements of paragraphs
(b)(2) and (3) of this section, as applica-
ble, is eligible to serve as a partnership
representative, including a wholly owned
entity disregarded as separate from its
owner for federal tax purposes. A person
designated under this section as partner-
ship representative is deemed to be eligi-
ble to serve as the partnership representa-
tive unless and until the IRS determines
that the person is ineligible. A partnership
can designate itself as its own partnership
representative provided it meets the re-
quirements of paragraphs (b)(2) and (3) of
this section.

(2) Substantial presence in the United
States. A person must have substantial
presence in the United States to be the
partnership representative. A person has
substantial presence in the United States
for the purposes of this section if-

(i) The person makes themselves avail-
able to meet in person with the IRS in the
United States at a reasonable time and
place as determined by the IRS in accor-
dance with § 301.7605-1; and

(ii) The person has a United States
taxpayer identification number, a street
address that is in the United States and a
telephone number with a United States
area code.

(3) Eligibility of an entity to be a part-
nership representative-(i) In general. A
person who is not an individual may be a
partnership representative only if an indi-
vidual who meets the requirements of
paragraph (b)(2) of this section is ap-
pointed by the partnership as the sole in-
dividual through whom the partnership
representative will act for all purposes un-
der subchapter C of chapter 63. A partner-
ship representative meeting the require-
ments of this paragraph (b)(3) is an entity
partnership representative, and the indi-
vidual through whom such entity partner-
ship representative acts is the designated
individual. Designated individual status
automatically terminates on the date that
the designation of the entity partnership
representative for which the designated
individual was appointed is no longer in

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effect in accordance with paragraph (d),
(e), or (f) of this section.

(ii) Appointment of a designated indi-
vidual. A designated individual must be
appointed by the partnership at the time of
the designation of the entity partnership
representative in the manner prescribed by
the IRS in forms, instructions, and other
guidance. Accordingly, if the entity part-
nership representative is designated on the
partnership return for the taxable year in
accordance with paragraph (c)(2) of this
section, the designated individual must be
appointed by the partnership at that time.
Similarly, if the entity partnership repre-
sentative is designated under paragraph
(e) of this section (regarding revocation
and subsequent designation after revoca-
tion of a partnership representative), the
designated individual must be appointed
at that time. If the partnership fails to
appoint a designated individual at the time
and in the manner set forth in this para-
graph (b)(3)(ii), the IRS may determine
that the entity partnership representative
designation is not in effect under para-
graph (f) of this section.

(4) Examples. The following examples
illustrate the rules of this paragraph (b).

Example 1. Partnership designates PR as its part-
nership representative for its 2018 tax year on its
timely filed 2018 partnership return. The IRS initi-
ates an administrative proceeding with respect to
Partnership's 2018 tax year. PR has a United States
taxpayer identification number, a United States street
address, and a phone number with a United States
area code. The IRS contacts PR and requests an
in-person meeting with respect to the administrative
proceeding. PR works with the IRS and agrees to
meet. PR has substantial presence in the United
States because she meets all the requirements under
paragraph (b)(2) of this section.

Example 2. The facts are the same as in Example
1 of this paragraph (b)(4), except that PR is an entity
and Partnership appointed DI, a designated individ-
ual to act on behalf of PR for its 2018 tax year on its
timely filed 2018 partnership return. DI has a United
States taxpayer identification number and a phone
number with a United States area code. However, the
address provided for DI is not a United States ad-
dress. Accordingly, PR is not an eligible partnership
representative because PR is an entity and DI does
not satisfy the requirements of paragraph (b)(3)(i) of
this section. Although DI does not have substantial
presence in the United States under paragraph (b)(2)
of this section and therefore PR is not an eligible
partnership representative, until there is a resignation
or revocation under paragraph (d) or (e) of this
section or until the IRS determines the partnership
representative designation is no longer in effect un-
der paragraph (f) of this section, the designation of
PR as the partnership representative remains in ef-
fect in accordance with paragraph (a) of this section,

and Partnership and all its partners are bound by the
actions of PR as the partnership representative.

Example 3. The facts are the same as in Example
1 of this paragraph (b)(4), except PR works in a
foreign country and spends the majority of her time
there. Unless PR otherwise fails to meet one of the
requirements under paragraph (b)(2) of this section,
PR has substantial presence in the United States.
However, even if PR fails to meet one of the require-
ments under paragraph (b)(2) of this section, until
there is a resignation or revocation under paragraph
(d) or (e) of this section or until the IRS determines
the partnership representative designation is no lon-
ger in effect under paragraph (f) of this section, the
designation of PR as the partnership representative
remains in effect in accordance with paragraph (a) of
this section, and Partnership and all its partners are
bound by the actions of PR as the partnership rep-
resentative.

(c) Designation of partnership repre-
sentative by the partnership-(1) In gen-
eral. The partnership must designate a
partnership representative separately for
each taxable year. The designation of a
partnership representative for one taxable
year is effective only for the taxable year
for which it is made.

(2) Designation. Except in the case of a
designation of a partnership representative
(and the appointment of the designated
individual, if applicable) after an event
described in paragraph (d) of this section
(regarding resignation), paragraph (e) of
this section (regarding revocation by the
partnership), or paragraph (f) of this sec-
tion (regarding designation made by the
IRS), or except as prescribed in forms,
instructions, and other guidance, designa-
tion of a partnership representative (and
the appointment of the designated individ-
ual, if applicable) must be made on the
partnership return for the partnership tax-
able year to which the designation relates
and must include all of the information
required by forms, instructions, and other
guidance, including information about the
designated individual if paragraph (b)(3)
of this section applies. The designation of
the partnership representative (and the ap-
pointment of the designated individual, if
applicable) is effective on the date that the
partnership return is filed.

(3) Example. The following example
illustrates the rules of this paragraph (c).

Example. Partnership properly designates PR1 as
its partnership representative for taxable year 2018
on its 2018 partnership return. Partnership designates
PR2 as its partnership representative for taxable year
2021 on its 2021 partnership return. In 2022, the IRS
mails Partnership a notice of administrative proceed-
ing under section 6231(a)(1) with respect to Partner-

ship's 2018 taxable year. PR1 is the partnership
representative for the 2018 partnership taxable year,
notwithstanding the designation of PR2 as partner-
ship representative for the 2021 partnership taxable
year.

(d) Resignations-(1) In general. A
partnership representative or designated
individual may resign as partnership rep-
resentative or designated individual, as
applicable, for a partnership taxable year
for any reason by notifying the IRS in
writing of the resignation in accordance
with forms, instructions, and other guid-
ance prescribed by the IRS. A resigning
partnership representative may not desig-
nate a successor partnership representa-
tive. A resigning designated individual
may not designate a successor designated
individual or partnership representative.
No later than 30 days after the IRS re-
ceives a written notification of resigna-
tion, the IRS will send written confirma-
tion of receipt of the written notification to
the partnership and the resigning partner-
ship representative (to the attention of the
designated individual if appropriate). A
failure by the IRS to send any notification
under this paragraph (d) does not invali-
date a valid resignation made pursuant to
this paragraph (d). A failure by the part-
nership representative (or designated indi-
vidual, if the designated individual is the
person resigning) to satisfy the require-
ments of this paragraph (d) is treated as if
there were no resignation, and the partner-
ship representative designation (and desig-
nated individual appointment, if applicable)
remains in effect until the designation (or
appointment) is terminated by valid resigna-
tion (as described in this paragraph (d)),
valid revocation by the partnership (as de-
scribed in paragraph (e) of this section), or a
determination by the IRS that the designa-
tion is not in effect (as described in para-
graph (f) of this section). See § 301.6223-2
for binding nature of actions taken by the
partnership representative or designated in-
dividual on behalf of a partnership represen-
tative, if applicable, prior to resignation.

(2) Time for resignation. A partnership
representative or designated individual
may submit the written notification of res-
ignation described in paragraph (d)(1) of
this section to the IRS only after the IRS
issues a notice of administrative proceed-
ing (NAP) under section 6231(a)(1) for
the partnership taxable year for which the
partnership representative designation is

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in effect or at such other time as pre-
scribed by the IRS in forms, instructions,
or other guidance. If the IRS withdraws
the NAP pursuant to § 301.6231-1(f), any
valid resignation by the partnership repre-
sentative or designated individual under
this paragraph (d) prior to the withdrawal
of the NAP remains in effect.

(3) Effective date of resignation. A
valid resignation is immediately effective
upon the IRS's receipt of the written no-
tification described in paragraph (d)(1) of
this section. As of the effective date of the
resignation-

(i) The resigning partnership represen-
tative (and designated individual, if appli-
cable) may not take any action on behalf
of the partnership with respect to the part-
nership taxable year affected by the resig-
nation;

(ii) The partnership representative des-
ignation is no longer in effect with respect
to the partnership taxable year affected by
the resignation;

(iii) In the case of a resigning entity
partnership representative, the appoint-
ment of the designated individual is no
longer in effect with respect to the part-
nership taxable year affected by the resig-
nation; and

(iv) In the case of a resigning desig-
nated individual, the designation of the
entity partnership representative is no lon-
ger in effect with respect to the partner-
ship taxable year affected by the resigna-
tion.

(e) Revocations-(1) In general. A part-
nership may revoke a designation of a
partnership representative or appointment
of a designated individual for a partner-
ship taxable year for any reason by noti-
fying the IRS in writing of the revocation
in accordance with forms, instructions,
and other guidance prescribed by the IRS.
The partnership may make such revoca-
tion regardless of when and how the des-
ignation or appointment was made, except
as provided in paragraph (e)(6) of this
section (regarding designation by the
IRS). The revocation must include the
designation of a successor partnership
representative (and the appointment of a
designated individual, if applicable). In
the case of a revocation of only the des-
ignated individual appointment, the part-
nership must designate a successor desig-
nated individual. No later than 30 days

after the IRS receives a written notifica-
tion of revocation submitted at the time
described in paragraph (e)(2) of this sec-
tion, the IRS will send written confirma-
tion of receipt of the written notification to
the partnership, the revoked partnership
representative or, in the case of a revoca-
tion of only the appointment of a desig-
nated individual, to the revoked desig-
nated individual, and to the newly
designated partnership representative. In
the case of a revocation of an entity part-
nership representative, the notification
will be sent to the entity partnership rep-
resentative, to the attention of the desig-
nated individual. A failure by the IRS to
send any notification under this paragraph
(e) does not invalidate a valid revocation
made pursuant to this paragraph (e). A
failure by the partnership to satisfy the
requirements of this paragraph (e), includ-
ing failure to designate a successor, is
treated as if no revocation has occurred
and the partnership representative desig-
nation (and designated individual appoint-
ment, if applicable) remains in effect until
the designation (or appointment) is termi-
nated either by valid resignation (as de-
scribed in paragraph (d) of this section),
valid revocation by the partnership (as
described in this paragraph (e)), or deter-
mination by the IRS that the designation is
not in effect (as described in paragraph (f)
of this section). See § 301.6223-2 for
binding nature of actions taken by the
partnership representative or designated
individual on behalf of a partnership rep-
resentative, if applicable, prior to revoca-
tion.

(2) Time for revocation-(i) Revoca-
tion during an administrative proceeding.
Except as provided in paragraph (e)(2)(ii)
of this section or in forms, instructions, or
other guidance prescribed by the IRS, a
partnership may revoke a designation of a
partnership representative or appointment
of a designated individual only after the
IRS issues a notice of selection for exam-
ination or a NAP under section 6231(a)(1)
for the partnership taxable year for which
the designation or appointment is in ef-
fect. If the IRS withdraws the NAP pur-
suant to § 301.6231-1(f), any valid revo-
cation of a partnership representative
designation or designated individual ap-
pointment under this paragraph (e) prior

to the withdrawal of the NAP remains in
effect.

(ii) Revocation with an AAR. The part-
nership may revoke a designation of a
partnership representative or appointment
of a designated individual for the taxable
year prior to receiving a notice of selec-
tion for examination or a NAP by filing a
valid administrative adjustment request
(AAR) in accordance with section 6227 for
a partnership taxable year. A partnership
may not use the form prescribed by the IRS
for filing an AAR solely for the purpose of
revoking a designation of a partnership rep-
resentative or appointment of a designated
individual. See § 301.6227-1 for the rules
regarding the time and manner of filing an
AAR.

(3) Effective date of revocation. Except
as described in paragraph (e)(6)(ii) of this
section (regarding the effective date of a
revocation of a partnership representative
designated by the IRS under paragraph
(f)(5) of this section), a valid revocation is
immediately effective upon the IRS's re-
ceipt of the written notification described
in paragraph (e)(1) of this section. A re-
vocation of a partnership representative
designation and a designation of a new
partnership representative (and appoint-
ment of a new designated individual, if
applicable) is effective on the date the
partnership files a valid AAR. Similarly, a
revocation of a designated individual ap-
pointment and appointment of a new des-
ignated individual is effective on the date
the partnership files a valid AAR. As of
the effective date of the revocation-

(i) The revoked partnership representa-
tive (and designated individual, if appli-
cable) may not take any action on behalf
of the partnership with respect to the part-
nership taxable year affected by the revo-
cation;

(ii) The designation of the revoked
partnership representative is no longer in
effect, and the successor partnership rep-
resentative designation (and designated
individual appointment, if applicable) is
in effect with respect to the partnership
taxable year affected by the revocation;

(iii) In the case of a revoked entity
partnership representative, the appoint-
ment of the designated individual is no
longer in effect with respect to the part-
nership taxable year affected by the revo-
cation; and

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(iv) In the case of a revoked designated
individual where the designation of the
entity partnership representative has not
been revoked, the revoked designated in-
dividual may not take any action on behalf
of the partnership with respect to the part-
nership taxable year affected by the revo-
cation, the appointment of the revoked
designated individual is no longer in ef-
fect, and the appointment of the successor
designated individual is in effect.

(4) Partners who may sign revocation.
A revocation under this paragraph (e)
must be signed by a person who was a
partner at any time during the partnership
taxable year to which the revocation re-
lates or as provided in forms, instructions,
and other guidance prescribed by the IRS.

(5) Form of the revocation. The written
notification of revocation described in
paragraph (e)(1) of this section must in-
clude the items described in this para-
graph (e)(5). A notification of revocation
described in paragraph (e)(1) of this sec-
tion that does not include each of the
following items is not a valid revocation:

(i) A certification under penalties of
perjury that the person signing the notifi-
cation is a partner described in paragraph
(e)(4) of this section authorized by the
partnership to revoke the designation of
the partnership representative (or appoint-
ment of the designated individual, if ap-
plicable).

(ii) A statement that the person signing
the notification is revoking the designa-
tion of the partnership representative (or
appointment of the designated individual,
if applicable);

(iii) A designation of a successor part-
nership representative (and appointment
of a designated individual, if applicable)
in accordance with this section and forms,
instructions, and other guidance pre-
scribed by the IRS; and

(iv) In the case of a revocation of an
appointment of a designated individual,
appointment of a successor designated in-
dividual in accordance with this section
and forms, instructions, and other guid-
ance prescribed by the IRS.

(6) Partnership representative desig-
nated by the IRS-(i) In general. If a
partnership representative is designated
(and a designated individual is appointed,
if applicable) by the IRS pursuant to para-
graph (f)(5) of this section, the partnership

may only revoke that designation (or the
appointment of the designated individual,
if applicable) with the permission of the
IRS, which the IRS will not unreasonably
withhold.

(ii) Effective date of revocation. The
effective date of any revocation submitted
in accordance with paragraph (e)(6)(i) of
this section is the date on which the IRS
sends notification that the revocation is
valid.

(7) Multiple revocations -(i) In gen-
eral. The IRS may determine that a des-
ignation is not in effect under paragraph
(f) of this section if:

(A) The IRS receives a revocation of a
designation of a partnership representative
or appointment of a designated individual,
and

(B) Within the 90-day period prior to
the date the revocation described in para-
graph (e)(7)(i)(A) of this section was re-
ceived, the IRS received another revoca-
tion for the same partnership taxable year.

(ii) Time limitation. The IRS may not
determine that a designation is not in ef-
fect in accordance with paragraph (e)(7)(i)
of this section later than 90 days after the
IRS's receipt of the revocation described
in paragraph (e)(7)(i)(A) of this section.

(8) Examples. The following examples
illustrate the rules of this paragraph (e).

Example 1. Partnership properly designates PR,
an individual, as partnership representative for its
2018 taxable year on its timely filed 2018 partner-
ship return. In 2020, Partnership mails written noti-
fication to the IRS to revoke designation of PR as its
partnership representative for Partnership's 2018
taxable year. The revocation is not made in connec-
tion with an AAR for Partnership's 2018 taxable
year, and the IRS has not mailed Partnership a notice
of selection for examination or a NAP under section
6231(a)(1) with respect to Partnership's 2018 tax-
able year. Because the revocation was not made
when permitted under paragraph (e)(2) of this sec-
tion, the revocation is not effective and B remains
the partnership representative for Partnership's 2018
taxable year unless and until B's status as partner-
ship representative is properly revoked under para-
graph (e) of this section or terminated in accordance
with paragraph (d) (regarding resignation) or (f) (re-
garding IRS designation) of this section.

Example 2. During an administrative proceeding
with respect to Partnership's 2018 taxable year, Part-
nership provides the IRS with written notification to
revoke its designation of PR, an individual, as its
partnership representative for the 2018 taxable year.
The written notification does not include a designa-
tion of a new partnership representative for Partner-
ship's 2018 taxable year. Because the revocation
does not include a designation of a new partnership
representative as required under paragraph (e)(1) of

this section, the revocation is not effective and PR
remains the partnership representative for Partner-
ship's 2018 taxable year unless and until B's status
as partnership representative is properly revoked un-
der paragraph (e) of this section or terminated in
accordance with paragraph (d) (regarding resigna-
tion) or (f) (regarding IRS designation) of this sec-
tion.

(f) Designation of the partnership rep-
resentative by the IRS-(1) In general. If
the IRS determines that a designation of a
partnership representative is not in effect
for a partnership taxable year in accor-
dance with paragraph (f)(2) of this sec-
tion, the IRS will notify the partnership
that a partnership representative designa-
tion is not in effect. The IRS will also
notify the most recent partnership repre-
sentative for the partnership taxable year,
except as described in paragraph (f)(2)(iii)
of this section. In the case of an entity
partnership representative, the notification
will be sent to the entity partnership rep-
resentative, to the attention of the desig-
nated individual. The determination that a
designation is not in effect is effective on
the date the IRS mails the notification.
Except as described in paragraph (f)(4) of
this section, the partnership may desig-
nate, in accordance with paragraph (f)(3)
of this section, a successor partnership
representative (and designated individual,
if applicable) eligible under paragraph (b)
of this section within 30 days of the date
the IRS mails the notification. In the case
of a resignation of a partnership represen-
tative, this notification may include the
written confirmation of receipt described
in paragraph (d)(1) of this section. See
paragraph (f)(2)(iv) of this section. If the
partnership does not designate a successor
within 30 days from the date of IRS noti-
fication, the IRS will designate a partner-
ship representative in accordance with
paragraph (f)(5) of this section. A partner-
ship representative designation made in
accordance with paragraphs (c), (e), or (f)
of this section remains in effect until the
IRS determines the designation is not in
effect. See § 301.6223-2 for binding na-
ture of actions taken by the partnership
representative or designated individual on
behalf of a partnership representative, if
applicable, prior to a determination by the
IRS that the designation is not in effect.

(2) IRS determination that partnership
representative designation not in effect.
The IRS may, but is not required to, de-

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termine that a partnership representative
designation is not in effect. The IRS is not
obligated to search for or otherwise seek
out information related to the circum-
stances in which the IRS may determine a
partnership representative designation is
not in effect, and the fact that the IRS is
aware of any such circumstances does not
obligate the IRS to determine that a part-
nership representative designation is not
in effect. The IRS may determine that the
partnership representative designation is
not in effect if the IRS determines that -

(i) The partnership representative or
the designated individual does not have
substantial presence as described in para-
graph (b)(2) of this section;

(ii) The partnership failed to appoint a
designated individual as described in
paragraph (b)(3) of this section, as appli-
cable;

(iii) The partnership failed to make a
valid designation as described in para-
graph (c) of this section;

(iv) The partnership representative or
designated individual resigns as described
in paragraph (d) of this section;

(v) The partnership has made multiple
revocations as described in paragraph
(e)(7) of this section; or

(vi) The partnership representative des-
ignation is no longer in effect as described
in other published guidance.

(3) Designation by the partnership
during the 30-day period. Designation of
a partnership representative (and appoint-
ment of a designated individual, if appli-
cable) by the partnership during the 30-
day period described in paragraph (f)(1)
of this section must be made in accor-
dance with forms, instructions, and other
guidance prescribed by the IRS. If the
partnership fails to provide all information
required by forms, instructions, and other
guidance, the partnership will have failed
to make a designation (and appointment,
if applicable). If the partnership does not
fully comply with the requirement of this
paragraph (f)(3) within the 30-day period
described in paragraph (f)(1) of this sec-
tion, the IRS will designate a partnership
representative (and appoint a designated
individual, if applicable).

(4) No opportunity for designation by
the partnership in the case of multiple
revocations. In the event that the IRS de-
termines a partnership representative des-

ignation is not in effect due to multiple
revocations as described in paragraph
(e)(7) of this section, the partnership will
not be given an opportunity to designate
the successor partnership representative
prior to the designation by the IRS as
described in paragraph (f)(5) of this sec-
tion. However, see paragraph (e)(6) of this
section regarding revocation of a partner-
ship representative designated by the IRS.

(5) Designation by the IRS-(i) In gen-
eral. The IRS designates a partnership
representative under this paragraph (f)(5)
by notifying the partnership of the name,
address, and telephone number of the new
partnership representative. If the IRS des-
ignates an entity partnership representa-
tive, the IRS will also appoint a desig-
nated individual to act on behalf of the
entity partnership representative. The des-
ignation of a partnership representative
(and appointment of a designated individ-
ual, if applicable) by the IRS is effective
on the date on which the IRS mails the
notification of the designation (and ap-
pointment, if applicable) to the partner-
ship. The IRS will also mail a copy of the
notification of the designation (and ap-
pointment, if applicable) to the new part-
nership representative (through the new
designated individual, if applicable) that
has been designated (and appointed, if
applicable) by the IRS under this section.

(ii) Factors considered when partner-
ship representative designated by the IRS.
The IRS will ordinarily consider one or
more of the factors set forth in this para-
graph (f)(5)(ii) when determining whom to
designate as partnership representative. No
single factor is determinative, and other than
as described in paragraph (f)(5)(iii) of this
section, the IRS may exercise its discretion
to designate a person as partnership repre-
sentative even if none of the factors are
applicable to such person. The factors are
not requirements for eligibility to be desig-
nated by the IRS as partnership representa-
tive; the only requirements for eligibility are
described under paragraph (b) of this sec-
tion. The IRS is not obligated to search for
or otherwise seek out information related to
the factors, and the fact that the IRS is aware
of any information related to such factors
does not obligate the IRS to designate a
particular person. Although the IRS may
designate any person to be the partnership
representative, a principal consideration in

determining whom to designate as a part-
nership representative is whether there is a
reviewed year partner that is eligible to
serve as the partnership representative in
accordance with paragraph (b)(1) of this
section or whether there is a partner at the
time the partnership representative designa-
tion is made that is eligible to serve as the
partnership representative. Other factors that
will ordinarily be considered by the IRS in
determining whom to designate as a part-
nership representative include, but are not
limited to:

(A) The views of the partners having a
majority interest in the partnership regard-
ing the designation;

(B) The general knowledge of the per-
son in tax matters and the administrative
operation of the partnership;

(C) The person's access to the books
and records of the partnership;

(D) Whether the person is a United
States person (within the meaning of sec-
tion 7701(a)(30)); and

(E) The profits interest of the partner in
the case of a partner.

(iii) IRS employees. The IRS will not
designate a current employee, agent, or con-
tractor of the IRS as the partnership repre-
sentative unless that employee, agent, or
contractor was a reviewed year partner or is
currently a partner in the partnership.

(6) Examples. The following examples
illustrate the rules of this paragraph (f).

Example 1. The IRS determines that Partnership
has designated a partnership representative that does
not have substantial presence in the United States as
defined in paragraph (b)(2) of this section. The IRS
may, but is not required to, determine that the des-
ignation is not in effect and designate a new part-
nership representative after following the procedures
in this paragraph (f).

Example 2. Partnership designates as its partner-
ship representative a corporation but fails to appoint
a designated individual to act on behalf of the cor-
poration as required under paragraph (b)(3) of this
section. The IRS may, but is not required to, deter-
mine that the partnership representative designation
is not in effect and may designate a new partnership
representative after following the procedures in this
paragraph (f).

Example 3. The partnership representative re-
signs pursuant to paragraph (d) of this section. The
IRS mails Partnership a notification informing Part-
nership that no designation is in effect and that the
IRS plans to designate a new partnership represen-
tative. Partnership fails to respond within 30 days of
the date the IRS mails the notification. The IRS must
designate a partnership representative pursuant to
this paragraph (f).

Example 4. Partnership designated on its partner-
ship return a partnership representative, PR1. After

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Partnership received a NAP, Partnership submits to
the IRS the form described in paragraph (e)(4) of this
section requesting the revocation of PR1's designa-
tion as partnership representative and designating
PR2 as the partnership representative. Sixty days
later, Partnership signs and submits a form described
in paragraph (e)(4) of this section requesting the
revocation of PR2's designation as partnership rep-
resentative and designating PR3 as the partnership
representative. The IRS accepts the revocation of
PR2 and designation of PR3 as valid and effective
upon receipt pursuant to paragraph (e)(3) of this
section. However, because PR2's revocation was
within 90 days of PRI's revocation, the IRS may
determine within 90 days of IRS's receipt of PR2's
revocation, pursuant to paragraphs (e)(7) and (f)(2)
of this section, that there is no designation in effect
due to multiple revocations. The IRS may then des-
ignate a new partnership representative pursuant to
this paragraph (f) without allowing Partnership an
opportunity to designate a partnership representative
within the 30-day period described in paragraph
(f)(1) of this section.

(g) Reliance on forms required by this
section. The IRS may rely on any form or
other document filed or submitted under
this section as evidence of the designation,
resignation, or revocation on such form
and as evidence of the date on which such
form was filed or submitted relating to a
designation, resignation, or revocation.

(h) Applicability date-(1) In general.
Except as provided in paragraph (h)(2) of
this section, this section applies to part-
nership taxable years beginning after De-
cember 31, 2017.

(2) Election under § 301.9100-22 in ef-
fect. This section applies to any partnership
taxable years beginning after November 2,
2015 and before January 1, 2018 for which
a valid election under § 301.9100-22 is in
effect.

Par. 3. Section 301.6223-2 is added to
read as follows:

§ 301.6223-2 Binding effect of actions
of the partnership and partnership
representative.

(a) Binding nature of actions by part-
nership and final decision in a partnership
proceeding. The actions of the partnership
and the partnership representative taken
under subchapter C of chapter 63 of the
Internal Revenue Code (subchapter C of
chapter 63) and any final decision in a pro-
ceeding brought under subchapter C of
chapter 63 with respect to the partnership
bind the partnership, all partners of the part-
nership (including partnership-partners as
defined in § 301.6241-1(a)(7) that have a

valid election under section 6221(b) in ef-
fect for any taxable year that ends with or
within the taxable year of the partnership),
and any other person whose tax liability is
determined in whole or in part by taking into
account directly or indirectly adjustments
determined under subchapter C of chapter
63 (for example, indirect partners as defined
in § 301.6241-1(a)(4)). For instance, a set-
tlement agreement entered into by the part-
nership representative on behalf of the
partnership, a notice of final partnership ad-
justment (FPA) with respect to the partner-
ship that is not contested by the partnership,
or the final decision of a court with respect
to the partnership if the FPA is contested,
binds all persons described in the preceding
sentence.

(b) Actions by the partnership repre-
sentative before termination of designa-
tion. A termination of the designation of a
partnership representative because of a
resignation under § 301.6223-1(d) or
a revocation under § 301.6223-1(e), or as
a result of a determination by the Internal
Revenue Service (IRS) under § 301.6223-
1(f) that the designation is not in effect, does
not affect the validity of any action taken by
that partnership representative during the
period prior to such termination. For exam-
ple, if a partnership representative properly
designated under § 301.6223-1 consented
to an extension of the period of limitations
on making adjustments under section
6235(b) in accordance with § 301.6235-
1(d), that extension remains valid even after
termination of the designation of that part-
nership representative.

(c) Actions by the partnership repre-
sentative upon withdrawal of notice of
administrative proceeding. If the IRS is-
sues a notice of administrative proceeding
(NAP) under section 6231(a)(1) and sub-
sequently withdraws such NAP pursuant
to § 301.6231-1(f), any actions taken by a
partnership representative (or successor
partnership representative after a change
to the partnership representative that oc-
curred after the issuance of the NAP and
before the NAP was withdrawn) are bind-
ing as described in paragraph (a) of this
section even though the NAP has been
withdrawn and has no effect for purposes
of subchapter C of chapter 63.

(d) Partnership representative has the
sole authority to act on behalf of the part-
nership-(1) In general. The partnership

representative has the sole authority to act
on behalf of the partnership for all pur-
poses under subchapter C of chapter 63. In
the case of an entity partnership represen-
tative, the designated individual has the
sole authority to act on behalf of the part-
nership representative and the partnership.
Except for a partner that is the partnership
representative or the designated individ-
ual, no partner, or any other person, may
participate in an administrative proceed-
ing without the permission of the IRS. The
failure of the partnership representative to
follow any state law, partnership agree-
ment, or other document or agreement has
no effect on the authority of the partner-
ship representative or the designated indi-
vidual as described in section 6223,
§ 301.6223-1, and this section. Nothing in
this section affects, or otherwise restricts,
the ability of a partnership representative
to authorize a person to represent the part-
nership representative, in the partnership
representative's capacity as the partner-
ship representative, before the IRS under a
valid power of attorney in a proceeding
involving the partnership under subchap-
ter C of chapter 63.

(2) Designation provides authority to
bind the partnership-(i) Partnership
representative. A partnership representa-
tive, by virtue of being designated under
section 6223 and § 301.6223-1, has the
authority to bind the partnership for all
purposes under subchapter C of chapter
63.

(ii) Designated individual. A partnership
that is required to appoint a designated in-
dividual described under § 301.6223-
1(b)(3)(i) acts through such designated indi-
vidual. By virtue of being appointed as part
of the designation of the partnership repre-
sentative under § 301.6223-1, the desig-
nated individual has the sole authority to
bind the partnership representative and
therefore the partnership, its partners, and
any other person as described in paragraph
(a) of this section for all purposes under
subchapter C of chapter 63 so long as the
partnership representative designation and
designated individual appointment are in ef-
fect.

(e) Examples. The following examples
illustrate the rules of this section.

Example 1. Partnership designates a partnership
representative, PR, on its timely filed partnership
return for 2020. PR is a partner in Partnership. The
partnership agreement for Partnership includes a

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clause that requires PR to consult with an identified
management group of partners in Partnership before
taking any action with respect to an administrative
proceeding before the IRS. The IRS initiates an
administrative proceeding with respect to Partner-
ship's 2020 taxable year. During the course of the
administrative proceeding, PR consents to an exten-
sion of the period of limitations on making adjust-
ments under section 6235(b) allowing additional
time for the IRS to mail an FPA. PR failed to consult
with the management group of partners prior to
agreeing to this extension of time. PR's consent
provided to the IRS to extend the time period is valid
and binding on Partnership because, pursuant to sec-
tion 6223, PR, as the designated partnership repre-
sentative, has authority to bind Partnership and all its
partners.

Example 2. Partnership designates a partnership
representative, PR, on its timely filed partnership
return for 2020. PR is not a partner in Partnership.
During an administrative proceeding with respect to
Partnership's 2020 taxable year, PR agrees to certain
partnership adjustments and within 45 days after the
issuance of the FPA elects the alternative to payment
of the imputed underpayment under section 6226.
Certain partners in Partnership challenge the actions
taken by PR during the administrative proceeding
and the validity of the section 6226 statements fur-
nished to those partners, alleging that PR was never
authorized to act on behalf of Partnership under state
law or the partnership agreement. Because PR was
designated by Partnership as the partnership repre-
sentative under section 6223 and this section, PR
was authorized to act on behalf of Partnership for all
purposes under subchapter C of chapter 63, and the
IRS may rely on that designation as conclusive ev-
idence of PR's authority to act on behalf of Partner-
ship.

Example 3. Partnership designates an entity part-
nership representative, EPR, and appoints an indi-
vidual, A, as the designated individual on its timely
filed partnership return for 2020. EPR is a C corpo-
ration. A is unaffiliated with EPR and is not an
officer, director, or employee of EPR. During an
administrative proceeding with respect to Partner-
ship's 2020 taxable year, A, acting for EPR, agrees
to an extension of the period of limitations on mak-
ing adjustments under section 6235(b) from March
15, 2024 to December 31, 2024. The IRS mails an
FPA with respect to the 2020 partnership taxable
year on December 13, 2024, before expiration of the
extended period of limitations on making adjust-
ments as agreed to by EPR, but after the expiration
of the unextended period of limitations on making
adjustments. Partnership challenges the FPA as un-
timely, alleging that A was not authorized under
state law to act on behalf of EPR and thus the
extension agreement was invalid. Because A was
appointed by the partnership as the designated indi-
vidual to act on behalf of EPR, A was authorized to
act on behalf of EPR for all purposes under subchap-
ter C of chapter 63, and the IRS may rely on that
appointment as conclusive evidence of A's authority
to act on behalf of EPR and Partnership.

Example 4. The partnership representative, PR,
consents to an extension of the period of limitations
on making adjustments under section 6235(b) and
§ 301.6235-1(d) for Partnership for the partnership

taxable year. After signing the consent, PR resigns
as partnership representative in accordance with
§ 301.6223-1(d). The consent to extend the period of
limitations on making adjustments under section
6235(b) remains valid even after PR resigns.

Example 5. Partnership designates a partnership
representative who does not make themselves avail-
able to meet with the IRS in person in the United
States as required by § 301.6223-1(b). Although the
partnership representative does not have substantial
presence in the United States within the meaning of
§ 301.6223-1(b)(2), until a termination occurs under
§ 301.6223-1(d) or (e) or the IRS determines the
partnership representative designation is no longer in
effect under § 301.6223-1(f), the partnership repre-
sentative designation remains in effect, and Partner-
ship and all its partners are bound by the actions of
the partnership representative.

Example 6. Partnership designates PR1 as the
partnership representative on its timely filed partner-
ship return for 2020. On September 1, 2022, the IRS
sends a NAP for the 2020 taxable year to Partnership
and PR, and Partnership revokes PR1's designation
and designates PR2 as the partnership representative
in accordance with § 301.6223-1(e). On November
1, 2023, PR2 consents to an extension of the period
of limitations on making adjustments under section
6235(b) and § 301.6235(d) for Partnership's 2020
taxable year. On December 1, 2023, the IRS then
withdraws the NAP. PR2 remains the partnership
representative, and the consent to extend the period
of limitations on making adjustments under section
6235(b) remains valid even after the NAP is with-
drawn.

(f) Applicability date-(1) In general.
Except as provided in paragraph (f)(2) of
this section, this section applies to part-
nership taxable years beginning after De-
cember 31, 2017.

(2) Election under § 301.9100-22 in
effect. This section applies to any partner-
ship taxable years beginning after Novem-
ber 2, 2015 and before January 1, 2018 for
which a valid election under § 301.9100-22
is in effect.

Par. 4. Section 301.9100-22 is added
to read as follows:

§ 301.9100-22 Time, form, and manner
of making the election under section
1101(g)(4) of the Bipartisan Budget Act
of 2015 for returns filed for partnership
taxable years beginning after November
2, 2015 and before January 1, 2018.

(a) Election. Pursuant to section 1101(g)
(4) of the Bipartisan Budget Act of 2015,
Public Law 114-74 (BBA), a partnership
may elect at the time and in such form and
manner as described in this section for
amendments made by section 1101 of the
BBA, except section 6221(b) as added by
the BBA, to apply to any return of the

partnership filed for an eligible taxable
year as defined in paragraph (d) of this
section. An election is valid only if made
in accordance with this section. Once
made, an election may only be revoked
with the consent of the Internal Revenue
Service (IRS). An election is not valid if it
frustrates the purposes of section 1101 of
the BBA. A partnership may not request
an extension of time under § 301.9100-3
for an election described in this section.

(b) Election on notification by the
IRS-(1) Time for making the election.
Except as described in paragraph (c) of
this section, an election under this section
must be made within 30 days of the date
of notification to a partnership, in writing,
that a return of the partnership for an
eligible taxable year has been selected for
examination (a notice of selection for ex-
amination).

(2) Form and manner of making the
election-(i) In general. The partnership
makes an election under this section by pro-
viding a written statement with the words
"Election under Section 1101(g)(4)" written
at the top that satisfies the requirements of
paragraph (b)(2) of this section to the indi-
vidual identified in the notice of selection
for examination as the IRS contact regard-
ing the examination.

(ii) Statement requirements. A state-
ment making an election under this sec-
tion must be in writing and be dated and
signed by the tax matters partner, as de-
fined under section 6231(a)(7) (prior to
amendment by the BBA), and the appli-
cable regulations, or an individual who
has the authority to sign the partnership
return for the taxable year under section
6063, the regulations thereunder, and ap-
plicable forms and instructions. The fact
that an individual dates and signs the
statement making the election described
in this paragraph (b) shall be prima facie
evidence that the individual is authorized
to make the election on behalf of the part-
nership. A statement making an election
must include-

(A) The partnership's name, taxpayer
identification number, and the partnership
taxable year for which the election de-
scribed in this paragraph (b) is being
made;

(B) The name, taxpayer identification
number, address, and daytime telephone

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number of the individual who signs the
statement;

(C) Language indicating that the part-
nership is electing application of section
1101(c) of the BBA for the partnership
return for the eligible taxable year identi-
fied in the notice of selection for exami-
nation;

(D) The information required to prop-
erly designate the partnership representa-
tive as defined by section 6223 as
amended by the BBA, which must include
the name, taxpayer identification number,
address, and daytime telephone number of
the partnership representative and any ad-
ditional information required by applica-
ble regulations, forms and instructions,
and other guidance issued by the IRS;

(E) The following representations-

(1) The partnership is not insolvent and
does not reasonably anticipate becoming
insolvent before resolution of any adjust-
ment with respect to the partnership tax-
able year for which the election described
in this paragraph (b) is being made;

(2) The partnership has not filed, and
does not reasonably anticipate filing, vol-
untarily a petition for relief under title 11
of the United States Code;

(3) The partnership is not subject to,
and does not reasonably anticipate becom-
ing subject to, an involuntary petition for
relief under title 11 of the United States
Code; and

(4) The partnership has sufficient as-
sets, and reasonably anticipates having
sufficient assets, to pay a potential im-
puted underpayment with respect to the
partnership taxable year that may be de-
termined under subchapter C of chapter
63 of the Internal Revenue Code as
amended by the BBA; and

(F) A representation, signed under pen-
alties of perjury, that the individual sign-
ing the statement is duly authorized to
make the election described in this para-
graph (b) and that, to the best of the indi-
vidual's knowledge and belief, all of the
information contained in the statement is
true, correct, and complete.

(iii) Notice of Administrative Pro-
ceeding. Upon receipt of the election
described in this paragraph (b), the IRS
will promptly mail a notice of adminis-
trative proceeding to the partnership
and the partnership representative, as
required under section 6231(a)(1) as
amended by the BBA. Notwithstanding
the preceding sentence, the IRS will not
mail the notice of administrative pro-
ceeding before the date that is 30 days
after receipt of the election described in
paragraph (b) of this section.

(c) Election for the purpose of filing an
administrative adjustment request (AAR)
under section 6227 as amended by the
BBA-(1) In general. A partnership that
has not been issued a notice of selection
for examination as described in paragraph
(b)(1) of this section may make an elec-
tion with respect to a partnership return
for an eligible taxable year for the purpose
of filing an AAR under section 6227 as
amended by the BBA. Once an election
under this paragraph (c) is made, all of the
amendments made by section 1101 of the
BBA, except section 6221(b) as added by
the BBA, apply with respect to the part-
nership taxable year for which such elec-
tion is made.

(2) Time for making the election. No
election under this paragraph (c) may be
made before January 1, 2018.

(3) Form and manner of making an
election. An election under this paragraph
(c) must be made in the manner prescribed
by the IRS for that purpose in accordance
with applicable regulations, forms and in-
structions, and other guidance issued by
the IRS.

(4) Effect of filing an AAR before Jan-
uary 1, 2018. Except in the case of an
election made in accordance with para-
graph (b) of this section, an AAR filed on
behalf of a partnership before January 1,
2018, is deemed for purposes of paragraph
(d)(2) of this section, to be an AAR filed
under section 6227(c) (prior to amend-
ment by the BBA) or an amended return
of partnership income, as applicable.

(d) Eligible taxable year-(1) In gen-
eral. For purposes of this section, the term
eligible taxable year means any partner-
ship taxable year beginning after Novem-
ber 2, 2015 and before January 1, 2018,
except as provided in paragraph (d)(2) of
this section.

(2) Exception if AAR or amended re-
turn filed or deemed filed. Notwithstand-
ing paragraph (d)(1) of this section, a part-
nership taxable year is not an eligible
taxable year for purposes of this section if
for the partnership taxable year-

(i) The tax matters partner has filed an
AAR under section 6227(c) (prior to
amendment by the BBA),

(ii) The partnership is deemed to have
filed an AAR under section 6227(c) (prior
to the amendment by the BBA) in accor-
dance with paragraph (c)(4) of this sec-
tion, or

(iii) An amended return of partnership
income has been filed or has been deemed
to be filed under paragraph (c)(4) of this
section.

(e) Applicability date. These regula-
tions are applicable to returns filed for
partnership taxable years beginning after
November 2, 2015 and before January 1,
2018.

§ 301.9100-22T [Removed]

Par. 5. Section 301.9100-22T is
removed.

Kirsten Wielobob,
Deputy Commissioner for Services
and Enforcement.
Approved: July 20, 2018

David J. Kautter,
Assistant Secretary of the Treasury
(Tax Policy).

(Filed by the Office of the Federal Register on August 6,
2018, 4:15 p.m., and published in the issue of the Federal
Register for August 9, 2018, 83 F.R. 39331)

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## Part III. Administrative, Procedural, and Miscellaneous

### Methods for Calculating W-2 Wages for Purposes of Section 199A

Notice 2018-64

#### SECTION 1. PURPOSE

This notice (Notice) contains a pro-
posed revenue procedure that provides
guidance on methods for calculating W-2
wages for purposes of section 199A of the
Internal Revenue Code (Code) and pro-
posed §§ 1.199A-1 through 1.199A-6 of
the Income Tax Regulations (26 CFR part
1), which are contained in a notice of
proposed rulemaking (REG-107892-18)
being published contemporaneously with
this Notice. Specifically, this Notice pro-
vides methods for calculating W-2 wages
(1) for purposes of section 199A(b)(2),
which, for certain taxpayers, provides a
limitation based on W-2 wages to the
amount of the deduction for qualified busi-
ness income under section 199A(a); and (2)
for purposes of section 199A(b)(7), which,
for certain specified agricultural and horti-
cultural cooperative patrons, provides a re-
duction to the section 199A(a) deduction
based on W-2 wages.

## SECTION 2. BACKGROUND

Section 199A was enacted on Decem-
ber 22, 2017 as part of the act entitled "An
Act to provide for reconciliation pursuant
to titles II and V of the concurrent reso-
lution on the budget for fiscal year 2018,"
P.L. 115-97 (Act), and was amended on
March 23, 2018 retroactively to January 1,
2018, by H.R.1625 - Consolidated Ap-
propriations Act, 2018, P.L. 115-141,
(H.R. 1625). Congress enacted section
199A to provide a deduction to non-
corporate taxpayers of up to 20 percent of
the taxpayer's qualified business income
(QBI) from each of the taxpayer's quali-
fied trades or businesses, including those
operated through a partnership, S corpo-
ration, or sole proprietorship, as well as a
deduction of up to 20 percent of aggregate
qualified REIT dividends and qualified
publicly traded partnership income. For
each qualified trade or business, section
199A(b)(2) limits the amount of the sec-

tion 199A deduction to the lesser of (1) 20
percent of the taxpayer's QBI with respect
to the qualified trade or business, or (2)
the greater of (A) 50 percent of the W-2
wages with respect to the qualified trade
or business, or (B) the sum of 25 percent
of the W-2 wages with respect to the
qualified trade or business plus 2.5 percent
of the unadjusted basis immediately after
acquisition of all qualified property. Un-
der section 199A(b)(3), this limitation is
phased in above a threshold amount of
taxable income.

Section 199A(b)(7) provides that in the
case of any qualified trade or business of a
patron of a specified agricultural or horti-
cultural cooperative, the amount deter-
mined under section 199A(b)(2) with re-
spect to such trade or business shall be
reduced by the lesser of (A) 9 percent of
so much of the qualified business income
with respect to such trade or business as is
properly allocable to qualified payments
received from such cooperative, or (B) 50
percent of so much of the W-2 wages
with respect to such trade or business as
are so allocable.

Section 199A(b)(4)(A) of the Code de-
fines the term "W-2 wages" to mean, with
respect to any person for any taxable year
of such person, the amounts described in
section 6051(a)(3) and (8) paid by such
person with respect to employment of em-
ployees by such person during the calen-
dar year ending during such taxable year.
Proposed § 1.199A-2 further defines W-2
wages for purposes of section 199A. The
proposed revenue procedure included in
this Notice would provide methods for
calculating the amount of W-2 wages, as
defined in section 199A(b)(4) and pro-
posed § 1.199A-2, for purposes of deter-
mining the deduction limitation in section
199A(b)(2) and the reduction in section
199A(b)(7). Section 1.199A-2(b)(2)(iv)
(A) of the proposed regulations provides the
Internal Revenue Service with authority to
issue guidance providing the methods that
may be used to calculate W-2 wages.

## SECTION 3. REQUEST FOR COMMENTS

The Treasury Department and the IRS
request comments on this proposed reve-

nue procedure. In particular, the Treasury
Department and the IRS request com-
ments concerning the calculation of "W-2
wages" with respect to remuneration paid
for services performed in Puerto Rico.
Section 199A(f)(1)(C)(ii) provides that in
the case of a taxpayer with qualified busi-
ness income from sources within the com-
monwealth of Puerto Rico, the determina-
tion of W-2 wages of such taxpayer shall
be made without regard to any exclusion
under section 3401(a)(8) for remuneration
paid for services performed in the Com-
monwealth of Puerto Rico. Because bona
fide residents of the Commonwealth of
Puerto Rico are not subject to federal in-
come tax and do not receive Forms W-2,
the methods provided in the proposed rev-
enue procedure will be difficult to apply
with respect to employees who are resi-
dents of Puerto Rico. The Treasury De-
partment and the IRS request comments
concerning appropriate methods for calcu-
lating W-2 wages with respect to remu-
neration paid for services performed in
Puerto Rico by bona fide residents of
Puerto Rico.

Interested parties are invited to submit
comments on this Notice by October 1,
2018. Comments should be submitted
to: CC:PA:LPD:PR (Notice 2018-64),
Room 5203, Internal Revenue Service,
P.O. Box 7604, Ben Franklin Station,
Washington, D.C., 20044. Submissions
may be hand-delivered Monday through
Friday between the hours of 8 a.m. and 4
p.m. to CC:PA:LPD:PR (Notice 2018-
64), Courier's Desk, Internal Revenue Ser-
vice, 1111 Constitution Avenue, N.W.,
Washington, D.C. 20224. Alternatively, tax-
payers may submit comments electronically
to Notice.comments@irscounsel.treas.gov.
Please include "Notice 2018-64" in the
subject line of any electronic submission.

## SECTION 4. EFFECTIVE DATE AND IMMEDIATE RELIANCE

This Notice is effective on August 27,
2018. The proposed revenue procedure is
proposed to apply generally to taxable
years ending after December 31, 2017.

Until such time that the proposed rev-
enue procedure is published in final form,
taxpayers may use the methods described

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in the proposed revenue procedure in cal-
culating W-2 wages, as defined in section
199A(b)(4)(A), for purposes of determin-
ing the limitation in section 199A(b)(2)
and the reduction in section 199A(b)(7).

## SECTION 5. DRAFTING INFORMATION

The principal authors of this Notice are
Andrew Holubeck and Mikhail Zhidkov
of the Office of the Associate Chief Coun-
sel (Tax Exempt and Government Enti-
ties) and Frank J. Fisher and Benjamin H.
Weaver of the Office of the Associate
Chief Counsel (Passthroughs & Special
Industries). However, other personnel
from the Treasury Department and the
IRS participated in its development. For
further information regarding this Notice,
contact Andrew Holubeck or Mikhail
Zhidkov at (202) 317-4774, or Frank J.
Fisher or Benjamin H. Weaver at (202)
317-6850.

## SECTION 6. FORM OF PROPOSED REVENUE PROCEDURE

Set forth below is the form of the pro-
posed revenue procedure that is proposed
in this Notice:

## FORM OF PROPOSED REVENUE PROCEDURE

26 CFR 1.199A-2: Determination of
W-2 Wages

Rev. Proc. 2018-XX

## SECTION 1. PURPOSE

This revenue procedure provides meth-
ods for calculating W-2 wages, as defined
in section 199A(b)(4) and § 1.199A-2 of
the Income Tax Regulations, (1) for pur-
poses of section 199A(b)(2) of the Inter-
nal Revenue Code (Code) which, for
certain taxpayers, provides a limitation
based on W-2 wages to the amount of
the deduction for qualified business in-
come (QBI); and (2) for purposes of
section 199A(b)(7), which, for certain
specified agricultural and horticultural
cooperative patrons, provides a reduc-
tion to the section 199A deduction based
on W-2 wages.

## SECTION 2. BACKGROUND

For taxpayers above a certain amount
of taxable income, section 199A(b)(2)
limits the amount of a taxpayer's section
199A deduction for each qualified trade or
business to the lesser of (1) 20 percent of
the taxpayer's QBI with respect to the
qualified trade or business, or (2) the
greater of (A) 50 percent of the W-2
wages with respect to the qualified trade
or business, or (B) the sum of 25 percent
of the W-2 wages with respect to the
qualified trade or business plus 2.5 percent
of the unadjusted basis immediately after
acquisition of all qualified property. Sec-
tion 199A(b)(7) provides that in the case
of any qualified trade or business of a
patron of a specified agricultural or horti-
cultural cooperative, the amount deter-
mined under section 199A(b)(2) with re-
spect to such trade or business shall be
reduced by the lesser of (A) 9 percent of
so much of the qualified business income
with respect to such trade or business as is
properly allocable to qualified payments
received from such cooperative, or (B) 50
percent of so much of the W-2 wages
with respect to such trade or business as
are so allocable.

Section 199A(b)(4)(A) defines the
term "W-2 wages" to mean, with respect
to any person for any taxable year of such
person, the amounts described in section
6051(a)(3) and (8) paid by such person
with respect to employment of employees
by such person during the calendar year
ending during such taxable year. Section
199A(b)(4)(B) provides that W-2 wages
does not include any amount which is not
properly allocable to qualified business in-
come for purposes of section 199A(c)(1).
Section 199A(b)(4)(C) provides that W-2
wages shall not include any amount that is
not properly included in a return filed with
the Social Security Administration (SSA)
on or before the 60th day after the due date
(including extensions) for such return.

Section 1.199A-2(b)(2)(iv)(A) of the
regulations provides the Internal Revenue
Service with authority to issue guidance
providing the methods that may be used to
calculate W-2 wages.

This revenue procedure provides three
methods for calculating W-2 wages, as de-
fined in section 199A(b)(4) and § 1.199A-2,
for purposes of section 199A(b) and the

regulations thereunder. The first method
(the unmodified Box method) allows for a
simplified calculation while the second and
third methods (the modified Box 1 method
and the tracking wages method) provide
greater accuracy.

W-2 wages calculated under this rev-
enue procedure are not necessarily eligi-
ble for use in computing the section 199A
limitations. As mentioned above, only
W-2 wages which are properly allocable
to QBI may be taken into account in com-
puting the section 199A(b)(2). W-2 wage lim-
itations. Under § 1.199A-2(g), the taxpayer
must determine the extent to which the W-2
wages calculated under this revenue proce-
dure are properly allocable to QBI. Then,
the properly allocable W-2 wages amount is
used in determining the W-2 wages limita-
tion under section 199A(b)(2) for that trade
or business as well as any reduction for
income received from cooperatives under
section 199A(b)(7).

## SECTION 3. RULES OF APPLICATION

.01 In general. In calculating W-2
wages for a taxable year under the meth-
ods described in this revenue procedure,
include only wages properly reported on
Forms W-2 that meet the applicable rules
of § 1.199A-2(b). Specifically, § 1.199A-
2(b)(2)(i) provides that, except as pro-
vided in § 1.199A-2(b)(2)(iv)(C)(2) (con-
cerning short taxable years that do not
include December 31) and § 1.199A-
2(b)(2)(iv)(D) (concerning remuneration
for services performed in the Common-
wealth of Puerto Rico), the Forms W-2,
"Wage and Tax Statement," or any subse-
quent form or document used in determin-
ing the amount of W-2 wages are those
issued for the calendar year ending during
the person's taxable year for wages paid
to employees (or former employees) of
the person for employment by the person.
Section 1.199A-2(b)(2)(i) also provides
that, for purposes of § 1.199A-2, employ-
ees of the person are limited to employees
of the person as defined in section
3121(d)(1) and (2) (that is, officers of a
corporation and employees of the person
under the common law rules). Therefore,
Forms W-2 provided to statutory employ-
ees described in section 3121(d)(3) (that
is, Forms W-2 in which the "Statutory
Employee" box in Box 13 is checked)

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should not be included in calculating W-2
wages under any of the methods described
in this revenue procedure.

.02 No application in determining
whether amounts are wages for employ-
ment tax purposes. The discussions of
"wages" in this revenue procedure and in
the regulations under section 199A are for
purposes of section 199A only and have
no application in determining whether
amounts are wages under section 3121(a)
for purposes of the Federal Insurance
Contributions Act, under section 3306(b)
for purposes of the Federal Unemploy-
ment Tax Act, or under section 3401(a)
for purposes of the Collection of Income
Tax at Source on Wages (federal income
tax withholding), or any other wage-
related determination. See § 1.199A-2 of
the regulations.

## SECTION 4. DEFINITION OF W-2 WAGES AND CORRELATION WITH BOXES ON FORM W-2

.01 Definition of W-2 wages. Section
199A(b)(4)(A) provides that W-2 wages
means, with respect to any person for any
taxable year of such person, the sum of the
amounts described in section 6051(a)(3)
and (8) paid by such person with respect
to employment of employees by such
person during the calendar year ending
during such taxable year. Thus, W-2
wages include: (i) the total amount of
wages as defined in section 3401(a); (ii)
the total amount of elective deferrals
(within the meaning of section 402(g)
(3)); (iii) the compensation deferred un-
der section 457; and (iv) the amount of
designated Roth contributions (as de-
fined in section 402A).

.02 Correlation with Form W-2. Under
the 2018 Forms W-2, the elective defer-
rals under section 402(g)(3) and the
amounts deferred under section 457 di-
rectly correlate to coded items reported in
Box 12 on Form W-2. Box 12, Code D is
for elective deferrals to a section 401(k)
cash or deferred arrangement plan (in-
cluding a SIMPLE 401(k) arrangement);
Box 12, Code E is for elective deferrals
under a section 403(b) salary reduction
agreement; Box 12, Code F is for elective
deferrals under a section 408(k)(6) salary
reduction Simplified Employee Pension
(SEP); Box 12, Code G is for elective
deferrals and employer contributions (in-

cluding nonelective deferrals) to any gov-
ernmental or nongovernmental section
457(b) deferred compensation plan; Box
12, Code S is for employee salary reduc-
tion contributions under a section 408(p)
SIMPLE (simple retirement account);
Box 12, Code AA is for designated Roth
contributions (as defined in section 402A)
under a section 401(k) plan; and Box 12,
Code BB is for designated Roth contribu-
tions (as defined in section 402A) under a
section 403(b) salary reduction agree-
ment. However, designated Roth contri-
butions are also reported in Box 1, Wages,
tips, other compensation and are subject to
income tax withholding.

## SECTION 5. METHODS FOR CALCULATING W-2 WAGES

For any taxable year, a taxpayer must
calculate W-2 wages for purposes of sec-
tion 199A(b)(2) using one of the three
methods described in section 5.01, 5.02,
and 5.03 of this revenue procedure. For a
taxpayer with a short taxable year, see
Section 6 of this revenue procedure. In
calculating W-2 wages for a taxable year
under the methods below, the taxpayer
includes only those Forms W-2 that are
for the calendar year ending with or
within the taxable year of the taxpayer and
that meet the rules of application de-
scribed in section 3 of this revenue proce-
dure.

.01 Unmodified box method. Under the
unmodified box method, W-2 wages are
calculated by taking, without modifica-
tion, the lesser of-

(A) The total entries in Box 1 of all
Forms W-2 filed with SSA by the tax-
payer with respect to employees of the
taxpayer for employment by the tax-
payer; or

(B) The total entries in Box 5 of all
Forms W-2 filed with SSA by the tax-
payer with respect to employees of the
taxpayer for employment by the tax-
payer.

.02 Modified Box 1 method. Under the
Modified Box 1 method, the taxpayer
makes modifications to the total entries in
Box 1 of Forms W-2 filed with respect to
employees of the taxpayer. W-2 wages
under this method are calculated as fol-
lows-

(A) Total the amounts in Box 1 of all
Forms W-2 filed with SSA by the tax-

payer with respect to employees of the
taxpayer for employment by the tax-
payer;

(B) Subtract from the total in para-
graph .02(A) of this section amounts
included in Box 1 of Forms W-2 that
are not wages for Federal income
tax withholding purposes, including
amounts that are treated as wages for
purposes of income tax withholding
under section 3402(o) (for example,
supplemental unemployment compen-
sation benefits within the meaning of
Rev. Rul. 90-72); and

(C) Add to the amount obtained after
paragraph .02(B) of this section the
total of the amounts that are reported in
Box 12 of Forms W-2 with respect to
employees of the taxpayer for employ-
ment by the taxpayer and that are prop-
erly coded D, E, F, G, and S.

.03 Tracking wages method. Under
the tracking wages method, the taxpayer
actually tracks total wages subject to
Federal income tax withholding and
makes appropriate modifications. W-2
wages under this method are calculated
as follows-

(A) Total the amounts of wages subject
to Federal income tax withholding that
are paid to employees of the taxpayer
for employment by the taxpayer and
that are reported on Forms W-2 filed
with SSA by the taxpayer for the cal-
endar year; and

(B) Add to the amount obtained after
paragraph .03(A) of this section the
total of the amounts that are reported in
Box 12 of Forms W-2 with respect to
employees of the taxpayer for employ-
ment by the taxpayer and that are prop-
erly coded D, E, F, G, and S.

## SECTION 6. APPLICATION IN CASE OF SHORT TAXABLE YEAR

.01 Special rule for taxpayers with a
short taxable year. In the case of a tax-
payer with a short taxable year, subject to
the rules of application described in sec-
tion 3 of this revenue procedure, the W-2
wages of the taxpayer for the short taxable
year shall include only those wages paid
during the short taxable year to employees
of the taxpayer, only those elective defer-
rals (within the meaning of section
402(g)(3)) made during the short taxable
year by employees of the taxpayer, and

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only compensation actually deferred un-
der section 457 during the short taxable
year with respect to employees of the tax-
payer. See §1.199A-2(b)(2)(iv)(C) of the
regulations.

.02 Method required for a short tax-
able year and modifications required in
application of method. The W-2 wages
of a taxpayer with a short taxable year
shall be determined under the tracking
wages method described in section 5.03
of this revenue procedure. In applying
the tracking wages method in the case of
a short taxable year, the taxpayer must
apply the method as follows-

(A) For purposes of section 5.03(A),
the total amount of wages subject to
Federal income tax withholding and
reported on Form W-2 must include
only those wages subject to Federal
income tax withholding that are actu-
ally or constructively paid to employ-
ees during the short taxable year and
reported on Form W-2 for the calendar
year ending with or within that short
taxable year (or, for a short taxable
year that does not contain a calendar
year ending with or within such short
taxable year, wages subject to Federal
income tax withholding that are actu-
ally or constructively paid to employ-
ees during the short taxable year and
reported on Form W-2 for the calendar
year containing such short taxable
year); and

(B) For purposes of section 5.03(B),
only the portion of the total amounts
reported in Box 12, Codes D, E, F, G,
and S on Forms W-2, that are actually
deferred or contributed during the short
taxable year are included in W-2
wages.

## SECTION 7. EFFECTIVE DATE

This revenue procedure applies to tax-
able years ending after December 31, 2017.

## SECTION 8. DRAFTING INFORMATION

The principal authors of this revenue
procedure are Andrew Holubeck and
Mikhail Zhidkov of the Office of the As-
sociate Chief Counsel (Tax Exempt and
Government Entities) and Frank J. Fisher
and Benjamin H. Weaver of the Office of
the Associate Chief Counsel (Pass-
throughs & Special Industries). However,
other personnel from the Treasury Depart-
ment and the IRS participated in its devel-
opment. For further information regarding
this revenue procedure contact Andrew
Holubeck or Mikhail Zhidkov at (202)
317-4774, or Frank J. Fisher or Benjamin
H. Weaver at (202) 317-6850.

## Update for Weighted Average Interest Rates, Yield Curves, and Segment Rates

## Notice 2018-65

This notice provides guidance on the
corporate bond monthly yield curve, the
corresponding spot segment rates used un-
der § 417(e)(3), and the 24-month average
segment rates under § 430(h)(2) of the
Internal Revenue Code. In addition, this
notice provides guidance as to the interest
rate on 30-year Treasury securities under
§ 417(e)(3)(A)(ii)(II) as in effect for plan
years beginning before 2008 and the 30-
year Treasury weighted average rate un-
der § 431(c)(6)(E)(ii)(I).

## YIELD CURVE AND SEGMENT RATES

Section 430 specifies the minimum
funding requirements that apply to single-
employer plans (except for CSEC plans
under § 414(y)) pursuant to § 412. Section
430(h)(2) specifies the interest rates that
must be used to determine a plan's target
normal cost and funding target. Under this
provision, present value is generally de-

termined using three 24-month average
interest rates ("segment rates"), each of
which applies to cash flows during speci-
fied periods. To the extent provided under
§ 430(h)(2)(C)(iv), these segment rates
are adjusted by the applicable percentage
of the 25-year average segment rates for
the period ending September 30 of the
year preceding the calendar year in which
the plan year begins.1 However, an elec-
tion may be made under § 430(h)(2)
(D)(ii) to use the monthly yield curve in
place of the segment rates.

Notice 2007-81, 2007-44 I.R.B. 899,
provides guidelines for determining the
monthly corporate bond yield curve, and
the 24-month average corporate bond
segment rates used to compute the target
normal cost and the funding target. Con-
sistent with the methodology specified in
Notice 2007-81, the monthly corporate
bond yield curve derived from July 2018
data is in Table 2018-7 at the end of this
notice. The spot first, second, and third
segment rates for the month of July 2018
are, respectively, 3.15, 4.20, and 4.47.

The 24-month average segment rates
determined under § 430(h)(2)(C)(i) through
(iii) must be adjusted pursuant to § 430(h)
(2)(C)(iv) to be within the applicable mini-
mum and maximum percentages of the cor-
responding 25-year average segment rates.
For plan years beginning before 2021, the
applicable minimum percentage is 90%
and the applicable maximum percentage
is 110%. The 25-year average segment
rates for plan years beginning in 2017
and 2018 were published in Notice
2016-54, 2016-40 I.R.B. 429, and No-
tice 2017-50, 2017-41 I.R.B. 280, re-
spectively.

## 24-MONTH AVERAGE CORPORATE BOND SEGMENT RATES

The three 24-month average corporate
bond segment rates applicable for August
2018 without adjustment for the 25-year
average segment rate limits are as follows:

24-Month Average Segment Rates Without 25-Year Average Adjustment

Applicable Month

First Segment

Second Segment

Third Segment

August 2018

2.21

3.77

4.45

1Pursuant to § 433(h)(3)(A), the 3rd segment rate determined under § 430(h)(2)(C) is used to determine the current liability of a CSEC plan (which is used to calculate the minimum amount
of the full funding limitation under § 433(c)(7)(C)).

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month averages applicable for August

Based on § 430(h)(2)(C)(iv), the 24-
2018, adjusted to be within the applicable
minimum and maximum percentages of

the corresponding 25-year average seg-
ment rates, are as follows:

Adjusted 24-Month Average Segment Rates

For Plan Years Beginning In

Applicable Month

First Segment

Second Segment

Third Segment

2017

August 2018

4.16

5.72

6.48

2018

August 2018

3.92

5.52

6.29

## 30-YEAR TREASURY SECURITIES INTEREST RATES

Section 431 specifies the minimum
funding requirements that apply to mul-
tiemployer plans pursuant to § 412. Sec-
tion 431(c)(6)(B) specifies a minimum
amount for the full-funding limitation de-
scribed in § 431(c)(6)(A), based on the
plan's current liability. Section 431(c)(6)
(E)(ii)(I) provides that the interest rate

used to calculate current liability for this
purpose must be no more than 5 percent
above and no more than 10 percent below
the weighted average of the rates of inter-
est on 30-year Treasury securities during
the four-year period ending on the last day
before the beginning of the plan year.
Notice 88-73, 1988-2 C.B. 383, provides
guidelines for determining the weighted
average interest rate. The rate of interest
on 30-year Treasury securities for July

2018 is 3.01 percent. The Service deter-
mined this rate as the average of the daily
determinations of yield on the 30-year
Treasury bond maturing in May 2048. For
plan years beginning in August 2018, the
weighted average of the rates of interest
on 30-year Treasury securities and the
permissible range of rates used to calcu-
late current liability are as follows:

For Plan Years

Treasury Weighted Average Rates

Permissible Range 90% to 105%

30-Year Treasury

Beginning In

Weighted Average

August 2018

2.86

2.57 to 3.00

## MINIMUM PRESENT VALUE SEGMENT RATES

In general, the applicable interest rates
under § 417(e)(3)(D) are segment rates

computed without regard to a 24-month
average. Notice 2007-81 provides guide-
lines for determining the minimum pres-
ent value segment rates. Pursuant to that
notice, the minimum present value seg-

ment rates determined for July 2018 are as
follows:

Minimum Present Value Segment Rates

Month

First Segment

Second Segment

Third Segment

July 2018

3.15

4.20

4.47

## DRAFTING INFORMATION

The principal author of this notice is
Tom Morgan of the Office of the Associ-

ate Chief Counsel (Tax Exempt and Gov-
ernment Entities). However, other person-
nel from the IRS participated in the
development of this guidance. For further

information regarding this notice, contact
Mr. Morgan at 202-317-6700 or Tony
Montanaro at 202-317-8698 (not toll-free
numbers).

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# Table 2018-7 Monthly Yield Curve for July 2018 Derived from July 2018 Data

Maturity

Yield

Maturity

Yield

Maturity

Yield

Maturity

Yield

Maturity

Yield

0.5

2.54

20.5

4.45

40.5

4.48

60.5

4.49

80.5

4.50

1.0

2.76

21.0

4.45

41.0

4.48

61.0

4.49

81.0

4.50

1.5

2.96

21.5

4.45

41.5

4.48

61.5

4.49

81.5

4.50

2.0

3.11

22.0

4.45

42.0

4.48

62.0

4.49

82.0

4.50

2.5

3.21

22.5

4.45

42.5

4.48

62.5

4.49

82.5

4.50

3.0

3.28

23.0

4.45

43.0

4.48

63.0

4.49

83.0

4.50

3.5

3.34

23.5

4.45

43.5

4.48

63.5

4.49

83.5

4.50

4.0

3.39

24.0

4.45

44.0

4.48

64.0

4.49

84.0

4.50

4.5

3.44

24.5

4.45

44.5

4.48

64.5

4.49

84.5

4.50

5.0

3.49

25.0

4.45

45.0

4.48

65.0

4.49

85.0

4.50

5.5

3.55

25.5

4.45

45.5

4.48

65.5

4.49

85.5

4.50

6.0

3.61

26.0

4.46

46.0

4.48

66.0

4.49

86.0

4.50

6.5

3.68

26.5

4.46

46.5

4.48

66.5

4.49

86.5

4.50

7.0

3.75

27.0

4.46

47.0

4.48

67.0

4.49

87.0

4.50

7.5

3.82

27.5

4.46

47.5

4.48

67.5

4.49

87.5

4.50

8.0

3.89

28.0

4.46

48.0

4.48

68.0

4.49

88.0

4.50

8.5

3.95

28.5

4.46

48.5

4.48

68.5

4.49

88.5

4.50

9.0

4.01

29.0

4.46

49.0

4.48

69.0

4.49

89.0

4.50

9.5

4.07

29.5

4.46

49.5

4.48

69.5

4.49

89.5

4.50

10.0

4.12

30.0

4.46

50.0

4.48

70.0

4.49

90.0

4.50

10.5

4.17

30.5

4.46

50.5

4.48

70.5

4.49

90.5

4.50

11.0

4.21

31.0

4.46

51.0

4.49

71.0

4.49

91.0

4.50

11.5

4.25

31.5

4.46

51.5

4.49

71.5

4.49

91.5

4.50

12.0

4.28

32.0

4.47

52.0

4.49

72.0

4.49

92.0

4.50

12.5

4.31

32.5

4.47

52.5

4.49

72.5

4.49

92.5

4.50

13.0

4.34

33.0

4.47

53.0

4.49

73.0

4.49

93.0

4.50

13.5

4.36

33.5

4.47

53.5

4.49

73.5

4.50

93.5

4.50

14.0

4.38

34.0

4.47

54.0

4.49

74.0

4.50

94.0

4.50

14.5

4.39

34.5

4.47

54.5

4.49

74.5

4.50

94.5

4.50

15.0

4.41

35.0

4.47

55.0

4.49

75.0

4.50

95.0

4.50

15.5

4.42

35.5

4.47

55.5

4.49

75.5

4.50

95.5

4.50

16.0

4.43

36.0

4.47

56.0

4.49

76.0

4.50

96.0

4.50

16.5

4.43

36.5

4.47

56.5

4.49

76.5

4.50

96.5

4.50

17.0

4.44

37.0

4.47

57.0

4.49

77.0

4.50

97.0

4.50

17.5

4.44

37.5

4.47

57.5

4.49

77.5

4.50

97.5

4.50

18.0

4.45

38.0

4.47

58.0

4.49

78.0

4.50

98.0

4.50

18.5

4.45

38.5

4.47

58.5

4.49

78.5

4.50

98.5

4.50

19.0

4.45

39.0

4.47

59.0

4.49

79.0

4.50

99.0

4.50

19.5

4.45

39.5

4.48

59.5

4.49

79.5

4.50

99.5

4.50

20.0

4.45

40.0

4.48

60.0

4.49

80.0

4.50

100.0

4.50

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# Part IV. Items of General Interest

Notice of proposed
rulemaking and notice of
public hearing Qualified
Business Income Deduction

## REG-107892-18

AGENCY: Internal Revenue Service
(IRS), Treasury.

ACTION: Notice of proposed rulemaking
and notice of public hearing.

SUMMARY: This document contains
proposed regulations concerning the de-
duction for qualified business income un-
der section 199A of the Internal Revenue
Code (Code). The regulations will affect
individuals, partnerships, S corporations,
trusts, and estates engaged in domestic
trades or businesses. The proposed regu-
lations also contain an anti-avoidance rule
under section 643 of the Code to treat
multiple trusts as a single trust in certain
cases. This document also provides notice
of a public hearing on these proposed
regulations.

DATES: Written or electronic comments
must be received by October 1, 2018. Out-
lines of topics to be discussed at the public
hearing scheduled for October 16, 2018,
at 10 a.m. must be received by October 1,
2018. If no outlines of topics are received
by October 1, 2018, public hearing will be
cancelled.

ADDRESSES: Send submissions to CC:
PA:LPD:PR (REG-107892-18), Room
5203, Internal Revenue Service, P.O. Box
7604, Ben Franklin Station, Washington,
D.C., 20044. Submissions may be hand-
delivered Monday through Friday be-
tween the hours of 8 a.m. and 4 p.m.
to CC:PA:LPD:PR (REG-107892-18),
Courier's Desk, Internal Revenue Service,
1111 Constitution Avenue, N.W., Wash-
ington, D.C., 20224, or via the Federal
eRulemaking Portal at www.regulations-
.gov (indicate IRS and REG-107892-18).
The public hearing will be held in the
Auditorium, Internal Revenue Service,
1111 Constitution Avenue, NW., Wash-
ington, DC.

FOR FURTHER INFORMATION CON-
TACT: Concerning the proposed regula-
tions, Vishal R. Amin, Frank J. Fisher, or
Wendy L. Kribell at (202) 317-6850 or
Adrienne M. Mikolashek at 202-317-
5279; concerning submissions of com-
ments and outlines of topics for the public
hearing, Regina Johnson at (202) 317-
6901 (not toll-free numbers).

## SUPPLEMENTARY INFORMATION: Paperwork Reduction Act

The collection of information con-
tained in this notice of proposed rulemak-
ing has been submitted to the Office of
Management and Budget for review in
accordance with the Paperwork Reduction
Act of 1995 (44 U.S.C. 3507(d)). The
Department of the Treasury (Treasury De-
partment) and the IRS request comment
on the assumptions, methodology, and
burden estimates related to this informa-
tion collection. Comments on the collec-
tion of information should be sent to the
Office of Management and Budget, Attn:
Desk Officer for the Department of the
Treasury, Office of Information and Reg-
ulatory Affairs, Washington, DC 20503,
with copies to the Internal Revenue Ser-
vice, Attn: IRS Reports Clearance Officer,
SE:CAR:MP:T:T:SP, Washington, DC
20224. Comments on the collection of
information should be received by Octo-
ber 15, 2018.

Comments are specifically requested
concerning:

Whether the proposed collection of in-
formation is necessary for the proper per-
formance of the IRS, including whether
the information will have practical utility;

The accuracy of the estimated burden
associated with the proposed collection of
information;

How the quality, utility, and clarity of
the information to be collected may be
enhanced;

How the burden of complying with the
proposed collection of information may
be minimized, including through the ap-
plication of automated collection tech-
niques or other forms of information tech-
nology; and

Estimates of capital or start-up costs
and costs of operation, maintenance, and

purchase of service to provide informa-
tion.

Details of the estimated collection bur-
den can be found in Section I.J. of the
Special Analyses section later in this doc-
ument.

The collection of information required
by this proposed regulation is in proposed
§ 1.199A-4 and proposed § 1.199A-6.
The collection of information in proposed
§ 1.199A-4 is required for taxpayers that
choose to aggregate two or more trades or
businesses. The collection of information
in proposed § 1.199A-6 is required for
passthrough entities that report section
199A information to their owners or ben-
eficiaries. It is necessary to report the in-
formation to the IRS in order to ensure
that taxpayers properly report in accor-
dance with the rules of the proposed reg-
ulations the correct amount of deduction
under section 199A. The collection of in-
formation is necessary to ensure tax com-
pliance.

The likely respondents are individuals
with qualified business income from more
than one trade or business as well as most
partnerships, S corporations, trusts, and
estates that have qualified business in-
come.

Estimated total annual reporting bur-
den: 25 million hours.

Estimated average annual burden hours
per respondent will vary from 30 minutes
to 20 hours, depending on individual cir-
cumstances, with an estimated average of
2.5 hours.

Estimated number of respondents: 10
million.

Estimated annual frequency of re-
sponses: annually.

Estimated monetized burden: Using
the IRS's taxpayer compliance cost esti-
mates, taxpayers who are self-employed
with multiple businesses are estimated to
have a monetization rate of $39 per hour.
Pass-throughs that issue K-1s have a mon-
etization rate of $53 per hour. (See "Tax-
payer Compliance Costs for Corporations
and Partnerships: A New Look," Contos,
et. al. IRS Research Bulletin (2012) p. 5
for a description of the model.)

An agency may not conduct or spon-
sor, and a person is not required to re-
spond to, a collection of information un-

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less it displays a valid control number
assigned by the Office of Management
and Budget.

Books or records relating to a collec-
tion of information must be retained as
long as their contents may become mate-
rial in the administration of any internal
revenue law. Generally, tax returns and
tax return information are confidential, as
required by section 6103.

### Background

This document contains proposed
amendments to the Income Tax Regula-
tions (26 CFR part 1) under sections 199A
and 643 of the Code.

#### I. Section 199A

Section 199A was enacted on Decem-
ber 22, 2017, by § 11011 of "An Act to
provide for reconciliation pursuant to ti-
tles II and V of the concurrent resolution
on the budget for fiscal year 2018," P.L.
115-97 (TCJA), and was amended on
March 23, 2018, retroactively to January
1, 2018, by § 101 of Division T of the
Consolidated Appropriations Act, 2018,
P.L. 115-141, (2018 Act). Section 199A
applies to taxable years beginning after
2017 and before 2026.

Section 199A provides a deduction of up
to 20 percent of income from a domestic
business operated as a sole proprietorship or
through a partnership, S corporation, trust,
or estate (section 199A deduction). The sec-
tion 199A deduction may be taken by indi-
viduals and by some estates and trusts. A
section 199A deduction is not available for
wage income or for business income earned
through a C corporation. For taxpayers
whose taxable income exceeds a statutorily-
defined amount (threshold amount), section
199A may limit the taxpayer's section 199A
deduction based on (i) the type of trade or
business engaged in by the taxpayer, (ii) the
amount of W-2 wages paid with respect to
the trade or business (W-2 wages), and/or
(iii) the unadjusted basis immediately after
acquisition (UBIA) of qualified property
held for use in the trade or business (UBIA
of qualified property). These statutory limi-
tations are subject to phase-in rules based
upon taxable income above the threshold
amount.

Section 199A also allows individuals
and some trusts and estates (but not cor-

porations) a deduction of up to 20 percent
of their combined qualified real estate in-
vestment trust (REIT) dividends and qual-
ified publicly traded partnership (PTP) in-
come, including qualified REIT dividends
and qualified PTP income earned through
passthrough entities. This component of
the section 199A deduction is not limited
by W-2 wages or UBIA of qualified prop-
erty.

The section 199A deduction is the
lesser of (1) the sum of the combined
amounts described in the prior two para-
graphs or (2) an amount equal to 20 per-
cent of the excess (if any) of taxable in-
come of the taxpayer for the taxable year
over the net capital gain of the taxpayer
for the taxable year.

Additionally, section 199A(g) provides
that specified agricultural or horticultural
cooperatives may claim a special entity-
level deduction that is substantially simi-
lar to the domestic production activities
deduction under former section 199.

Finally, the statute expressly grants the
Secretary authority to prescribe such reg-
ulations as are necessary to carry out the
purposes of section 199A (section 199A(f)
(4)), and provides specific grants of author-
ity with respect to: the treatment of acquisi-
tions, dispositions, and short-tax years (sec-
tion 199A(b)(5)); certain payments to
partners for services rendered in a non-
partner capacity (section 199A(c)(4)(C));
the allocation of W-2 wages and UBIA of
qualified property (section 199A(f)(1)(A)
(iii)); restricting the allocation of items and
wages under section 199A and such report-
ing requirements as the Secretary deter-
mines appropriate (section 199A(f)(4)(A));
the application of section 199A in the case
of tiered entities (section 199A(f)(4)(B);
preventing the manipulation of the deprecia-
ble period of qualified property using trans-
actions between related parties (section
199A(h)(1)); and determining the UBIA of
qualified property acquired in like-kind ex-
changes or involuntary conversions (section
199A(h)(2)).

#### II. Section 643

Part I of subchapter J of chapter 1 of
the Code provides rules related to the tax-
ation of estates, trusts, and beneficiaries.
For various subparts of part I of subchap-
ter J, sections 643(a), 643(b), and 643(c)

define the terms distributable net income
(DNI), income, and beneficiary, respec-
tively. Sections 643(d) through 643(i)
(other than section 643(f)) provide addi-
tional rules. Section 643(f) grants the Sec-
retary authority to treat two or more trusts
as a single trust for purposes of subchapter
J if (1) the trusts have substantially the
same grantors and substantially the same
primary beneficiaries and (2) a principal
purpose of such trusts is the avoidance of
the tax imposed by chapter 1 of the Code.
Section 643(f) further provides that, for
these purposes, spouses are treated as a
single person.

## Explanation of Provisions

The purpose of these proposed regula-
tions is to provide taxpayers with computa-
tional, definitional, and anti-avoidance guid-
ance regarding the application of section
199A. These proposed regulations contain
six substantive sections, §§ 1.199A-1
through 1.199A-6, each of which provides
rules relevant to the calculation of the sec-
tion 199A deduction. Additionally, the pro-
posed regulations would establish anti-
abuse rules under section 643(f) to prevent
taxpayers from establishing multiple non-
grantor trusts or contributing additional cap-
ital to multiple existing non-grantor trusts in
order to avoid Federal income tax, including
abuse of section 199A. This Explanation of
Provisions describes each of the proposed
regulation sections in turn.

### I. Proposed § 1.199A-1: Operational Rules

Section 1.199A-1 of the proposed reg-
ulations (proposed § 1.199A-1) provides
guidance on the determination of the sec-
tion 199A deduction. For simplicity, the
proposed regulations use the term individ-
ual when referring to an individual, trust,
estate, or other person eligible to claim the
section 199A deduction. The term rele-
vant passthrough entity (RPE) is used to
describe passthrough entities that directly
operate the trade or business or pass
through the trade or business' items of
income, gain, loss, or deduction from
lower-tier RPEs to the individual.

Proposed § 1.199A-1(b) contains def-
initions applicable for section 199A and
§§ 1.199A-1 through 1.199A-6. Pro-
posed § 1.199A-1(c) provides guidance

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on the computation of the section 199A
deduction for individuals with taxable in-
come at or below the threshold amount.
Proposed § 1.199A-1(d) provides guid-
ance on the computation of the section
199A deduction for individuals with tax-
able income above the threshold amount,
including individuals with taxable income
within a phase-in range above the thresh-
old amount. Proposed § 1.199A-1(e) pro-
vides special rules related to the section
199A deduction.

## A. Defined terms

Defined terms in proposed § 1.199A-
1(b) include aggregated trade or business,
applicable percentage, phase-in range,
qualified business income (QBI), QBI
component, qualified PTP income, quali-
fied REIT dividends, reduction amount,
RPE, specified service trade or business
(SSTB), threshold amount, total QBI
amount, UBIA of qualified property, and
W-2 wages.

Proposed § 1.199A-1(b) also defines
trade or business for purposes of section
199A and proposed §§ 1.199A-1 through
1.199A-6. Neither the statutory text of
section 199A nor the legislative history
provides a definition of trade or business
for purposes of section 199A. Multiple
commenters stated that section 162 is the
most appropriate definition for purposes
of section 199A. Although the term trade
or business is defined in more than one
provision of the Code, the Department of
the Treasury (Treasury Department) and
the IRS agree with commenters that for
purposes of section 199A, section 162(a)
provides the most appropriate definition
of a trade or business. This is based on the
fact that the definition of trade or business
under section 162 is derived from a large
body of existing case law and administra-
tive guidance interpreting the meaning of
trade or business in the context of a broad
range of industries. Thus, the definition of
a trade or business under section 162 pro-
vides for administrable rules that are ap-
propriate for the purposes of section 199A
and which taxpayers have experience ap-
plying and therefore defining trade or
business as a section 162 trade or business
will reduce compliance costs, burden, and
administrative complexity.

The proposed regulations extend the
definition of trade or business for pur-
poses of section 199A beyond section 162
in one circumstance. Solely for purposes
of section 199A, the rental or licensing of
tangible or intangible property to a related
trade or business is treated as a trade or
business if the rental or licensing and the
other trade or business are commonly
controlled under proposed § 1.199A-
4(b)(1)(i). It is not uncommon that for
legal or other non-tax reasons taxpayers
may segregate rental property from oper-
ating businesses. This rule allows taxpay-
ers to aggregate their trades or businesses
with the associated rental or intangible
property under proposed § 1.199A-4 if
all of the requirements of proposed
§ 1.199A-4 are met. In addition, this rule
may prevent taxpayers from improperly
allocating losses or deductions away from
trades or businesses that generate income
that is eligible for a section 199A deduc-
tion.

## B. Computation of the section 199A deduction for individuals with taxable income below the threshold amount

### 1. Basic computational rules

An individual with income attributable
to one or more domestic trades or busi-
nesses, other than as a result of owning
stock of a C corporation or engaging in
the trade or business of being an em-
ployee, and with taxable income (before
computing the section 199A deduction) at
or below the threshold amount, is entitled
to a section 199A deduction equal to the
lesser of (i) 20 percent of the QBI (gen-
erally defined as the net amount of quali-
fied items of income, gain, deduction, and
loss with respect to a qualified trade or
business of the taxpayer) from the indi-
vidual's trades or businesses plus 20 per-
cent of the individual's combined quali-
fied REIT dividends and qualified PTP
income or (ii) 20 percent of the excess (if
any) of the individual's taxable income
over the individual's net capital gain. Pro-
posed § 1.199A-1(c) contains guidance
on calculating the amount of the deduc-
tion in these circumstances. If an individ-
ual's combined QBI is negative or com-
bined qualified REIT dividends and PTP
income is less than zero, proposed

§ 1.199A-1(c)(2) provides rules for the
carryover of the losses.

## 2. Carryover loss rules for negative total QBI amounts

If an individual has multiple trades or
businesses, the individual must calculate
the QBI from each trade or business and
then net the amounts. Section 199A(c)(2)
provides that, for purposes of section
199A, if the net QBI with respect to qual-
ified trades or businesses of the taxpayer
for any taxable year is less than zero, such
amount shall be treated as a loss from a
qualified trade or business in the succeed-
ing taxable year. Proposed § 1.199A-
1(c)(2)(i) repeats this rule and provides
that the section 199A carryover rules do
not affect the deductibility of the losses
for purposes of other provisions of the
Code.

## 3. Carryover loss rules if combined qualified REIT dividends and qualified PTP income is less than zero

One commenter stated it was not clear
whether, if a taxpayer has an overall loss
from combined qualified REIT dividends
and qualified PTP income (because a loss
from a PTP exceeds REIT dividends and
PTP income), the negative amount should
be netted against any net positive QBI
(regardless of source), or whether the neg-
ative amount should be segregated and
subject to its own loss carryforward rule
distinct from but analogous to the QBI
loss carryforward rule. Section 199A con-
templates that qualified REIT dividends
and qualified PTP income are computed
and taken into account separately from
QBI and should not affect QBI. If overall
losses attributable to qualified REIT divi-
dends and qualified PTP income were net-
ted against QBI, these losses would affect
QBI. Therefore, a separate loss carryfor-
ward rule is needed to segregate an overall
loss attributable to qualified REIT divi-
dends and qualified PTP income from
QBI. Additionally, commenters have ex-
pressed concern that losses in excess of
income could create a negative section
199A deduction, a result incompatible
with the statute. Accordingly, proposed
§ 1.199A-1(c)(2)(ii) provides that if an
individual has an overall loss after quali-

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fied REIT dividends and qualified PTP
income are combined, the portion of the
individual's section 199A deduction re-
lated to qualified REIT dividends and
qualified PTP income is zero for the tax-
able year. In addition, the overall loss
does not affect the amount of the taxpay-
er's QBI. Instead, such overall loss is car-
ried forward and must be used to offset
combined qualified REIT dividends and
qualified PTP income in the succeeding
taxable year or years for purposes of sec-
tion 199A.

C. Computation of the section 199A
deduction for individuals with taxable
income above the threshold amount

Proposed § 1.199A-1(d) addresses the
calculation of the section 199A deduction
for individuals with taxable income above
the threshold amount. All of the rules re-
lating to the REIT/PTP component of the
section 199A deduction applicable to in-
dividuals with taxable income at or below
the threshold amount also apply to indi-
viduals with taxable income above the
threshold amount. The QBI component of
the section 199A deduction, however, is
subject to limitations for individuals with
taxable income exceeding the threshold
amount. These limitations include the ex-
clusion or reduction of items from an
SSTB and limitations based on the W-2
wages of the trade or business or a com-
bination of the W-2 wages and the UBIA
of qualified property. Proposed § 1.199A-
1(d) provides guidance on the application
of these limitations.

Proposed § 1.199A-1(d)(2)(i) addresses
the limitation or exclusion from QBI for
SSTBs. SSTBs are specified service trades
or businesses as defined in section 199A(d)
(2) and proposed § 1.199A-5 (see part V. of
the Explanation of Provisions). If an indi-
vidual's taxable income is above the thresh-
old amount but within the phase-in range
then the individual must calculate an appli-
cable percentage that limits the QBI, W-2
wages, and UBIA of qualified property from
an SSTB that are used to calculate the indi-
vidual's section 199A deduction. If the in-
dividual's taxable income is above the
phase-in range, then no amount of QBI,
W-2 wages, or UBIA of qualified property
from an SSTB can be used by the individual

in calculating the individual's section 199A
deduction.

Proposed § 1.199A-1(d)(2)(iv) ad-
dresses the limitations on QBI based on
W-2 wages and UBIA of qualified prop-
erty. An individual must determine the
W-2 wages and the UBIA of qualified
property attributable to each trade or busi-
ness contributing to the individual's com-
bined QBI under the rules of proposed
§ 1.199A-2. The W-2 wages and UBIA
of qualified property amounts are com-
pared to QBI in order to determine an
individual's QBI component for each
trade or business.

After determining the QBI for each
trade or business, the individual must
compare 20 percent of that trade or busi-
ness' QBI to the alternative limitations for
that trade or business. The limitation to
which the 20 percent of QBI is compared
is the greater of 50 percent of the W-2
wages attributable to the trade or business
or 25 percent of those W-2 wages plus 2.5
percent of the UBIA of qualified property
for that trade or business. If 20 percent of
the QBI of the trade or business is greater
than the relevant alternative limitation, the
QBI component is limited in the calcula-
tions under the proposed regulations to the
amount of the alternative limitation. If an
individual's taxable income is within the
phase-in range and 20 percent of QBI is
greater than either of the limitation
amounts, the individual's QBI component
for the trade or business is instead equal to
20 percent of QBI reduced by the reduc-
tion amount as described in proposed
§ 1.199A-1(d)(2)(iv)(B).

One commenter noted that, if com-
bined QBI from all of an individual's
trades or businesses is greater than zero,
but the individual's QBI from one or more
trades or businesses is less than zero, the
mechanics of how the loss should be off-
set against the QBI income for purposes
of calculating the section 199A deduction
are unclear. How such a loss is allocated
matters in situations in which an individ-
ual has taxable income above the thresh-
old amount and more than one trade or
business with positive QBI. The com-
menter suggested that a "netting" ap-
proach best reflects Congress's intent, and
that the absence of a netting approach
would lead to inconsistent and counterin-
tuitive results that Congress did not in-

tend. The Treasury Department and the
IRS agree that a netting approach is con-
templated by the carryforward rule of sec-
tion 199A(c)(2) and is necessary to ensure
results consistent with the intent of section
199A. Accordingly, proposed § 1.199A-
1(d)(2)(iii) provides that, if an individual
has QBI of less than zero from one trade
or business, but has overall QBI greater
than zero when all of the individual's
trades or businesses are taken together,
then the individual must offset the net
income in each trade or business that pro-
duced net income with the net loss from
each trade or business that produced net
loss before the individual applies the lim-
itations based on W-2 wages and UBIA
of qualified property. The individual must
apportion the net loss among the trades or
businesses with positive QBI in propor-
tion to the relative amounts of QBI in
such trades or businesses. Then, for pur-
poses of applying the limitation based
on W-2 wages and UBIA of qualified
property, the net gain or income with
respect to each trade or business (as
offset by the apportioned losses) is the
taxpayer's QBI with respect to that trade
or business. The W-2 wages and UBIA
of qualified property from the trades or
businesses which produced negative
QBI are not taken into account for pur-
poses of proposed § 1.199A-1(d) and
are not carried over into the subsequent
year. The Treasury Department and the
IRS request comments on the approach
described above.

## D. Special rules

Proposed § 1.199A-1(e) incorporates
special rules contained in sections 199A
and 6662. Section 199A(f)(1) provides
that in the case of a partnership or S
corporation, section 199A is applied at the
partner or shareholder level. The proposed
regulations provide that the section 199A
deduction has no effect on the adjusted
basis of the partner's interest in the part-
nership. With respect to S corporations, the
section 199A deduction has no effect on the
adjusted basis of a shareholder's stock in an
S corporation or the S corporation's accu-
mulated adjustments account.

The proposed regulations provide that
the deduction under section 199A does
not reduce net earnings from self-

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employment under section 1402 or net
investment income under section 1411.
Therefore, both sections 1402 and 1411
are calculated as though there is no sec-
tion 199A deduction.

Section 199A(f)(1)(C) provides that, in
the case of a taxpayer with QBI from
within the Commonwealth of Puerto Rico,
if such income is taxable under section 1
for a taxable year, then for purposes of
determining QBI of such individual for
such taxable year, the term "United
States" shall include the Commonwealth
of Puerto Rico. Proposed § 1.199A-
1(e)(3) repeats this statutory language.

Section 199A(f)(2) provides that for
purposes of determining alternative mini-
mum taxable income under section 55,
QBI shall be determined without regard
to any adjustments under sections 56
through 59. To clarify that the section
199A deduction does not result in individ-
uals being subject to the alternative min-
imum tax, proposed § 1.199A-1(e)(4)
provides that, for purposes of determining
alternative minimum taxable income un-
der section 55, the deduction allowed un-
der section 199A(a) for a taxable year
shall be equal in amount to the deduction
allowed under section 199A(a) in deter-
mining taxable income for that taxable
year.

Section 6662(a) provides a penalty
for an underpayment of tax required to
be shown on a return. Under section
6662(b)(2), the penalty applies to the
portion of any underpayment that is at-
tributable to a substantial understate-
ment of income tax. Section 6662(d)(1)
defines substantial understatement of in-
come tax, which is generally an under-
statement that exceeds the greater of 10
percent of the tax required to be shown
on the return or $5,000. Section
6662(d)(1)(C) provides a special rule in
the case of any taxpayer who claims the
deduction allowed under section 199A
for the taxable year, which requires that
section 6662(d)(1)(A) is applied by sub-
stituting "5 percent" for "10 percent."
Proposed § 1.199A-1(e)(5) cross-re-
ferences this rule.

Section 199A(b)(7) provides that in the
case of any qualified trade or business of a
patron of a specified agricultural or horti-
cultural cooperative, the amount deter-
mined under section 199A(b)(2) with re-

spect to such trade or business shall be
reduced by the lesser of (A) 9 percent of
so much of the qualified business in-
come with respect to such trade or busi-
ness as is properly allocable to qualified
payments received from such coopera-
tive, or (B) 50 percent of so much of the
W-2 wages with respect to such trade or
business as are so allocable. Proposed
§ 1.199A-1(e)(6) repeats this statutory
language.

## II. Proposed § 1.199A-2: Determination of W-2 Wages and the UBIA of Qualified Property

As described in part I.C. of this Expla-
nation of Provisions, if an individual's
taxable income exceeds the threshold
amount, section 199A(b)(2)(B) imposes a
limit on the section 199A deduction based
on the greater of either (i) the W-2 wages
paid, or (ii) the W-2 wages paid and
UBIA of qualified property attributable to
a trade or business. This part of this Ex-
planation of Provisions describes the rules
in proposed § 1.199A-2 regarding the de-
termination of W-2 wages and UBIA of
qualified property.

## A. W-2 wages attributable to a trade or business

The W-2 wage rules of proposed
§ 1.199A-2 generally follow the rules un-
der former section 199. Section 199,
which was repealed by the TCJA, pro-
vided for a deduction with respect to cer-
tain domestic production activities and
contained a W-2 wage limitation similar
to the one in section 199A. The legislative
text of the W-2 wage limitation in section
199A is modeled on the text of former
section 199, and both taxpayers and the
IRS have developed experience in apply-
ing those W-2 wage rules for over a de-
cade. The regulations under former sec-
tion 199 provided rules to determine W-2
wages, which provide a useful starting
point in developing the W-2 wage rules
under section 199A, including rules on the
definition of W-2 wages, wages paid by
persons other than the common-law em-
ployer, and methods for calculating W-2
wages.

The Treasury Department and the
IRS have received comments concern-

ing whether amounts paid to workers who
receive Forms W-2 from third party pay-
ors (such as professional employer orga-
nizations, certified professional employer
organizations, or agents under section
3504) that pay these wages to workers on
behalf of their clients and report wages on
Forms W-2, with the third party payor as
the employer listed in Box c of the Forms
W-2, may be included in the W-2 wages
of the clients of third party payors. In
order for wages reported on a Form W-2
to be included in the determination of
W-2 wages of a taxpayer, the Form
W-2 must be for employment by the
taxpayer. The regulations under former
section 199, specifically § 1.199-
2(a)(2), addressed this issue, providing
that, since employees of the taxpayer are
defined in the regulations as including
only common law employees of the tax-
payer and officers of a corporate tax-
payer, taxpayers may take into account
wages reported on Forms W-2 issued by
other parties provided that the wages
reported on the Forms W-2 were paid to
employees of the taxpayer for employ-
ment by the taxpayer.

Proposed § 1.199A-2(b)(2)(ii) pro-
vides a rule for wages paid by a person
other than the common law employer that
is substantially similar to the rule in
§ 1.199-2(a)(2). Specifically, the pro-
posed regulations provide that, in deter-
mining W-2 wages, a person may take
into account any W-2 wages paid by an-
other person and reported by the other
person on Forms W-2 with the other per-
son as the employer listed in Box c of the
Forms W-2, provided that the W-2 wages
were paid to common law employees or
officers of the person for employment by
the person. In such cases, the person pay-
ing the W-2 wages and reporting the W-2
wages on Forms W-2 is precluded from
taking into account such wages for pur-
poses of determining W-2 wages with
respect to that person. Persons that pay
and report W-2 wages on behalf of or
with respect to others can include certified
professional employer organizations un-
der section 7705, statutory employers un-
der section 3401(d)(1), and agents under
section 3504. Under this rule, persons
who otherwise qualify for the deduction
under section 199A are not limited in ap-
plying the deduction merely because they

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use a third party payor to pay and report
wages to their employees. However,
with respect to individuals who taxpay-
ers assert are their common law employ-
ees for purposes of section 199A, tax-
payers are reminded of their duty to file
returns and apply the tax law on a con-
sistent basis.

Unlike former section 199, the W-2
wage limitation in section 199A applies
separately for each trade or business. Ac-
cordingly, proposed § 1.199A-2 provides
that, in the case of W-2 wages that are
allocable to more than one trade or busi-
ness, the portion of the W-2 wages allo-
cable to each trade or business is deter-
mined to be in the same proportion to total
W-2 wages as the deductions associated
with those wages are allocated among the
particular trades or businesses. Section
199A(b)(4) also requires that to be taken
into account, W-2 wages must be prop-
erly allocable to QBI. W-2 wages are
properly allocable to QBI if the associated
wage expense is taken into account in
computing QBI.

Additionally, proposed § 1.199A-
2(b)(4) restates the rule of section
199A(f)(1)(A)(iii), which provides that, in
the case of a trade or business conducted
by an RPE, a partner's or shareholder's
allocable share of wages must be deter-
mined in the same manner as the partner's
allocable share or a shareholder's pro rata
share of wage expenses.

Consistent with section 199A(b)(5)
and the legislative history of the TCJA,
which direct the Secretary to provide rules
for applying the W-2 wage limitation in
cases in which the taxpayer acquires, or
disposes of, a trade or business, the
major portion of a trade or business, or the
major portion of a separate unit of a trade
or business during the year, proposed
§ 1.199A-2(b)(2)(iv)(B) provides rules
that apply in the case of an acquisition or
disposition of a trade or business. See
Joint Explanatory Statement of the Com-
mittee of Conference, 38. Specifically,
proposed § 1.199A-2(b)(2)(iv)(B)(1) pro-
vides that, in the case of an acquisition or
disposition of a trade or business, the ma-
jor portion of a trade or business, or the
major portion of a separate unit of a trade
or business that causes more than one
individual or entity to be an employer of
the employees of the acquired or disposed

of trade or business during the calendar
year, the W-2 wages of the individual or
entity for the calendar year of the acqui-
sition or disposition are allocated between
each individual or entity based on the pe-
riod during which the employees of the
acquired or disposed of trade or business
were employed by the individual or entity,
regardless of which permissible method is
used for reporting predecessor and succes-
sor wages on Form W-2. For this purpose,
the period of employment is determined
consistently with the principles for deter-
mining whether an individual is an em-
ployee described in proposed § 1.199A-
2(b).

A notice of proposed revenue proce-
dure, Notice 2018-64, 2018-35 IRB 347,
which provides three methods for calcu-
lating W-2 wages is being issued concur-
rently with this notice of proposed rule-
making. The three methods in the notice
are substantially similar to the methods
provided in Rev. Proc. 2006-47, 2006-2
C.B. 869, for purposes of calculating
"paragraph (e)(1) wages" (that is, wages
described in § 1.199-2(e)(1) issued under
former section 199). The first method (the
unmodified Box method) allows for a sim-
plified calculation while the second and
third methods (the modified Box 1 method
and the tracking wages method) provide
for greater accuracy.

## B. The UBIA of qualified property

Section 199A(b)(2)(B)(ii) provides an
alternative deduction limitation based on 25
percent of W-2 Wages with respect to the
qualified trade or business and 2.5 percent
of the UBIA of qualified property. Proposed
§ 1.199A-2 restates the statutory definitions
under the qualified property rules, and pro-
vides additional guidance.

### 1. General definition of UBIA of qualified property

Proposed § 1.199A-2(c)(1) restates the
definition of qualified property in section
199A(b)(6)(A), which provides that
"qualified property" means tangible prop-
erty of a character subject to depreciation
that is held by, and available for use in, a
trade or business at the close of the tax-
able year, and which is used in the pro-
duction of QBI, and for which the depre-

ciable period has not ended before the
close of the taxable year. Proposed
§ 1.199A-2(c)(2) also restates the defini-
tion of depreciable period in section
199A(b)(6)(B), which provides that "de-
preciable" period means the period begin-
ning on the date the property is first placed
in service by the taxpayer and ending on
the later of (a) the date 10 years after that
date, or (b) the last day of the last full year
in the applicable recovery period that
would apply to the property under section
168(c), regardless of the application of
section 168(g).

Because the applicable recovery period
under section 168(c) of the property is not
changed by any additional first-year de-
preciation deduction allowable under sec-
tion 168, proposed § 1.199A-2(c)(2)(ii)
also clarifies that the additional first-year
depreciation deduction allowable under
section 168 (for example, under section
168(k) or section 168(m)) does not affect
the applicable recovery period under sec-
tion 168(c).

Proposed § 1.199A-2(c)(3) provides a
definition of UBIA. The Treasury Depart-
ment and the IRS believe that existing
general principles used to define "unad-
justed basis" in § 1.263(a)-3(h)(5) pro-
vide a reasonable basis for an administra-
ble rule that is appropriate for the
purposes of section 199A and that their
use will reduce compliance costs, burden,
and administrative complexity because
taxpayers have experience applying them.
In addition, the Treasury Department and
the IRS believe that "immediately after
acquisition" means as of the date the prop-
erty is placed in service because section
199A provides that "qualified property"
must be used in the production of QBI. In
order to be used in the production of QBI,
the qualified property necessarily must be
placed in service. Determining UBIA as
of the date the property is placed in ser-
vice ensures consistency between pur-
chased and produced qualified property,
and reduces compliance costs, burden,
and administrative complexity because
taxpayers are already required to deter-
mine that amount. Accordingly, proposed
§ 1.199A-2 provides that the term
"UBIA" means the basis as determined
under section 1012 or other applicable
sections of chapter 1, including subchap-
ter O (relating to gain or loss on disposi-

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tions of property), subchapter C (relating
to corporate distributions and adjust-
ments), subchapter K (relating to partners
and partnerships), and subchapter P (relat-
ing to capital gains and losses). UBIA is
determined without regard to any adjust-
ments described in section 1016(a)(2)
or (3), any adjustments for tax credits
claimed by the taxpayer (for example, un-
der section 50(c)), or any adjustments for
any portion of the basis for which the
taxpayer has elected to treat as an expense
(for example, under sections 179, 179B,
or 179C). Therefore, for purchased or pro-
duced qualified property, UBIA generally
will be its cost under section 1012 as of
the date the property is placed in service.
For qualified property contributed to a
partnership in a section 721 transaction
and immediately placed in service, UBIA
generally will be its basis under section
723. For qualified property contributed to
an S corporation in a section 351 transac-
tion and immediately placed in service,
UBIA generally will be its basis under
section 362. Further, for property inher-
ited from a decedent and immediately
placed in service by the heir, the UBIA
generally will be its fair market value at
the time of the decedent's death under sec-
tion 1014. However, proposed § 1.199A-
2(c)(3) provides that UBIA does reflect the
reduction in basis for the percentage of the
taxpayer's use of property for the taxable
year other than in the taxpayer's trade or
business.

### 2. Partnership special basis adjustments

After the enactment of the TCJA, the
Treasury Department and the IRS received
comments requesting guidance as to
whether partnership special basis adjust-
ments under sections 734(b) or 743(b) con-
stitute qualified property for purposes of
section 199A. Treating partnership special
basis adjustments as qualified property
could result in inappropriate duplication of
UBIA of qualified property (if, for example,
the fair market value of the property has not
increased and its depreciable period has not
ended). Accordingly, proposed § 1.199A-
2(c)(1)(iii) provides that partnership special
basis adjustments are not treated as separate
qualified property.

### 3. Property transferred with a principal purpose of increasing section 199A deduction

Qualified property includes deprecia-
ble property used during the taxable year
in the production of QBI and held by, and
available for use in, the trade or business
at the close of the taxable year. However,
it would be inconsistent with the purposes
of section 199A to permit trades or busi-
nesses to transfer or acquire property at
the end of the year merely to manipulate
the UBIA of qualified property attribut-
able to the trade or business. Therefore,
pursuant to the authority granted to the
Secretary under section 199A(f)(4), pro-
posed § 1.199A-2(c)(1)(iv) provides that
property is not qualified property if the
property is acquired within 60 days of the
end of the taxable year and disposed of
within 120 days without having been used
in a trade or business for at least 45 days
prior to disposition, unless the taxpayer
demonstrates that the principal purpose of
the acquisition and disposition was a pur-
pose other than increasing the section
199A deduction.

## 4. Like-kind exchanges and involuntary conversions

Section 199A does not provide rules to
determine UBIA for qualified property in
the case of an exchange of property under
section 1031 (like-kind exchange) or in-
voluntary conversion under section 1033.
However, section 199A(h)(2) specifically
instructs the Secretary to do so. The Trea-
sury Department and the IRS believe that
existing general principles used for like-
kind exchanges and involuntary conver-
sions under § 1.168(i)-(6) provide a use-
ful analogy for administrable rules that are
appropriate for the purposes of section
199A and that their use will reduce com-
pliance costs, burden, and administrative
complexity because taxpayers have experi-
ence applying them. Accordingly, proposed
§ 1.199A-2(c)(2)(iii) generally follows the
rules of § 1.168(i)-6 to provide that quali-
fied property that is acquired in a like-
kind exchange, as defined in § 1.168(i)-
6(b)(11), or in an involuntary conver-
sion, as defined in § 1.168(i)-6(b)(12),
is treated as replacement Modified Acceler-
ated Cost Recovery System (MACRS)

property as defined in § 1.168(i)-6(b)(1)
whose depreciable period generally is de-
termined as of the date the relinquished
property was first placed in service. Ac-
cordingly, subject to one exception, pro-
posed § 1.199A-2(c)(2)(iii) provides
that, for purposes of determining the
depreciable period, the date the ex-
changed basis in the replacement quali-
fied property is first placed in service by
the trade or business is the date on
which the relinquished property was
first placed in service by the individual
or RPE and the date the excess basis in
the replacement qualified property is
first placed in service by the individual
or RPE is the date on which the replace-
ment qualified property was first placed
in service by the individual or RPE. As
a result, the depreciable period under
section 199A for the exchanged basis of
the replacement qualified property will
end before the depreciable period for the
excess basis of the replacement qualified
property ends.

The exception is that proposed § 1.199A-
2(c)(2)(iii)(C) provides that, for purposes
of determining the depreciable period, if
the individual or RPE makes an election
under § 1.168(i)-6(i)(1) (the election not
to apply § 1.168(i)-6)), the date the ex-
changed basis and excess basis in the re-
placement qualified property are first
placed in service by the trade or business
is the date on which the replacement qual-
ified property is first placed in service by
the individual or RPE, with UBIA deter-
mined as of that date. In this case, the
depreciable periods under section 199A
for the exchanged basis and the excess
basis of the replacement qualified prop-
erty will end on the same date.

Thus, unless the exception applies,
qualified property acquired in a like-kind
exchange or involuntary conversion will
have two separate placed in service dates
under the proposed regulations: for pur-
poses of determining the UBIA of the
property, the relevant placed in service
date will be the date the acquired property
is actually placed in service; for purposes
of determining the depreciable period of
the property, the relevant placed in service
date generally will be the date the relin-
quished property was first placed in ser-
vice. The proposed regulations contain an
example illustrating these rules.

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## 5. Other nonrecognition transactions

The Treasury Department and the IRS
have received comments requesting guid-
ance on the application of the qualified
property rules to nonrecognition trans-
fers involving transferred basis property
within the meaning of section 7701(a)(43)
(transferred basis transactions). For exam-
ple, taxpayers and practitioners requested
guidance on how to determine the depre-
ciable period of the property if a partner-
ship conducts a trade or business and
qualified property is contributed to that
trade or business in a nonrecognition
transfer under section 721(a). Also of rel-
evance in the context of non-recognition
transfers, section 199A(h)(1) grants the
Secretary anti-abuse authority to apply
rules similar to the rules under section
179(d)(2) (which can restrict the expens-
ing of certain assets in transferred basis
transactions) to prevent the manipulation
of the depreciable period of qualified
property using transactions between re-
lated parties.

The Treasury Department and the IRS
believe that existing general principles
used for transferred basis transactions un-
der § 168(i)(7) provide a useful analogy
for administrable rules that are appropri-
ate for the purposes of section 199A and
that their use will reduce compliance
costs, burden, and administrative com-
plexity because taxpayers have experience
applying them. Accordingly, proposed
§ 1.199A-2(c)(2)(iv) provides that, for
purposes of determining the depreciable
period, if an individual or RPE (the trans-
feree) acquires qualified property in a
transaction described in section 168(i)(7)
(B), the transferee determines the date on
which the qualified property was first
placed in service using a two-step ap-
proach. First, for the portion of the trans-
feree's UBIA of the qualified property
that does not exceed the transferor's
UBIA of such property, the date such por-
tion was first placed in service by the
transferee is the date on which the trans-
feror first placed the qualified property in
service. Second, for the portion of the
transferee's UBIA of the qualified prop-
erty that exceeds the transferor's UBIA of
such property, if any, such portion is
treated as separate qualified property that
the transferee first placed in service on the

date of the transfer. Thus, qualified prop-
erty acquired in these non-recognition
transactions will have two separate placed
in service dates under the proposed regu-
lations: for purposes of determining the
UBIA of the property, the relevant placed
in service date will be the date the ac-
quired property is placed in service by the
transferee (for instance, the date the part-
nership places in service property re-
ceived in a section 721 transaction); for
purposes of determining the depreciable
period of the property, the relevant placed
in service date generally will be the date
the transferor first placed the property in
service (for instance, the date the partner
placed the property in service in his or her
sole proprietorship). The proposed regula-
tions contain an example illustrating these
rules.

The Treasury Department and the
IRS request comments concerning ap-
propriate methods for accounting for
non-recognition transactions, including
rules to prevent the manipulation of the
depreciable period of qualified property
using transactions between related par-
ties.

## 6. Redetermination of UBIA and subsequent improvements to qualified property

The Treasury Department and the IRS
have received comments requesting guid-
ance on the treatment of subsequent im-
provements to qualified property. Subse-
quent improvements to qualified property
are generally treated as a separate item of
property under section 168(i)(6). The
Treasury Department and the IRS do not
believe a different approach is necessary
for purposes of section 199A. Accord-
ingly, proposed § 1.199A-2(c)(1)(ii) pro-
vides that, in the case of any addition to,
or improvement of, qualified property that
is already placed in service by the tax-
payer, such addition or improvement is
treated as separate qualified property that
the taxpayer first placed in service on the
date such addition or improvement is
placed in service by the taxpayer for pur-
poses of determining the depreciable pe-
riod of the qualified property. For exam-
ple, if a taxpayer acquired and placed in
service a machine on March 26, 2018, and
then incurs additional capital expenditures

to improve the machine in May 2020, and
places such improvements in service on
May 27, 2020, the taxpayer has two qual-
ified properties: the machine acquired and
placed in service on March 26, 2018, and
the improvements to the machine incurred
in May 2020 and placed in service on May
27, 2020.

## 7. Allocation of UBIA of qualified property by RPEs

In the case of a trade or business con-
ducted by an RPE, section 199A(f) pro-
vides that a partner's or shareholder's al-
locable share of the UBIA of qualified
property is determined in the same man-
ner as the partner's allocable share or
shareholder's pro rata share of deprecia-
tion. Proposed § 1.199A-2(a)(3) provides
that, in the case of qualified property held
by an RPE, each partner's or sharehold-
er's share of the UBIA of qualified prop-
erty is an amount that bears the same
proportion to the total UBIA of qualified
property as the partner's or shareholder's
share of tax depreciation bears to the en-
tity's total tax depreciation attributable to
the property for the year. In the case of
qualified property of a partnership that
does not produce tax depreciation during
the year (for example, property that has
been held for less than 10 years but whose
recovery period has ended), each partner's
share of the UBIA of qualified property is
based on how gain would be allocated to
the partners pursuant to sections 704(b)
and 704(c) if the qualified property were
sold in a hypothetical transaction for cash
equal to the fair market value of the qual-
ified property. In the case of qualified
property of an S corporation that does not
produce tax depreciation during the year,
each shareholder's share of the UBIA of
the qualified property is a share of the
UBIA proportionate to the ratio of shares
in the S corporation held by the share-
holder over the total shares of the S cor-
poration.

III. Proposed § 1.199A-3: QBI,
Qualified REIT Dividends, Qualified
PTP Income

Proposed § 1.199A-3 restates the def-
initions in section 199A(c) and provides
additional guidance on the determination

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of QBI, qualified REIT dividends, and
qualified PTP income.

## A. QBI

Section 199A(c)(1) provides that the
term "QBI" means, for any taxable year,
the net amount of qualified items of in-
come, gain, deduction, and loss attribut-
able to any qualified trade or business of
the taxpayer. QBI does not include any
qualified REIT dividends or qualified PTP
income. Section 199A(c)(3)(A) provides
that the term "qualified items of income,
gain, deduction, and loss" means items of
income, gain, deduction, and loss to the
extent such items are (i) effectively con-
nected with the conduct of a trade or busi-
ness within the United States (within the
meaning of section 864(c), determined by
substituting "qualified trade or business
(within the meaning of section 199A)" for
"nonresident alien individual or a foreign
corporation" or for "a foreign corpora-
tion" each place it appears), and (ii) in-
cluded or allowed in determining taxable
income for the taxable year. Section
199A(c)(3)(B) provides a list of items that
are not taken into account as qualified
items of income, gain, deduction, and
loss, including capital gain or loss, divi-
dends, interest income other than interest
income properly allocable to a trade or
business, amounts received from an annu-
ity other than in connection with a trade or
business, certain items described in sec-
tion 954, and items of deduction or loss
properly allocable to these items. Section
199A(c)(4) provides that QBI does not
include reasonable compensation paid to
the taxpayer by any qualified trade or
business of the taxpayer for services ren-
dered with respect to the trade or business,
any guaranteed payment described in sec-
tion 707(c) paid to a partner for services
rendered with respect to the trade or busi-
ness, and to the extent provided in regu-
lations, any payment described in section
707(a) to a partner for services rendered
with respect to the trade or business.

### i. Treatment of section 751 gain

The Treasury Department and the IRS
have received comments stating that it is
unclear whether gain or loss that is treated
as ordinary income under section 751

should be QBI if the section 751 income
meets all of the other requirements to be
QBI. This uncertainty is caused because
section 199A(e)(5) lists: (i) the taxpayer's
allocable share of the QBI from a publicly
traded partnership and (ii) income de-
scribed in section 751(a) as separate cat-
egories of qualified publicly traded part-
nership income, which could be read to
imply that income described in section
751 is not QBI. Section 1.199-5(e), is-
sued under former section 199, specifi-
cally included section 751(a) or (b) gains
as domestic production gross receipts.

The Treasury Department and the IRS
do not view the statutory reference to sec-
tion 751(a) gain as qualified PTP income
to exclude section 751 gain from being
QBI, but rather view such reference as
clarifying the rules for PTPs. Accord-
ingly, proposed § 1.199A-3(b)(1)(i) clar-
ifies that any gain attributable to assets of
a partnership giving rise to ordinary in-
come under section 751(a) or (b) is con-
sidered attributable to the trades or busi-
nesses conducted by the partnership, and
therefore, may constitute QBI if the other
requirements of section 199A and pro-
posed § 1.199A-3 are satisfied.

## ii. Guaranteed payments for the use of capital

Because guaranteed payments for the
use of capital under section 707(c) are
determined without regard to the income
of the partnership, proposed § 1.199A-
3(b)(1)(ii) provides that such payments
are not considered attributable to a trade
or business, and thus do not constitute
QBI. However, the partnership's related
expense for making the guaranteed pay-
ments may constitute QBI if the other
requirements are satisfied.

## iii. Section 481 adjustments

Section 1.199-8(g), issued under for-
mer section 199, provides rules on how
section 481(a) adjustments are taken into
account for purposes of former section
199. Similarly, proposed § 1.199A-
3(b)(1)(iii) provides that section 481 ad-
justments attributable to a trade or busi-
ness, whether positive or negative, and
arising in a taxable year ending after De-
cember 31, 2017, are treated as attribut-

able to that trade or business. Accord-
ingly, such section 481 adjustments will
constitute QBI to the extent the require-
ments of section 199A, including pro-
posed § 1.199A-3, are satisfied. Section
481 adjustments arising in a taxable year
ending before January 1, 2018, do not
constitute QBI.

## iv. Previously suspended losses

Several sections of the Code, including
sections 465, 469, 704(d), and 1366(d),
provide for disallowance of losses and
deductions in certain cases. Generally, the
disallowed amounts are suspended and
carried forward to the following year, at
which point they are re-tested and may
become allowable. Proposed § 1.199A-
3(b)(1)(iv) provides that, to the extent that
any previously disallowed losses or de-
ductions are allowed in the taxable year,
they are treated as items attributable to the
trade or business. However, losses or de-
ductions that were disallowed for taxable
years beginning before January 1, 2018,
are not taken into account for purposes of
computing QBI in a later taxable year.

## v. Net operating losses

Generally, items giving rise to a net
operating loss are allowed in computing
taxable income in the year incurred. Be-
cause those items would have been taken
into account in computing QBI in the year
incurred, the net operating loss should not
be treated as QBI in subsequent years.
Otherwise, the same loss could be taken
into account in multiple tax years. How-
ever, losses disallowed by section 461(l)
give rise to a net operating loss without
ever having been allowable in computing
taxable income. Thus, if deductions are
disallowed by reason of 461(l), those dis-
allowed deductions will not be included in
the QBI computation in the year incurred
(because they are not includable in taxable
income), and, if the resulting net operating
loss also is not included in the QBI com-
putation, the deduction would perma-
nently escape the QBI rules. This result
would be inappropriate. Accordingly, pro-
posed § 1.199A-3(b)(1)(v) provides that
generally, a deduction under section 172
for a net operating loss is not considered
attributable to a trade or business and

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therefore, is not taken into account in
computing QBI. However, to the extent
the net operating loss is comprised of
amounts attributable to a trade or business
that were disallowed under section 461(l),
the net operating loss is considered attrib-
utable to that trade or business, and will
constitute QBI to the extent the require-
ments of section 199A, including pro-
posed § 1.199A-3, are satisfied.

The Treasury Department and the IRS
request comments regarding the interac-
tion of section 199A and 461(l) generally.

### vi. Requirement that an item be effectively connected with a U.S. trade or business

Section 199A applies to all noncorpo-
rate taxpayers, whether such taxpayers are
domestic or foreign. Accordingly, section
199A applies to both U.S. citizens and
resident aliens as well as nonresident
aliens that have QBI. As noted previously
in this Explanation of Provisions, QBI
includes items of income, gain, deduction,
and loss to the extent such items are (i)
included or allowed in determining tax-
able income for the taxable year and (ii)
effectively connected with the conduct of
a trade or business within the United
States (within the meaning of section
864(c), determined by substituting “qual-
ified trade or business (within the meaning
of section 199A)" for "nonresident alien
individual or a foreign corporation" or for
"a foreign corporation" each place it ap-
pears).

a. Summary of rules for generally
determining whether income is
effectively connected with a United
States trade or business

Section 864(c) provides rules that non-
resident alien individuals and foreign cor-
porations use to determine which items of
income, gain, or loss are effectively con-
nected with a United States trade or busi-
ness. Section 873(a) permits nonresident
aliens to deduct expenses only if and to
the extent that they are connected with, or
properly allocable and apportioned to, in-
come effectively connected with a United
States trade or business.

Thus, for example, a U.S. partner of a
partnership that operates a trade or busi-
ness in both the United States and in a

foreign country would only include the
items of income, gain, deductions, and
loss that would be effectively connected
with a United States trade or business.
Similarly, a shareholder of an S corpora-
tion that is engaged in a trade or business
in both the United States and in a foreign
country would only take into account the
items of income, gain, deduction, and loss
that would be effectively connected to the
portion of the business conducted by the S
corporation in the United States, deter-
mined by applying the principles of sec-
tion 864(c).

In general, whether a nonresident alien
is engaged in a trade or business within
the United States, as opposed to a trade or
business conducted solely outside the
United States, is based upon all the facts
and circumstances, as developed through
case law and other published guidance.
Pursuant to section 875(1), a nonresident
alien is considered engaged in a trade or
business within the United States if the
partnership of which such individual is a
member is so engaged.

Section 864(b) provides that the term
"trade or business within the United
States" includes (but is not limited to) the
performance of personal services within
the United States at any time during the
taxable year, but excludes the perfor-
mance of services described in section
864(b)(1) and (2). Section 864(b)(1) cov-
ers a limited set of nonresident aliens who
perform services in the United States on
behalf of foreign persons not otherwise
engaged in a U.S. trade or business, or on
behalf of U.S. persons through a foreign
office, if the nonresident aliens are present
in the United States less than 90 days
during the taxable year and their compen-
sation does not exceed $3,000. Section
864(b)(2) generally treats foreign persons,
including partnerships, who are trading in
stocks, securities, and in commodities for
their own account or through a broker or
other independent agent as not engaged in
a United States trade or business.

## b. Application to section 199A

Although the cross reference in section
199A(c)(3)(A)(i) to section 864 is limited
to paragraph (c) of that section, no income
derived from excluded services under sec-
tion 864(b)(1) or (2) could ever be effec-

tively connected income in the hands of a
nonresident alien. Accordingly, section
199A incorporates the specific rules re-
garding the scope of the term "trade or
business in the United States" in deter-
mining QBI. As such, if a trade or busi-
ness is not engaged in a U.S. trade or
business by reason of section 864(b),
items of income, gain, deduction, or loss
from that trade or business will not be
included in QBI because such items
would not be effectively connected with
the conduct of a U.S. trade or business.

If a trade or business is determined to
be conducted in the United States, section
864(c)(3) generally treats all income of a
nonresident alien from sources within the
United States as effectively connected
with the conduct of a U.S. trade or busi-
ness. However, any income from sources
within the United States described in sec-
tion 871(a)(1) or (h) and any gain or loss
from the sale of capital assets are only
effectively connected if the income meets
requirements of section 864(c)(2) and the
regulations thereunder. Under section
864(c)(4), income from sources without
the United States is generally not treated
as effectively connected with the conduct
of a U.S. trade or business unless an ex-
ception under section 864(c)(4)(B) ap-
plies. Thus, a trade or business's foreign
source income, gain, or loss, (and any
deductions effectively connected with
such foreign source income, gain, or loss)
would generally not be included in QBI,
unless the income meets an exception in
section 864(c)(4)(B). Whether income is
U.S. or foreign sourced is determined un-
der sections 861, 862, 863, and 865, and
the regulations thereunder.

This rule does not mean that any item
that is effectively connected with the con-
duct of a trade or business with the United
States is therefore QBI. As discussed pre-
viously, the item must also be "with re-
spect to" a trade or business. Certain pro-
visions of the Code allow items to be
treated as effectively connected, even
though they are not with respect to a trade
or business. For example, section 871(d)
allows a nonresident alien individual to
elect to treat income from real property in
the United States that would not otherwise
be treated as effectively connected with
the conduct of a trade or business within
the United Sates as effectively connected.

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However, for purposes of section 199A, if
items are not attributable to a trade or
business under 162, such items do not
constitute QBI.

Similarly, the fact that a deduction is
allowed for purposes of computing effec-
tively connected taxable income does not
necessarily mean that it is taken into ac-
count for purposes of section 199A. For
example, for purposes of computing effec-
tively connected taxable income, section
873(b) allows certain deductions, includ-
ing for theft losses of property located
within the United States and charitable
contributions allowed under section 170,
to be taken into account regardless of
whether they are connected with income
that is effectively connected with the con-
duct of a trade or business within the
United States. However, for purposes of
section 199A, these items would not be
taken into account because section 199A
only permits a deduction for income that
is both attributable to a trade or business
and that is also effectively connected in-
come.

## vii. Exclusion from QBI for certain items

## a. Treatment of section 1231 gains and losses

Section 199A(c)(3)(B)(i) provides that
QBI does not include any item of short-
term capital gain, short-term capital loss,
long-term capital gain, or long-term capi-
tal loss. The Treasury Department and the
IRS have received comments requesting
guidance on the extent to which gains and
losses subject to section 1231 may be
taken into account in calculating QBI.
Section 1231 provides rules under which
gains and losses from certain involuntary
conversions and the sale of certain prop-
erty used in a trade or business are either
treated as long-term capital gains or long-
term capital losses, or not treated as gains
and losses from sales or exchanges of
capital assets.

Section 199A(c)(3)(B)(i) excludes cap-
ital gains or losses, regardless of whether
those items arise from the sale or ex-
change of a capital asset. The legislative
history of section 199A provides that QBI
does not include any item taken into ac-
count in determining net long-term capital

gain or net long-term capital loss. Confer-
ence Report page 30. Accordingly, pro-
posed § 1.199A-3(b)(2)(ii)(A) clarifies
that, to the extent gain or loss is treated as
capital gain or loss, it is not included in
QBI. Specifically, if gain or loss is treated
as capital gain or loss under section 1231,
it is not QBI. Conversely, if section 1231
provides that gains or losses are not
treated as gains and losses from sales or
exchanges of capital assets, section
199A(c)(3)(B)(i) does not apply and thus,
the gains or losses must be included in
QBI (provided all other requirements are
met).

## b. Interest Income.

Section 199A(c)(4)(C) provides that
QBI does not include any interest income
other than interest income that is properly
allocable to a trade or business. The Trea-
sury Department and the IRS believe that
interest income received on working cap-
ital, reserves, and similar accounts is not
properly allocable to a trade or business,
and therefore should not be included in
QBI, because such interest income, al-
though held by a trade or business, is
simply income from assets held for invest-
ment. Accordingly, proposed § 1.199A-
3(b)(2)(ii)(C) provides that interest in-
come received on working capital,
reserves, and similar accounts is not prop-
erly allocable to a trade or business. In
contrast, interest income received on ac-
counts or notes receivable for services or
goods provided by the trade or business is
not income from assets held for invest-
ment, but income received on assets ac-
quired in the ordinary course of trade or
business.

## c. Reasonable compensation

Section 199A(c)(4)(A) provides that
QBI does not include "reasonable com-
pensation paid to the taxpayer by any
qualified trade or business of the taxpayer
for services rendered with respect to the
trade or business." Similarly, guaranteed
payments for services under section
707(c) are excluded from QBI. The phrase
"reasonable compensation" is a well-
known standard in the context of S corpo-
rations. Under Rev. Rul. 74-44, 1974-1
C.B. 287, S corporations must pay

shareholder-employees "reasonable com-
pensation for services performed" prior to
making "dividend" distributions with re-
spect to shareholder-employees' stock in
the S corporation under section 1368. See
also David E. Watson, P.C. v. United
States, 668 F.3d 1008, 1017 (8th Cir.
2012). The legislative history of section
199A confirms that the reasonable com-
pensation rule was intended to apply to S
corporations.

The Treasury Department and the IRS
have received requests for guidance on
whether the phrase "reasonable compen-
sation" within the meaning of section
199A extends beyond the context of S
corporations for purposes of section
199A. The Treasury Department and the
IRS believe "reasonable compensation" is
best read as limited to the context from
which it derives: compensation of S cor-
poration shareholders-employees. If rea-
sonable compensation were to apply out-
side of the context of S corporations, a
partnership could be required to apply the
concept of reasonable compensation to its
partners, regardless of whether amounts
paid to partners were guaranteed. Such a
result would violate the principle set forth
in Rev. Rul. 69-184, 1969-1 CB 256,
that a partner of a partnership cannot be an
employee of that partnership. There is no
indication that Congress intended to change
this long-standing Federal income tax prin-
ciple. Accordingly, proposed § 1.199A-
3(b)(2)(ii)(H) provides that QBI does not
include reasonable compensation paid by an
S corporation but does not extend this rule
to partnerships. Because the trade or busi-
ness of performing services as an employee
is not a qualified trade or business under
section 199A(d)(1)(B), wage income re-
ceived by an employee is never QBI. The
rule for reasonable compensation is merely
a clarification that, even if an S corpora-
tion fails to pay a reasonable wage to
its shareholder-employees, the shareholder-
employees are nonetheless prevented from
including an amount equal to reasonable
compensation in QBI.

### d. Guaranteed payments

Section 199A(c)(4)(B) provides that
QBI does not include any guaranteed pay-
ment described in section 707(c) paid by a
partnership to a partner for services ren-

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dered with respect to the trade or business.
Proposed § 1.199A-3(b)(2)(ii)(I) restates
this statutory rule and clarifies that the
partnership's deduction for such guaran-
teed payment is an item of QBI if it is
properly allocable to the partnership's
trade or business and is otherwise deduct-
ible for Federal income tax purposes. It
may be unclear whether a guaranteed pay-
ment to an upper-tier partnership for ser-
vices performed for a lower-tier partner-
ship is QBI for the individual partners of
the upper-tier partnership if the upper-tier
partnership does not itself make a guaran-
teed payment to its partners. Section
199A(c)(4)(B) does not limit the term
"partner" to an individual. Consequently,
for purposes of the guaranteed payment
rule, a partner may be an RPE. Accord-
ingly, proposed § 1.199A-3(b)(2)(ii)(I)
clarifies that QBI does not include any
guaranteed payment described in section
707(c) paid to a partner for services ren-
dered with respect to the trade or business,
regardless of whether the partner is an
individual or an RPE. Therefore, for the
purposes of this rule, a guaranteed pay-
ment paid by a lower-tier partnership to an
upper-tier partnership retains its character
as a guaranteed payment and is not in-
cluded in QBI of a partner of the upper-
tier partnership regardless of whether it is
guaranteed to the ultimate recipient.

## e. Section 707(a) payments

Section 199A(c)(4)(C) provides that
QBI does not include, to the extent pro-
vided in regulations, any payment de-
scribed in section 707(a) to a partner for
services rendered with respect to the trade
or business. Section 707(a) addresses ar-
rangements in which a partner engages
with the partnership other than in its ca-
pacity as a partner. Within the context of
section 199A, payments under section
707(a) for services are similar to, and
therefore, should be treated similarly as,
guaranteed payments, reasonable com-
pensation, and wages, none of which is
includable in QBI. In addition, consistent
with the tiered partnership rule for guar-
anteed payments described previously, to
the extent an upper-tier RPE receives a
section 707(a) payment, that income
should not constitute QBI to the partners
of the upper-tier entity. Accordingly, pro-

posed § 1.199A-3(b)(2)(ii)(J) provides
that QBI does not include any payment
described in section 707(a) to a partner for
services rendered with respect to the trade
or business, regardless of whether the
partner is an individual or an RPE. The
Treasury Department and the IRS request
comments on whether there are situations
in which it is appropriate to include sec-
tion 707(a) payments in QBI.

viii. Allocation of items not clearly
attributable to a single trade or
business.

Proposed § 1.199A-3(b)(5) provides
that, if an individual or an RPE directly
conducts multiple trades or businesses,
and has items of QBI that are properly
attributable to more than one trade or
business, the taxpayer or entity must allo-
cate those items among the several trades
or businesses to which they are attribut-
able using a reasonable method that is
consistent with the purposes of section
199A. The chosen reasonable method for
each item must be consistently applied
from one taxable year to another and must
clearly reflect the income of each trade or
business. There are several different ways
to allocate expenses, such as direct tracing
or allocating based on gross income, but
whether these are reasonable depends on
the facts and circumstances of each trade
or business. The Treasury Department and
the IRS are considering whether "reason-
able method" should be defined to include
the direct tracing method, allocations
based on gross income, or other methods,
within appropriate parameters. The Trea-
sury Department and the IRS request
comments on reasonable methods for the
allocation of items not clearly attributable
to a single trade or business and whether
any safe harbors may be appropriate.

## B. Qualified REIT dividends and qualified PTP income

Proposed § 1.199A-3(c)(2) restates the
statutory provisions regarding qualified
REIT dividends and provides additional
guidance relating to such dividends. Pur-
suant to the regulatory authority conferred
under section 199A(f)(4), proposed
§ 1.199A-3(c)(2)(ii) provides an anti-
abuse rule to prevent dividend stripping

and similar transactions aimed at captur-
ing qualified REIT dividends without hav-
ing economic exposure to the REIT stock
for a meaningful period of time. The pro-
posed anti-abuse rule incorporates the
principles of section 246(c).

Proposed § 1.199A-3(c)(3) restates the
statutory provisions regarding qualified
PTP income and provides additional guid-
ance regarding such income. One com-
menter questioned whether section 751
income recognized upon the sale of an
interest in a PTP must meet the standards
for QBI (such as the requirement that the
income be effectively connected with a
U.S. trade or business) to qualify as qual-
ified PTP income. Section 199A includes
special rules exempting qualified PTP in-
come from the W-2 wage and UBIA of
qualified property limitations. However,
these statutory rules do not exempt qualified
PTP income from the other QBI require-
ments. Accordingly, proposed § 1.199A-
3(c)(3)(ii) clarifies that the other rules appli-
cable to the determination of QBI apply to
the determination of qualified PTP income.

## IV. Proposed § 1.199A-4: Aggregation Rules

### A. Overview

The proposed regulations incorporate
the rules under section 162 for determin-
ing whether a trade or business exists for
purposes of section 199A. A taxpayer can
have more than one trade or business for
purposes of section 162. See § 1.446-
1(d)(1). However, in most cases, a trade or
business cannot be conducted through
more than one entity.

The Treasury Department and the IRS
have received comments requesting that
the regulations provide that taxpayers be
permitted to group or "aggregate" trades
or businesses under section 199A using
the grouping rules described in § 1.469-4
(grouping rules). Section 1.469-4 sets
forth the rules for grouping a taxpayer's
trade or business activities and rental ac-
tivities for purposes of applying the pas-
sive activity loss and credit limitation
rules of section 469. Section 469 uses the
term "activities" in determining the appli-
cation of the limitation rules under section
469. In contrast, section 199A applies to
trades or businesses. By focusing on ac-

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tivity, the grouping rules may be both
under and over inclusive in determining
what activities give rise to a trade or busi-
ness for section 199A purposes.

Additionally, section 469 is a loss lim-
itation rule used to prevent taxpayers from
sheltering passive losses with nonpassive
income. The section 199A deduction is
not based on the level of a taxpayer's
involvement in the trade or business (that
is, both active and passive owners of a
trade or business may be entitled to a
section 199A deduction if they otherwise
satisfy the requirements of section 199A
and these proposed regulations). Compli-
cating matters further, a taxpayer's section
469 groupings may include specified ser-
vice trades or businesses, requiring sepa-
rate rules to segregate the two categories
of trades or businesses to calculate the
section 199A deduction.

Therefore, the grouping rules under
section 469 are not appropriate for deter-
mining a trade or business for section
199A purposes. Accordingly, the Trea-
sury Department and the IRS are not
adopting the section 469 grouping rules as
the means by which taxpayers can aggre-
gate trades or businesses for purposes of
applying section 199A.

Although it is not appropriate to apply
the grouping rules under section 469 to
section 199A, the Treasury Department
and the IRS agree with practitioners that
some amount of aggregation should be
permitted. It is not uncommon for what
are commonly thought of as single trades
or businesses to be operated across multi-
ple entities. Trades or businesses may be
structured this way for various legal, eco-
nomic, or other non-tax reasons. The fact
that businesses are operated across entities
raises the question of whether, in defining
trade or business for purposes of section
199A, section 162 trades or businesses
should be permitted or required to be ag-
gregated or disaggregated, and if so,
whether such aggregation or disaggrega-
tion should occur at the entity level or the
individual level. Allowing taxpayers to ag-
gregate trades or businesses offers taxpayers a
means of combining their trades or businesses
for purposes of applying the W-2 wage and
UBIA of qualified property limitations and
potentially maximizing the deduction under
section 199A. If such aggregation is not per-
mitted, taxpayers could be forced to incur

costs to restructure solely for tax purposes. In
addition, business and non-tax law require-
ments may not permit many taxpayers to re-
structure their operations. Therefore, proposed
§ 1.199A-4 permits the aggregation of sepa-
rate trades or businesses, provided certain re-
quirements are satisfied.

The Treasury Department and the IRS
are aware that many commenters were
concerned with having multiple regimes
for grouping (that is, under sections 199A,
1411, and 469). Accordingly, comments
are requested on the aggregation method
described in proposed § 1.199A-4, in-
cluding whether this would be an appro-
priate grouping method for purposes of
sections 469 and 1411, in addition to sec-
tion 199A.

### B. Aggregation rules

Under proposed § 1.199A-4, aggrega-
tion is permitted but is not required. How-
ever, an individual may aggregate trades
or businesses only if the individual can
demonstrate that the requirements in pro-
posed § 1.199A-4(b)(1) are satisfied.
First, consistent with other provisions in
the proposed regulations, each trade or
business must itself be a trade or business
as defined in § 1.199A-1(b)(13).

Second, the same person, or group of
persons, must directly or indirectly, own a
majority interest in each of the businesses
to be aggregated for the majority of the
taxable year in which the items attribut-
able to each trade or business are included
in income. All of the items attributable to
the trades or businesses must be reported
on returns with the same taxable year
(not including short years). Proposed
§ 1.199A-4(b)(3) provides rules allowing
for family attribution. Because the pro-
posed rules look to a group of persons,
non-majority owners may benefit from the
common ownership and are permitted to
aggregate. The Treasury Department and
the IRS considered certain reporting re-
quirements in which the majority owner
or group of owners would be required to
provide information about all of the other
pass-through entities in which they held a
majority interest. Due to the complexity
and potential burden on taxpayers of such
an approach, proposed § 1.199A-4 does
not provide such a reporting requirement.
The Treasury Department and the IRS re-

quest comments on whether a reporting or
other information sharing requirement
should be required.

Third, none of the aggregated trades or
businesses can be an SSTB. Proposed
§ 1.199A-5 addresses SSTBs and trades
or businesses with SSTB income.

Fourth, individuals and trusts must es-
tablish that the trades or businesses meet
at least two of three factors, which dem-
onstrate that the businesses are in fact part
of a larger, integrated trade or business.
These factors include: (1) the businesses
provide products and services that are the
same (for example, a restaurant and a food
truck) or they provide products and ser-
vices that are customarily provided to-
gether (for example, a gas station and a
car wash); (2) the businesses share facili-
ties or share significant centralized busi-
ness elements (for example, common per-
sonnel, accounting, legal, manufacturing,
purchasing, human resources, or informa-
tion technology resources); or (3) the
businesses are operated in coordination
with, or reliance on, other businesses in
the aggregated group (for example, supply
chain interdependencies).

## C. Individuals

An individual is permitted to aggregate
trades or businesses operated directly and
trades or businesses operated through
RPEs. Individual owners of the same
RPEs are not required to aggregate in the
same manner.

An individual directly engaged in a
trade or business must compute QBI, W-2
wages, and UBIA of qualified property for
each trade or business before applying the
aggregation rules. If an individual has ag-
gregated two or more trades or businesses,
then the combined QBI, W-2 wages, and
UBIA of qualified property for all aggre-
gated trades or businesses is used for pur-
poses of applying the W-2 wage and
UBIA of qualified property limitations de-
scribed in proposed § 1.199A-1(d)(2)(iv).

## D. RPEs

RPEs must compute QBI, W-2 wages,
and UBIA of qualified property for each
trade or business. An RPE must provide its
owners with information regarding QBI,

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W-2 wages, and UBIA of qualified property
attributable to its trades or businesses.

The Treasury Department and the IRS
considered permitting aggregation by an
RPE in a tiered structure. The Treasury
Department and the IRS considered sev-
eral approaches to tiered structures, in-
cluding permitting only the operating en-
tity to aggregate the trades or businesses
or permitting each tier to add to the ag-
gregated trade or business from a lower-
tier, provided that the combined aggre-
gated trade or business otherwise satisfied
the requirements of proposed § 1.199A-
4(b)(1) had the businesses all been owned
by the lower-tier entity. The Treasury De-
partment and the IRS are concerned that
the reporting requirements needed for ei-
ther of these rules would be overly com-
plex for both taxpayers and the IRS to
administer. In addition, because the sec-
tion 199A deduction is in all cases taken
at the individual level, it should not be
detrimental, and in fact may provide
flexibility to taxpayers, to provide for
aggregation at only one level. The Trea-
sury Department and the IRS request
comments on the proposed approach to
tiered structures and the reporting nec-
essary to allow an individual to demon-
strate to which trades or businesses his
or her QBI, W-2 wages, and UBIA of
qualified property are attributable for
purposes of calculating his or her sec-
tion 199A deduction.

## E. Reporting and consistency

Proposed § 1.199A-4(c)(1) requires
that once multiple trades or businesses are
aggregated into a single aggregated trade
or business, individuals must consistently
report the aggregated group in subsequent
tax years. Proposed § 1.199A-4(c)(1)
provides rules for situations in which the
aggregation rules are no longer met as
well as rules for when a newly created or
acquired trade or business can be added to
an existing aggregated group.

Proposed § 1.199A-4(c)(2)(i) provides
reporting and disclosure requirements for
individuals that choose to aggregate, in-
cluding identifying information about
each trade or business that constitutes a
part of the aggregated trade or business.
Proposed § 1.199A-4(c)(2)(ii) allows the
Commissioner to disaggregate trades or

businesses if an individual fails to make
the required aggregation disclosure. The
Treasury Department and the IRS request
comments as to whether it is administra-
ble to create a standard under which trades
or businesses will be disaggregated by the
Commissioner and what that standard
might be.

V. Proposed § 1.199A-5: Specified
Service Trade or Business and the Trade
or Business of Performing Services as
an Employee

Section 199A(c)(1) provides that only
items attributable to a qualified trade or
business are taken into account in deter-
mining the section 199A deduction for
QBI. Section 199A(d)(1) provides that a
"qualified trade or business" means any
trade or business other than (A) an SSTB,
or (B) the trade or business of performing
services as an employee.

## A. SSTB

This part V.A. explains the provisions
under proposed § 1.199A-5 relating to
SSTBs. First, the effect of classification as
an SSTB is discussed. Second, the excep-
tions for taxpayers below the threshold
amount and a de minimis exception are
described. Third, guidance is provided on
the meaning of the activities listed in the
definition of SSTB. Fourth, the rules for
determining whether a trade or business is
treated as part of an SSTB are described.
Finally, rules regarding classification as
an employee for purposes of section 199A
are discussed.

### 1. Effect of being an SSTB

### a. General rule

Consistent with section 199A, pro-
posed § 1.199A-5(a)(2) provides that, un-
less an exception applies, if a trade or
business is an SSTB, none of its items are
to be taken into account for purposes of
determining a taxpayer's QBI. In the case
of an SSTB conducted by an entity, such
as a partnership or an S corporation, if it is
determined that the trade or business is an
SSTB, none of the income from that trade
or business flowing to an owner of
the entity is QBI, regardless of whether
the owner participates in the specified ser-

vice activity. Therefore, a direct or indi-
rect owner of a trade or business engaged
in an SSTB is treated as engaged in the
SSTB for purposes of section 199A re-
gardless of whether the owner is passive
or participated in the SSTB. Similarly,
none of the W-2 wages or UBIA of qual-
ified property will be taken into account
for purposes of section 199A. For exam-
ple, because the field of athletics is an
SSTB, if a partnership owns a profes-
sional sports team, the partners' distrib-
utive shares of income from the partner-
ship's athletics trade or business is not QBI,
regardless of whether the partners partici-
pate in the partnership's trade or business.
Proposed § 1.199A-5 contains further ex-
amples illustrating the operation of this rule.

## b. Exceptions to the general rule

Under section 199A(d)(3), individuals
with taxable income below the threshold
amount are not subject to a restriction
with respect to SSTBs. Therefore, if an
individual or trust has taxable income be-
low the threshold amount, the individual
or trust is eligible to receive the deduction
under section 199A notwithstanding that a
trade or business is an SSTB. As de-
scribed in part I.C of this Explanation of
Provisions, the exclusion of QBI, W-2
wages, and UBIA of qualified property
from the computation of the section 199A
deduction is subject to a phase-in for in-
dividuals with taxable income within the
phase-in range. The application of this
phase-in is determined at the individual,
trust, or estate level, which may not be
where the trade or business is operated.
Therefore, if a partnership or an S corpo-
ration operates an SSTB, the application
of the threshold does not depend on the
partnership or S corporation's taxable in-
come but rather, the taxable income of the
individual partner or shareholder claiming
the section 199A deduction. For example,
if the partnership's taxable income is less
than the threshold amount, but each of the
partnership's individual partners have in-
come that exceeds the threshold amount
plus $50,000 ($100,000 in the case of a
joint return) then none of the partners may
claim a section 199A deduction with re-
spect to any income from the partner-
ship's SSTB.

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An RPE conducting an SSTB may not
know whether the taxable income of any
of its equity owners is below the threshold
amount. However, the RPE is best posi-
tioned to make the determination as to
whether its trade or business is an SSTB.
Therefore, reporting rules under proposed
§ 1.199A-6(b)(3)(B) requires each RPE
to determine whether it conducts an SSTB
and disclose that information to its part-
ners, shareholders, or owners. With re-
spect to each trade or business, once it is
determined that a trade or business is an
SSTB, it remains an SSTB and cannot be
aggregated with other trades or business. In
the case of a trade or business conducted by
an individual, such as a sole proprietorship,
disregarded entity, or grantor trust, the de-
termination of whether the business is an
SSTB is made by the individual.

Section 199A defines an SSTB to in-
clude any trade or business that "involves
the performance of services in" a specified
service activity. Although the statute, read
literally, does not suggest that a certain
quantum of specified service activity is nec-
essary to find an SSTB, the Treasury De-
partment and the IRS believe that requiring
all taxpayers to evaluate and quantify any
amount of specified service activity would
create administrative complexity and undue
burdens for both taxpayers and the IRS.
Therefore, analogous to the regulations un-
der section 448, it is appropriate to provide
a de minimis rule, under which a trade or
business will not be considered to be an
SSTB merely because it provides a small
amount of services in a specified service
activity.

Accordingly, proposed § 1.199A-5(c)(1)
provides that a trade or business (deter-
mined before the application of the aggre-
gation rules in proposed § 1.199A-4) is not
an SSTB if the trade or business has gross
receipts of $25 million or less (in a taxable
year) and less than 10 percent of the gross
receipts of the trade or business are attribut-
able to the performance of services in an
SSTB. For trades or business with gross
receipts greater than $25 million (in a tax-
able year), a trade or business is not an
SSTB if less than 5 percent of the gross
receipts of the trade or business are attribut-
able to the performance of services in an
SSTB.

2\. Definition of specified service trade or
business

The definition of an SSTB set forth in
section 199A incorporates, with modifica-
tions, the text of section 1202(e)(3)(A).
The text of section 1202(e)(3)(A) substan-
tially tracks the definition of "qualified
personal service corporation" under sec-
tion 448. Therefore, consistent with ordi-
nary rules of statutory construction, the
guidance in proposed § 1.199A-5(b) is
informed by existing interpretations and
guidance under both sections 1202 and
448 when relevant. However, existing
guidance under those sections is sparse
and the scope and purpose of those sec-
tions and section 199A are different. The
Treasury Department and the IRS also
note that, unlike sections 1202(e)(3)(A)
and 448, the purpose of section 199A is to
provide a deduction based on the charac-
ter of the taxpayer's trade or business.
Distinct guidance for section 199A is war-
ranted. Therefore, the guidance in pro-
posed § 1.199A-5(b) applies only to sec-
tion 199A, not sections 1202 and 448.

### a. Guidance on the meaning of the listed activities

Section 199A(d)(2)(A) provides that
an SSTB is any trade or business de-
scribed in section 1202(e)(3)(A) (applied
without regard to the words "engineering
[and] architecture") or that would be so
described if the term "employees or own-
ers" were substituted for "employees"
therein. Section 199A(d)(2)(B) provides
that an SSTB is any trade or business that
involves the performance of services that
consist of investing and investment man-
agement, trading, or dealing in securities
(as defined in section 475(c)(2)), partner-
ship interests, or commodities (as defined
in section 475(e)(2)).

Section 1202 provides an exclusion
from gross income for some or all of the
gain on the sale of certain qualified small
business stock. Section 1202 generally re-
quires that, for stock to be qualified small
business stock, the corporation must be
engaged in a qualified trade or business.
Section 1202(e)(3) provides that, for pur-
poses of section 1202(e), the term "qual-
ified trade or business" means any trade or
business other than any trade or business

involving the performance of services in
the fields of health, law, engineering, ar-
chitecture, accounting, actuarial science,
performing arts, consulting, athletics, fi-
nancial services, brokerage services, or
any trade or business where the principal
asset of such trade or business is the rep-
utation or skill of 1 or more of its employ-
ees; any banking, insurance, financing,
leasing, investing, or similar business; any
farming business (including the business
of raising or harvesting trees); any busi-
ness involving the production or extrac-
tion of products of a character with re-
spect to which a deduction is allowable
under section 613 or 613A; and any busi-
ness of operating a hotel, motel, restau-
rant, or similar business.

Thus, after application of the modifica-
tions described in section 199A(d)(2)(A),
the definition of an SSTB for purposes of
section 199A is (1) any trade or business
involving the performance of services in
the fields of health, law, accounting, actu-
arial science, performing arts, consulting,
athletics, financial services, brokerage ser-
vices, or any trade or business where the
principal asset of such trade or business is
the reputation or skill of one or more of its
employees or owners, and (2) any trade or
business that involves the performance of
services that consist of investing and
investment management, trading, or deal-
ing in securities (as defined in section
475(c)(2)), partnership interests, or com-
modities (as defined in section 475(e)(2)).

The Treasury Department and the IRS
have received comments requesting guid-
ance on the meaning and scope of the
various trades or businesses described in
the preceding paragraph. The Treasury
Department and the IRS agree with com-
menters that guidance with respect to
these trades or businesses is necessary for
several reasons. Most importantly, section
199A is a new Code provision intended to
benefit a wide range of businesses, and
taxpayers need certainty in determining
whether their trade or business generates
income that is eligible for the section
199A deduction. As previously discussed,
given the differing scope, objectives, and,
in some respects, language of sections
199A, 448, and 1202, the guidance under
sections 1202(e)(3)(A) and 448(d)(2) is
not an appropriate substitute for clear and
distinct guidance governing what consti-

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tutes an SSTB under section 199A. In
particular, some SSTBs are listed in sec-
tion 1202(e)(3)(A), but not listed in sec-
tion 448(d)(2), such as athletics, financial
services, brokerage services, and any
trade or business where the principal asset
of such trade or business is the reputation
or skill of one or more of its employees
or owners. In addition, some activities
are mentioned only in 199A, such as
investment management, trading, and
dealing. As described in the remainder
of this part V.A.2., proposed § 1.199A-
5(b) provides guidance on the definition
of an SSTB based on the plain meaning
of the statute, past interpretations of
substantially similar language in other
Code provisions, and other indicia of
legislative intent.

### i. SSTBs listed in section 199A(d)(2)(A)

The definition of an SSTB under sec-
tion 199A is substantially similar to the
list of service trades or businesses pro-
vided in section 448(d)(2)(A) and
§ 1.448-1T(e)(4)(i), as the legislative his-
tory notes. See Joint Explanatory State-
ment of the Committee of Conference,
footnotes 44-46. Section 448 prohibits
certain taxpayers from computing taxable
income under the cash receipts and dis-
bursements method of accounting. Under
section 448, qualified personal service
corporations generally are not subject to
the prohibition from using the cash
method. Section 448(d)(2) defines the
term qualified personal service corpora-
tion to include certain employee-owned
corporations, substantially all of the activ-
ities of which involve the performance of
services in the fields of health, law, engi-
neering, architecture, accounting, actuar-
ial science, performing arts, or consulting.
The regulations under section 448(d)(2),
found in § 1.448-1T(e)(4)(i), provide ad-
ditional guidance on several of the terms,
including health, performing arts, and
consulting. In addition, there have been
several court opinions, technical advice
memoranda, and private letter rulings in-
terpreting the various fields listed in sec-
tion 448(d)(2) and § 1.448-1T(e)(4)(i).

In general, the guidance under section
448(d)(2) emphasizes the direct provision
of services by the employees of a trade or
business, rather than the application of

capital. Commenters have suggested that
the regulations under section 448 serve as
a reasonable starting point for defining an
SSTB for purposes of section 199A. How-
ever, commenters also noted that the ob-
jectives and included categories of trades
or businesses within section 448 and sec-
tion 199A are different. Consistent with
ordinary rules of statutory construction
and the legislative history of section
199A, proposed § 1.199A-5(b) draws
upon the existing guidance under section
448(d)(2) when appropriate for purposes
of section 199A. Proposed § 1.199A-5(b)
generally follows the guidance issued un-
der section 448(d)(2) with some modifi-
cations. In certain instances, the principles
of section 448(d)(2) provide useful anal-
ogies in defining the particular fields listed
in section 1202(e)(3)(A) (as modified by
section 199A(d)(2)(A)) for purposes of
section 199A.

In addition, section 1202(e)(3)(A)
also includes "any trade or business
where the principal asset of such trade
or business is the reputation or skill of 1
or more of its employees." Section
199A(d)(2)(A) modifies this clause by
adding the words "or owners" to the
end, to read as follows: "any trade or
business where the principal asset of
such trade or business is the reputation
or skill of 1 or more of its employees or
owners." The meaning of this clause is
best determined by examining the lan-
guage of section 1202(e)(3)(A) in light
of the purpose of section 199A.

Case law under section 448 provides
that whether a service is performed in a
qualifying field under section 448(d)(2) is
to be decided by examining all relevant
indicia and is not controlled by state li-
censing laws. See Rainbow Tax Serv., Inc.
v. Commissioner, 128 T.C. 42 (2007);
Kraatz & Craig Surveying Inc. v. Com-
missioner, 134 T.C. 167 (2010). This ap-
proach also is appropriate for section
199A purposes. Additionally, states can
widely vary in what they require in terms
of licensure or certification. The Treasury
Department and the IRS believe that the
Federal tax law should not treat similarly
situated taxpayers differently based on a
particular state's decision that for con-
sumer protection purposes or otherwise, a
particular business type requires a license
or certification. Thus, proposed § 1.199A-

5(b) does not adopt a bright-line licensing
rule for purposes of determining whether
a trade or business is within a certain field
for purposes of section 199A.

### a. Health

Proposed § 1.199A-5(b)(2)(ii) is in-
formed by the definition of "health" under
section 448 and provides that the term "per-
formance of services in the field of health"
means the provision of medical services by
physicians, pharmacists, nurses, dentists,
veterinarians, physical therapists, psycholo-
gists, and other similar healthcare profes-
sionals who provide medical services di-
rectly to a patient. The performance of
services in the field of health does not in-
clude the provision of services not directly
related to a medical field, even though the
services may purportedly relate to the health
of the service recipient. For example, the
performance of services in the field of health
does not include the operation of health
clubs or health spas that provide physical
exercise or conditioning to their customers,
payment processing, or research, testing,
and manufacture and/or sales of pharmaceu-
ticals or medical devices.

## b. Law

Proposed § 1.199A-5(b)(2)(iii) is
based on the ordinary meaning of "ser-
vices in the field of law" and provides that
the term "performance of services in the
field of law" means the provision of ser-
vices by lawyers, paralegals, legal arbitra-
tors, mediators, and similar professionals
in their capacity as such. The performance
of services in the field of law does not
include the provision of services that do
not require skills unique to the field of
law, for example, the provision of services
in the field of law does not include the
provision of services by printers, delivery
services, or stenography services.

## c. Accounting

Proposed § 1.199A-5(b)(2)(iv) is
based on the ordinary meaning of "ac-
counting" and provides that the term "per-
formance of services in the field of ac-
counting" means the provision of services
by accountants, enrolled agents, return
preparers, financial auditors, and similar

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professionals in their capacity as such.
Provision of services in the field of ac-
counting is not limited to services requir-
ing state licensure as a certified public
accountant (CPA). The aim of proposed
§ 1.199A-5(b)(2)(iv) is to capture the
common understanding of accounting,
which includes tax return and bookkeep-
ing services, even though the provision of
such services may not require the same
education, training, or mastery of account-
ing principles as a CPA. The field of ac-
counting does not include payment pro-
cessing and billing analysis.

### d. Actuarial science

Proposed § 1.199A-5(b)(2)(v) is based
on the ordinary meaning "actuarial sci-
ence" and provides that the term "perfor-
mance of services in the field of actuarial
science" means the provision of services
by actuaries and similar professionals in
their capacity as such. Accordingly, the
field of actuarial science does not include
the provision of services by analysts,
economists, mathematicians, and statisti-
cians not engaged in analyzing or assess-
ing the financial costs of risk or uncer-
tainty of events.

### e. Performing arts

Proposed § 1.199A-5(b)(2)(vi) is in-
formed by the definition of "performing
arts" under section 448 and provides that
the term "performance of services in the
field of the performing arts" means the
performance of services by individuals
who participate in the creation of perform-
ing arts, such as actors, singers, musi-
cians, entertainers, directors, and similar
professionals performing services in their
capacity as such. The performance of ser-
vices in the field of performing arts does
not include the provision of services that
do not require skills unique to the creation
of performing arts, such as the mainte-
nance and operation of equipment or fa-
cilities for use in the performing arts. Sim-
ilarly, the performance of services in the
field of the performing arts does not in-
clude the provision of services by persons
who broadcast or otherwise disseminate
video or audio of performing arts to the
public.

### f. Consulting

Proposed § 1.199A-5(b)(2)(vii) is in-
formed by the definition of "consulting"
under section 448 and provides that the
term "performance of services in the field
of consulting" means the provision of pro-
fessional advice and counsel to clients to
assist the client in achieving goals and
solving problems. Consulting includes
providing advice and counsel regarding
advocacy with the intention of influencing
decisions made by a government or gov-
ernmental agency and all attempts to in-
fluence legislators and other government
officials on behalf of a client by lobbyists
and other similar professionals perform-
ing services in their capacity as such. The
performance of services in the field of
consulting does not include the perfor-
mance of services other than advice and
counsel. This determination is made based
on all the facts and circumstances of a
person's business.

Additionally, the Treasury Department
and the IRS are aware of the concern
noted by commenters that in certain kinds
of sales transactions it is common for
businesses to provide consulting services
in connection with the purchase of goods
by customers. For example, a company
that sells computers may provide custom-
ers with consulting services relating to the
setup, operation, and repair of the com-
puters, or a contractor who remodels
homes may provide consulting prior to
remodeling a kitchen. As described previ-
ously in this Explanation of Provisions,
proposed § 1.199A-5(c) provides a de
minimis rule, under which a trade or busi-
ness is not an SSTB if less than 10 percent
of the gross receipts (5 percent if the gross
receipts are greater than $25 million) of
the trade or business are attributable to the
performance of services in a specified ser-
vice activity. However, this de minimis
rule may not provide sufficient relief for
certain trades or business that provide an-
cillary consulting services. The Treasury
Department and the IRS believe that if a
trade or business involves the selling or
manufacturing of goods, and such trade or
business provides ancillary consulting ser-
vices that are not separately purchased or
billed, then such trades or businesses are not
in a trade or business in the field of consult-
ing. Accordingly, proposed § 1.199A-

5(b)(2)(vii) provides that the field of con-
sulting does not include consulting that is
embedded in, or ancillary to, the sale of
goods if there is no separate payment for the
consulting services.

### g. Athletics

The field of athletics is not listed in
section 448(d)(2), and there is little guid-
ance on its meaning as used in section
1202(e)(3)(A). However, commenters
noted, and the Treasury Department and
the IRS agree, that among the services
specified in section 199A(d)(2)(A) the
field of athletics is most similar to the field
of performing arts. Accordingly, proposed
§ 1.199A-5(b)(2)(viii) provides that the
term "performance of services in the field
of athletics" means the performances of
services by individuals who participate
in athletic competition such as athletes,
coaches, and team managers in sports
such as baseball, basketball, football, soc-
cer, hockey, martial arts, boxing, bowling,
tennis, golf, skiing, snowboarding, track
and field, billiards, and racing. The per-
formance of services in the field of athlet-
ics does not include the provision of ser-
vices that do not require skills unique to
athletic competition, such as the mainte-
nance and operation of equipment or fa-
cilities for use in athletic events. Simi-
larly, the performance of services in the
field of athletics does not include the pro-
vision of services by persons who broad-
cast or otherwise disseminate video or au-
dio of athletic events to the public.

### h. Financial services

Commenters requested guidance as to
whether financial services includes bank-
ing. These commenters noted that section
1202(e)(3)(A) includes the term financial
services, but that banking in separately
listed in section 1202(e)(3)(B) which sug-
gests that banking is not included as part
of financial services in section 1202(e)
(3)(A). The Treasury Department and the
IRS agree with such commenters that this
suggests that financial services should be
more narrowly interpreted here. There-
fore, proposed § 1.199A-5(b)(2)(ix) lim-
its the definition of financial services to
services typically performed by finan-
cial advisors and investment bankers

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and provides that the field of financial
services includes the provision of finan-
cial services to clients including manag-
ing wealth, advising clients with respect
to finances, developing retirement plans,
developing wealth transition plans, the
provision of advisory and other similar
services regarding valuations, mergers,
acquisitions, dispositions, restructurings
(including in title 11 or similar cases),
and raising financial capital by under-
writing, or acting as the client's agent in
the issuance of securities, and similar
services. This includes services pro-
vided by financial advisors, investment
bankers, wealth planners, and retirement
advisors and other similar professionals,
but does not include taking deposits or
making loans.

### i. Brokerage services

Proposed § 1.199A-5(b)(2)(x) uses the
ordinary meaning of "brokerage services"
and provides that the field of brokerage
services includes services in which a per-
son arranges transactions between a buyer
and a seller with respect to securities (as
defined in section 475(c)(2)) for a com-
mission or fee. This includes services pro-
vided by stock brokers and other similar
professionals, but does not include ser-
vices provided by real estate agents and
brokers, or insurance agents and brokers.

j. Any trade or business where the
principal asset of such trade or business
is the reputation or skill of 1 or more of
its employees or owners

Guidance on the meaning of the "rep-
utation or skill" clause in section
1202(e)(3)(A) is limited to dicta in one
case. In John P. Owen v. Commissioner,
T.C. Memo 2012-21, the Tax Court ex-
amined whether Mr. Owen, whose busi-
ness was insurance, was entitled to bene-
fits under section 1202 with respect to the
sale of his interest in a corporation con-
ducting such business. Under the facts
described in the case, the corporation had
extensive training programs and sales
structures, but primarily relied on the ser-
vices of independent contractors (includ-
ing Mr. Owen) in conducting its business.
Although the Tax Court acknowledged
that the business' success was due to Mr.

Owen's efforts, it found that the principal
asset of the company in question was the
training program and sales structure of the
business rather than Mr. Owen's services.

The Treasury Department and the IRS
received several comments regarding the
meaning of the "reputation or skill"
clause. Commenters described potential
methods to give maximum effect to the
literal language of the reputation or skill
clause by describing ways to (1) deter-
mine the extent to which the reputation or
skill of employees or owners constitutes
an asset of the business under Federal tax
accounting principles, and (2) measure
whether such an asset is in fact the prin-
cipal asset of the business.

One commenter suggested using an
activity-based standard under which no
service-based businesses would qualify
for the section 199A deduction. An SSTB
definition this broad would not comport
with the statute and would deny a section
199A deduction to businesses that the
statute does not appear to exclude. If the
"reputation or skill" clause was intended
to exclude all service businesses from
section 199A, there would have been no
reason to enumerate specific types of busi-
nesses in section 199A(d)(2); that lan-
guage would be pure surplusage. A broad
service-based test would also fail to pro-
vide a clear classification of businesses
that combine services with sales of prod-
ucts, such as plumbing and HVAC ser-
vices, if those businesses sell goods or
equipment in the course of providing ser-
vices. Therefore, the Treasury Department
and the IRS do not believe it is consistent
with the text, structure, or purpose of sec-
tion 199A to exclude all service busi-
nesses above the threshold amount from
qualifying for the section 199A deduction.

Another commenter described a bal-
ance sheet test that would compare the
value of assets other than goodwill and
workforce in place to the value of such
goodwill and workforce in place. The
commenter acknowledged that such a test
could also be broader than Congress in-
tended. In addition, the commenter noted
that such a test could easily lead to strange
and unintuitive results, and may be diffi-
cult to apply in the case of small busi-
nesses that do not maintain audited finan-
cial statements and would both be ripe for
abuse, and could potentially result in

many legal disputes between taxpayers
and the IRS.

Finally, one commenter described a
standard based on whether the trade or
business involves the provision of highly-
skilled services. The commenter argued
that the primary benefit of a standard like
this is that it would harmonize the mean-
ing of the reputation or skill phrase with
the trades or businesses listed in section
1202(e)(3)(A), each of which involve the
provision of services by professionals
who either received a substantial amount
of training (for example, doctors, nurses,
lawyers, and accountants), or who have
otherwise achieved a high degree of skill
in a given field (for example, professional
athletes or performing artists).

Congress enacted section 199A to pro-
vide a deduction from taxable income to
trades or businesses conducted by sole
proprietorships and passthrough entities
that do not benefit from the income tax
rate reduction afforded to C corporations
under the TCJA. The Treasury Depart-
ment and the IRS are concerned that a
broad definition of the "reputation or
skill" phrase that relied on a balance sheet
test or numerical ratios would have sev-
eral consequences inconsistent with the
intent of section 199A. Testing businesses
based on metrics, some of them subjec-
tive, that change over time could result in
inappropriate year-over-year tax conse-
quences and lead to distorted decision-
making. As the commenters noted, such
mechanical tests pose administrative dif-
ficulties and fail to provide taxpayers with
needed certainty regarding the tax law
necessary for conducting their business
affairs. Most significantly, such mechani-
cal rules might prevent trades or busi-
nesses that Congress intended to be eligi-
ble for the section 199A deduction from
claiming the section 199A deduction.

In sum, the Treasury Department and
the IRS believe that the "reputation or
skill" clause as used in section 199A was
intended to describe a narrow set of trades
or businesses, not otherwise covered by
the enumerated specified services, in
which income is received based directly
on the skill and/or reputation of employ-
ees or owners. Additionally, the Treasury
Department and the IRS believe that "rep-
utation or skill" must be interpreted in a
manner that is both objective and admin-

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istrable. Thus, proposed § 1.199A-
5(b)(2)(xiv) limits the meaning of the
"reputation or skill" clause to fact patterns
in which the individual or RPE is engaged
in the trade or business of: (1) receiving
income for endorsing products or services,
including an individual's distributive
share of income or distributions from an
RPE for which the individual provides en-
dorsement services; (2) licensing or receiv-
ing income for the use of an individual's
image, likeness, name, signature, voice,
trademark, or any other symbols associated
with the individual's identity, including an
individual's distributive share of income or
distributions from an RPE to which an in-
dividual contributes the rights to use the
individual's image; or (3) receiving appear-
ance fees or income (including fees or in-
come to reality performers performing as
themselves on television, social media, or
other forums, radio, television, and other
media hosts, and video game players). Pro-
posed § 1.199A-5(b)(4) contains two exam-
ples illustrating the application of this defi-
nition. The Treasury Department and the
IRS request comments on this rule, the clar-
ity of definitions for the statutorily enumer-
ated trades or businesses that are SSTBs
under section 199A(d)(2)(A), and the ac-
companying examples.

### ii. SSTBs described in 199A(d)(2)(B)

As mentioned previously, section 199A(d)
(2)(B) provides that an SSTB also includes
any trade or business that involves the per-
formance of services that consist of invest-
ing and investment management, trading, or
dealing in securities (as defined in section
475(c)(2)), partnership interests, or com-
modities (as defined in section 475(e)(2)).
This rule does not appear in section
1202(e)(3)(A) or section 448(d)(2).

Section 475(c)(2) provides a detailed
list of interests treated as securities, in-
cluding stock in a corporation; ownership
interests in widely held or publicly traded
partnerships or trusts; notes, bonds, de-
bentures, or other evidences of indebted-
ness; interest rate, currency, or equity no-
tional principal contracts; evidences of an
interest in, or derivative financial instru-
ments in any of the foregoing securities or
any currency, including any option, for-
ward contract, short position, or any sim-
ilar financial instruments; and certain

hedges with respect to any such securities.
Section 475(e)(2) provides a similarly de-
tailed list of property treated as a com-
modity, including any commodity which
is actively traded (within the meaning of
section 1092(d)(1)) or any notional prin-
cipal contract with respect to any such
commodity, evidences of an interest in, or
derivative financial instruments in any of
the foregoing commodities, and certain
hedges with respect to any such commod-
ities.

### a. Investing and investment management

Proposed § 1.199A-5(b)(2)(xi) uses
the ordinary meaning of "investing and
investment management" and provides
that any trade or business that involves the
"performance of services that consist of
investing and investment management"
means a trade or business that earns fees
for investment, asset management ser-
vices, or investment management services
including providing advice with respect to
buying and selling investments. The per-
formance of services that consist of in-
vesting and investment management
would include a trade or business that
receives either a commission, a flat fee, or
an investment management fee calculated
as a percentage of assets under manage-
ment. The performance of services of in-
vesting and investment management does
not include directly managing real prop-
erty.

### b. Trading

Proposed § 1.199A-5(b)(2)(xii) pro-
vides that any trade or business involving
the "performance of services that consist
of trading" means a trade or business of
trading in securities, commodities, or part-
nership interests. Whether a person is a
trader is determined by taking into ac-
count the relevant facts and circum-
stances. Factors that have been considered
relevant to determining whether a person
is a trader include the source and type of
profit generally sought from engaging in
the activity regardless of whether the ac-
tivity is being provided on behalf of cus-
tomers or for a taxpayer's own account.
See Endicott v. Commissioner, T.C.
Memo 2013-199; Nelson v. Commis-

sioner, T.C. Memo 2013-259, King v.
Commissioner, 89 T.C. 445 (1987). A per-
son that is a trader under these principles
will be treated as performing the services
of trading for purposes of section
199A(d)(2)(B).

## c. Dealing in securities, partnership interests, and commodities

For purposes of proposed § 1.199A-
5(b)(2)(xiii), the "performance of services
that consist of dealing in securities (as
defined in section 475(c)(2))" means reg-
ularly purchasing securities from and sell-
ing securities to customers in the ordinary
course of a trade or business or regularly
offering to enter into, assume, offset, as-
sign, or otherwise terminate positions in
securities with customers in the ordinary
course of a trade or business. For purposes
of the preceding sentence, a taxpayer that
regularly originates loans in the ordinary
course of a trade or business of making
loans but engages in no more than negli-
gible sales of the loans is not dealing
in securities for purposes of section
199A(d)(2). See § 1.475(c)-1(c)(2) and
(4) for the definition of negligible sales.

For purposes of proposed § 1.199A-
5(b)(2)(xiii), "the performance of services
that consist of dealing in partnership in-
terests" means regularly purchasing part-
nership interests from and selling partner-
ship interests to customers in the ordinary
course of a trade or business or regularly
offering to enter into, assume, offset, as-
sign, or otherwise terminate positions in
partnership interests with customers in the
ordinary course of a trade or business.

For purposes of proposed § 1.199A-
5(b)(2)(xiii), "the performance of services
that consist of dealing in commodities (as
defined in section 475(e)(2))" means reg-
ularly purchasing commodities from and
selling commodities to customers in the
ordinary course of a trade or business or
regularly offering to enter into, assume,
offset, assign, or otherwise terminate po-
sitions in commodities with customers in
the ordinary course of a trade or business.

## 3. Defining what is included in an SSTB

The Treasury Department and the IRS
are aware that some taxpayers have con-
templated a strategy to separate out parts

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of what otherwise would be an integrated
SSTB, such as the administrative func-
tions, in an attempt to qualify those sepa-
rated parts for the section 199A deduction.
Such a strategy is inconsistent with the
purpose of section 199A. Therefore, in
accordance with section 199A(f)(4), in or-
der to carry out the purposes of section
199A, proposed § 1.199A-5(c)(2) pro-
vides that an SSTB includes any trade or
business with 50 percent or more common
ownership (directly or indirectly) that pro-
vides 80 percent or more of its property or
services to an SSTB. Additionally, if a
trade or business has 50 percent or more
common ownership with an SSTB, to the
extent that the trade or business provides
property or services to the commonly-
owned SSTB, the portion of the property or
services provided to the SSTB will be
treated as an SSTB (meaning the income
will be treated as income from an SSTB).
For example, A, a dentist, owns a dental
practice and also owns an office building. A
rents half the building to the dental practice
and half the building to unrelated persons.
Under proposed § 1.199A-5(c)(2), the rent-
ing of half of the building to the dental
practice will be treated as an SSTB.

Additionally, proposed § 1.199A-5
provides a rule that if a trade or business
(that would not otherwise be treated as
an SSTB) has 50 percent or more com-
mon ownership with an SSTB and
shared expenses, including wages or
overhead expenses with the SSTB, it is
treated as incidental to an SSTB and,
therefore, as an SSTB, if the trade or
business represents no more than five
percent of gross receipts of the com-
bined business.

## B. Trade or business of performing services as an employee

Under section 199(d)(1)(B), the trade
or business of performing services as an
employee is not a qualified trade or busi-
ness. Unlike an SSTB, there is no thresh-
old amount that applies to the trade or
business of performing services as an em-
ployee. Thus, wage or compensation in-
come earned by any employee is not eli-
gible for the section 199A deduction no
matter the amount.

### 1. Definition

An individual is an employee for Fed-
eral employment tax purposes if he or she
has the status of an employee under the
usual common law and statutory rules ap-
plicable in determining the employer-
employee relationship. Guides for deter-
mining employment status are found
in §§ 31.3121(d)-1, 31.3306(i)-1, and
31.3401(c)-1. As stated in the regulations,
generally, the common law relationship of
employer and employee exists when the
person for whom the services are per-
formed has the right to direct and control
the individual who performs the services,
not only as to the result to be accom-
plished by the work but also as to the
details and means by which that result is
accomplished. That is, an employee is
subject to the direction and control of the
employer not only as to what shall be
done but how it shall be done. In this
connection it is not necessary that the em-
ployer actually direct or control the man-
ner in which the services are performed; it
is sufficient if he or she has the right to do
so.

In addition, the regulations and section
3401(c) state, generally, that an officer of
a corporation (including an S Corpora-
tion) is an employee of the corporation.
However, an officer of a corporation who
does not perform any services or performs
only minor services in his or her capacity
as officer and who neither receives nor is
entitled to receive, directly or indirectly,
any remuneration is not considered to be
an employee of the corporation. Whether
an officer's services are minor is a ques-
tion of fact that depends on the nature of
the services, the frequency and duration of
their performance, and the actual and po-
tential importance or necessity of the ser-
vices in relation to the conduct of the
corporation's business. See Rev. Rul. 74-
390.

To provide clarity, proposed § 1.199A-
5(d) provides a general rule that income
from the trade or business of performing
services as an employee refers to all wages
(within the meaning of section 3401(a)) and
other income earned in a capacity as an
employee, including payments described in
§ 1.6041-2(a)(1) (other than payments to
individuals described in section 3121(d)(3))
and § 1.6041-2(b)(1). If an individual de-

rives income in the course of a trade or
business that is not described in section
3401(a), § 1.6041-2(a)(1) (other than pay-
ments to individuals described in section
3121(d)(3)), or § 1.6041-2(b)(1), that indi-
vidual is not considered to be in the trade or
business of performing services as an em-
ployee with regard to such income.

### 2. Presumption for former employees

Section 199A provides that the trade or
business of providing services as an em-
ployee is not eligible for the section 199A
deduction. Therefore, taxpayers and prac-
titioners noted that it may be beneficial for
employees to treat themselves as indepen-
dent contractors or as having an equity
interest in a partnership or S corporation
in order to benefit from the deduction un-
der section 199A.

Section 530(b) of the Revenue Act of
1978 (P.L. 95-600), as amended by sec-
tion 9(d)(2) of P.L. 96-167, section 1(a)
of P.L. 96-541, and section 269(c) of P.L.
97-248, provides a prohibition against
regulations and rulings on employment
status for purposes of employment taxes.
Specifically, section 530(b) provides that
no regulation or revenue ruling shall be
published before the effective date of any
law clarifying the employment status of
individuals for purposes of the employ-
ment taxes by the Treasury Department
(including the IRS) with respect to the
employment status of any individual for
purposes of the employment taxes. Sec-
tion 530(c) of the Revenue Act of 1978
provides that, for purposes of section 530,
the term "employment tax" means any tax
imposed by subtitle C of the Internal Rev-
enue Code of 1954, and the term "employ-
ment status" means the status of an indi-
vidual, under the usual common law rules
applicable in determining the employer-
employee relationship as an employee or
as an independent contractor (or other in-
dividual who is not an employee). These
longstanding rules of section 530 of the
Revenue Act of 1978 limit the ability of
the IRS to impose employment tax liabil-
ity on employers for misclassifying em-
ployees as independent contractors but do
not preclude challenging a worker's status
for purposes of section 199A, an income
tax provision under subtitle A of the Code.

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Therefore, proposed § 1.199A-5(d)(3)
provides that for purposes of section
199A, if an employer improperly treats an
employee as an independent contractor or
other non-employee, the improperly clas-
sified employee is in the trade or business
of performing services as an employee
notwithstanding the employer's improper
classification. This issue is particularly
important in the case of individuals who
cease being treated as employees of an
employer, but subsequently provide sub-
stantially the same services to the em-
ployer (or a related entity) but claim to do
so in a capacity other than as an employee.
However, it would not be appropriate to
provide that someone who formerly was
an employee of an employer is now "less
likely" to be respected as an independent
contractor. Such a rule would not treat
similarly-situated taxpayers similarly: two
individuals who have a similar relation-
ship with a company and each claim to be
treated as independent contractors would
be treated differently depending on any
prior employment history with the com-
pany. Therefore, proposed § 1.199A-
5(d)(3) does not provide any new or dif-
ferent standards to be properly classified
as an independent contractor or owner of a
business. Instead, proposed § 1.199A-
5(d)(3) contains a presumption that ap-
plies in certain situations to ensure that
individuals properly substantiate their sta-
tus.

Specifically, proposed § 1.199A-5(d)(3)
provides that, solely for purposes of section
199A(d)(1)(B) and the regulations thereun-
der, an individual who was treated as an
employee for Federal employment tax pur-
poses by the person to whom he or she
provided services, and who is subsequently
treated as other than an employee by such
person with regard to the provision of sub-
stantially the same services directly or indi-
rectly to the person (or a related person), is
presumed to be in the trade or business of
performing services as an employee with
regard to such services. This presumption
may be rebutted only upon a showing by the
individual that, under Federal tax rules, reg-
ulations, and principles (including common-
law employee classification rules), the indi-
vidual is performing services in a capacity
other than as an employee. This presump-
tion applies regardless of whether the indi-
vidual provides services directly or indi-

rectly through an entity or entities. This
presumption is solely for purposes of sec-
tion 199A and does not otherwise change
the employment tax classification of the
individual. Section 199A is in subtitle A
of the Code, and this rule does not apply
for purposes of any other subtitle, in-
cluding subtitle C. Accordingly, this
rule does not implicate section 530(b) of
the Revenue Act of 1978. Proposed
§ 1.199A-5(d)(3)(ii) contains three ex-
amples illustrating this rule.

VI. Proposed § 1.199A-6: Special Rules
for RPEs, PTPs, Trusts, and Estates

Proposed § 1.199A-6 provides guid-
ance that certain specified entities (for ex-
ample, RPEs, PTPs, trusts, and estates)
may need to follow for purposes of com-
puting the entities' or their owners' sec-
tion 199A deductions.

## A. Computational steps for RPEs and PTPs

Although RPEs cannot take the section
199A deduction at the RPE level, each
RPE must determine and report the infor-
mation necessary for its direct and indirect
owners to determine their own section
199A deduction. Proposed § 1.199A-6(b)
follows the rules applicable to individuals
with taxable income above the threshold
amount set forth in § 1.199A-1(d) in di-
recting RPEs to determine what amounts
and information to report to their owners
and the IRS, including QBI, W-2 wages,
the UBIA of qualified property for each
trade or business directly engaged in, and
whether any of its trades or businesses are
SSTBs. RPEs must also determine and
report qualified REIT dividends and qual-
ified PTP income received directly by the
RPE. Proposed § 1.199A-6(b)(3) then re-
quires each RPE to report this information
on or with the Schedules K-1 issued to the
owners. RPEs must report this informa-
tion regardless of whether a taxpayer is
below the threshold. The Treasury Depart-
ment and the IRS request comments on
whether it is administrable to provide a
special rule that if none of the owners of
the RPE have taxable income above the
threshold amount, the RPE does not need
to determine and report W-2 wages,
UBIA of qualified property, or whether

the trade or business is an SSTB. Al-
though such a rule would relieve an RPE
of an unnecessary burden, the RPE would
need to have knowledge of the ultimate
owner's taxable income.

The definition of an RPE does not in-
clude a PTP. However, PTPs must still de-
termine and report QBI under the rules of
proposed § 1.199A-3 for each trade or busi-
ness in which the PTP is engaged and
whether those trades or businesses are
SSTBs. A PTP must also determine whether
it has received any qualified REIT dividends
or qualified PTP income or loss from an-
other PTP. These items must be reported on
or with the Schedule K-1. A PTP is not
required to determine or report W-2 wages
or the UBIA of qualified property.

## B. Application to trusts, estates, and beneficiaries

Proposed § 1.199A-6(d) contains spe-
cial rules for applying section 199A to
trusts and decedents' estates. To the extent
that a grantor or another person is treated
as owning all or part of a trust under
sections 671 through 679 (grantor trust),
including qualified subchapter S trusts
(QSSTs) with respect to which the bene-
ficiary has made an election under section
1361(d), the owner will compute its QBI
with respect to the owned portion of the
trust as if that QBI had been received
directly by the owner.

In the case of a section 199A deduction
claimed by a non-grantor trust or estate,
section 199A(f)(1)(B) applies rules simi-
lar to the rules under former section
199(d)(1)(B)(i) for the apportionment of
W-2 wages and the apportionment of
UBIA of qualified property. In the case
of a non-grantor trust or estate, the QBI
and expenses properly allocable to the
business, including the W-2 wages rele-
vant to the computation of the wage lim-
itation, and relevant UBIA of depreciable
property must be allocated among the
trust or estate and its various beneficiaries.
Specifically, proposed § 1.199A-6(d)(3)
(ii) provides that each beneficiary's share
of the trust's or estate's W-2 wages is
determined based on the proportion of the
trust's or estate's DNI that is deemed to
be distributed to that beneficiary for that
taxable year. Similarly, the proportion
of the entity's DNI that is not deemed

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distributed by the trust or estate will
determine the entity's share of the QBI
and W-2 wages. In addition, if the trust
or estate has no DNI in a particular
taxable year, any QBI and W-2 wages
are allocated to the trust or estate, and
not to any beneficiary.

In addition, proposed § 1.199A-
6(d)(3)(ii) provides that, to the extent the
trust's or estate's UBIA of qualified prop-
erty is relevant to a trust or estate and any
beneficiary, the trust's or estate's UBIA of
qualified property will be allocated among
the trust or estate and its beneficiaries in
the same proportion as DNI of the trust or
estate is allocated. This is the case regard-
less of how any depreciation or depletion
deductions resulting from the same prop-
erty may be allocated under section 643(c)
among the trust or estate and its benefi-
ciaries for purposes other than section
199A.

Under section 199A, the threshold
amount is determined at the trust level
without taking into account any distri-
bution deductions. Commenters have
noted that taxpayers could circumvent
the threshold amount by dividing assets
among multiple trusts, each of which
would claim its own threshold amount.
This result is inappropriate and incon-
sistent with the purpose of section
199A. Therefore, proposed § 1.199A-
6(d)(3)(v) provides that trusts formed or
funded with a significant purpose of re-
ceiving a deduction under section 199A
will not be respected for purposes of
section 199A.

The Treasury Department and the IRS
request comments with respect to whether
taxable recipients of annuity and unitrust
interests in charitable remainder trusts and
taxable beneficiaries of other split-interest
trusts may be eligible for the section 199A
deduction to the extent that the amounts
received by such recipients include
amounts that may give rise to the deduc-
tion. Such comments should include ex-
planations of how amounts that may give
rise to the section 199A deduction would
be identified and reported in the various
classes of income of the trusts received by
such recipients and how the excise tax
rules in section 664(c) would apply to
such amounts.

VII. Proposed § 1.643(f)-1: Anti-
avoidance Rules for Multiple Trusts

As described in section VI B of the
Explanation of Provisions, under section
199A, the threshold amount is determined
at the trust level without taking into account
any distribution deductions. Therefore, tax-
payers could circumvent the threshold
amount by dividing assets among multiple
trusts, each of which would claim its own
threshold amount. This result is inappropri-
ate and inconsistent with the purpose of
section 199A and general trust principles.

To address this and other concerns re-
garding the abusive use of multiple trusts,
proposed § 1.643(f)-1 confirms the appli-
cability of section 643(f). As noted in part
II of the Background, section 643(f) per-
mits the Secretary to prescribe regulations
to prevent taxpayers from establishing
multiple non-grantor trusts or contributing
additional capital to multiple existing non-
grantor trusts in order to avoid Federal
income tax. Proposed § 1.643(f)-1 pro-
vides that, in the case in which two or
more trusts have substantially the same
grantor or grantors and substantially the
same primary beneficiary or beneficiaries,
and a principal purpose for establishing
such trusts or contributing additional cash
or other property to such trusts is the
avoidance of Federal income tax, then
such trusts will be treated as a single trust
for Federal income tax purposes. For pur-
poses of applying this rule, spouses are
treated as only one person and, accord-
ingly, multiple trusts established for a
principal purpose of avoiding Federal in-
come tax may be treated as a single trust
even in cases where separate trusts are
established or funded independently by
each spouse. Proposed § 1.643(f)-1 fur-
ther provides examples to illustrate spe-
cific situations in which multiple trusts
will or will not be treated as a single
trust under this rule, including a situa-
tion where multiple trusts are created
with a principal purpose of avoiding the
limitations of section 199A. The appli-
cation of proposed § 1.643(f)-1, how-
ever, is not limited to avoidance of the
limitations under section 199A and pro-
posed §§ 1.199A-1 through 1.199A-6.

The rule in proposed § 1.643(f)-1
would apply to any arrangement involving
multiple trusts entered into or modified on

or after August 16, 2018. In the case of
any arrangement involving multiple trusts
entered into or modified before August 16,
2018, the determination of whether an ar-
rangement involving multiple trusts is
subject to treatment under section 643(f)
will be made on the basis of the statute
and the guidance provided regarding that
provision in the legislative history of sec-
tion 643(f). Pending the publication of
final regulations, the position of the Trea-
sury Department and the IRS is that the
rule in proposed § 1.643(f)-1 generally
reflects the intent of Congress regarding
the arrangements involving multiple trusts
that are appropriately subject to treatment
under section 643(f).

## VIII. Specified Agricultural or Horticultural Cooperatives

In the TCJA and the 2018 Act, Con-
gress provided special rules for applying
section 199A in the case of specified ag-
ricultural and horticultural cooperatives.
The Treasury Department and the IRS
continue to study this area and intend to
issue separate proposed regulations de-
scribing rules for applying section 199A
to specified agricultural and horticultural
cooperatives and their patrons later this
year. As provided in section 199A(g)(6),
such regulations will generally be based
on the regulations applicable to coopera-
tives and their patrons under former sec-
tion 199 (as in effect before its repeal).
The Treasury Department and the IRS
anticipate that the regulations will provide
that section 199A(g) applies only to the
patronage business of a relevant coopera-
tive. The proposed regulations will also
provide more information for taxpayers
that must apply the reduction under sec-
tion 199A(b)(7), which is a special rule
with respect to income received from co-
operatives.

# Availability of IRS Documents

IRS notices cited in this preamble are
made available by the Superintendent of
Documents, U.S. Government Printing
Office, Washington, DC 20402.

# Proposed Effective/Applicability Date

Section 7805(b)(1)(A) and (B) of the
Code generally provide that no temporary,

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proposed, or final regulation relating to
the internal revenue laws may apply to
any taxable period ending before the ear-
liest of (A) the date on which such regu-
lation is filed with the Federal Register,
or (B) in the case of a final regulation, the
date on which a proposed or temporary
regulation to which the final regulation
relates was filed with the Federal Regis-
ter. However, section 7805(b)(2) provides
that regulations filed or issued within 18
months of the date of the enactment of the
statutory provision to which they relate
are not prohibited from applying to tax-
able periods prior to those described in
section 7805(b)(1). Furthermore, section
7805(b)(3) provides that the Secretary
may provide that any regulation may take
effect or apply retroactively to prevent
abuse.

Accordingly, proposed §§ 1.199A-1
through 1.199A-6 generally are proposed
to apply to taxable years ending after the
date of publication of a Treasury decision
adopting these rules as final regulations in
the Federal Register. However, taxpayers
may rely on the rules set forth in proposed
§§ 1.199A-1 through 1.199A-6, in their
entirety, until the date a Treasury decision
adopting these regulations as final regula-
tions is published in the Federal Register.
In addition, to prevent abuse of section
199A and the regulations thereunder, the
anti-abuse rules of proposed §§ 1.199A-
2(c)(1)(iv), 1.199A-3(c)(2)(B), 1.199A-
5(c)(2), 1.199A-5(c)(3), 1.199A-5(d)(3),
and 1.199A-6(d)(3)(v) are proposed to ap-
ply to taxable years ending after December
22, 2017, the date of enactment of the
TCJA. Finally, the provisions of proposed
§ 1.643-1, which prevent abuse of the Code
generally through the use of trusts, are pro-
posed to apply to taxable years ending after
August 16, 2018.

Section 199A(f)(1) provides that sec-
tion 199A applies at the partner or S cor-
poration shareholder level, and that each
partner or shareholder takes into account
such person's allocable share of each
qualified item. Section 199A(c)(3) pro-
vides that the term "qualified item" means
items that are effectively connected with a
U.S. trade or business, and "included or
allowed in determining taxable income
from the taxable year." Section 199A ap-
plies to taxable years beginning after De-
cember 31, 2017. However, there is no

statutory requirement under section 199A
that a qualified item arise after December
31, 2017.

Section 1366(a) generally provides
that, in determining the income tax of a
shareholder for the shareholder's taxable
year in which the taxable year of the S
corporation ends, the shareholder's pro
rata share of the corporation's items is
taken into account. Similarly, section
706(a) generally provides that, in comput-
ing the taxable income of a partner for a
taxable year, the partner includes items of
the partnership for any taxable year of the
partnership ending within or with the part-
ner's taxable year. Therefore, income
flowing to an individual from a partner-
ship or S corporation is subject to the tax
rates and rules in effect in the year of the
individual in which the entity's year
closes, not the year in which the item
actually arose.

Accordingly, for purposes of determin-
ing QBI, W-2 wages, and UBIA of qual-
ified property, the effective dates provi-
sions provide that if an individual receives
QBI, W-2 wages, or UBIA of qualified
property from an RPE with a taxable year
that begins before January 1, 2018, and
ends after December 31, 2017, such items
are treated as having been incurred by the
individual during the individual's tax year
during which such RPE taxable year ends.

# Special Analyses

I. Regulatory Planning and Review -
Economic Analysis

Executive Orders 13563 and 12866 di-
rect agencies to assess costs and benefits
of available regulatory alternatives and, if
regulation is necessary, to select regula-
tory approaches that maximize net bene-
fits (including potential economic, envi-
ronmental, public health and safety
effects, distributive impacts, and equity).
Executive Order 13563 emphasizes the
importance of quantifying both costs and
benefits, of reducing costs, of harmoniz-
ing rules, and of promoting flexibility.

These proposed regulations have been
designated as subject to review under Ex-
ecutive Order 12866 pursuant to the
Memorandum of Agreement (April 11,
2018) between the Treasury Department
and the Office of Management and Budget
(OMB) regarding review of tax regula-

tions. The Treasury Department has deter-
mined that the proposed rulemaking is
subject to review as economically signif-
icant under section 1(c) of the Memoran-
dum of Agreement, and OMB concurs
with this designation. Accordingly, these
proposed regulations have been reviewed
by the Office of Management and Budget.
For more detail on the economic analysis,
please refer to the following analysis.

## A. Overview

Congress enacted section 199A to pro-
vide individuals, estates, and trusts a de-
duction of up to 20 percent of QBI from
domestic businesses, which includes
trades or businesses operated as a sole
proprietorship or through a partnership, S
corporation, trust, or estate. As stated in
the Explanation of Provisions, these pro-
posed regulations are necessary to provide
taxpayers with computational, defini-
tional, and anti-avoidance guidance re-
garding the application of section 199A.
The proposed regulations provide guid-
ance to taxpayers for purposes of calcu-
lating the section 199A deduction. They
provide clarity for taxpayers in determining
their eligibility for the deduction and the
amount of the allowed deduction. Among
other benefits, this clarity helps ensure that
taxpayers all calculate the deduction in a
similar manner, which encourages decision-
making that is economically efficient con-
tingent on the provisions of the overall
Code.

The proposed regulations contain
seven sections, six proposed under section
199A (proposed §§ 1.199A-1 through
1.199A-6) and one proposed under sec-
tion 643(f) (proposed § 1.643(f)-1).
Each of proposed §§ 1.199A-1 through
1.199A-6 provides rules relevant to the
section 199A deduction and proposed
§ 1.643(f)-1 would establish anti-abuse
rules to prevent taxpayers from estab-
lishing multiple non-grantor trusts or
contributing additional capital to multi-
ple existing non-grantor trusts in order
to avoid Federal income tax, including
abuse of section 199A. This economic
analysis describes the economic benefits
and costs of each of the seven sections
of the proposed regulations.

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## B. Baseline

The analysis in this section compares
the proposed regulation to a no-action
baseline reflecting anticipated Federal in-
come tax-related behavior in the absence
of these proposed regulations.

## C. Economic Analysis of Proposed § 1.199A-1

### 1. Background

Because the section 199A deduction has
not previously been available, a large num-
ber of the relevant terms and necessary cal-
culations taxpayers are currently required to
apply under the statute can benefit from
greater specificity. For example, the stat-
ute uses the term trade or business to
refer to the enterprise whose income
would be potentially eligible for the de-
duction but does not define what consti-
tutes a trade or business for purposes of
section 199A; the proposed regulations
provide that taxpayers should generally
apply the definition of a trade or busi-
ness provided by section 162(a). The
definition of trade or business in pro-
posed § 1.199A-1 is extended beyond
the section 162 definition if a taxpayer
chooses to aggregate businesses under
the rules of proposed § 1.199A-4. In
addition, solely for purposes of section
199A, the rental or licensing of property
to a related trade or business is treated
as a trade or business if the rental or
licensing and the other trade or business
are commonly controlled under pro-
posed § 1.199A-4(b)(1)(i). The pro-
posed regulations also make clear that
the section 199A deduction is allowed
when calculating alternative minimum
taxable income of individuals.

Because the section 199A deduction
has multiple components that may interact
in determining the deduction, it is also
valuable to lay out rules for calculating
the deduction since the statute does not
provide each of those particulars.

Alternative approaches the Treasury
Department and the IRS could have pro-
posed would be to remain silent on ad-
ditional definitional specificities and to
allow post-limitation netting in calculat-
ing the section 199A deduction. The
Treasury Department and the IRS con-

cluded these approaches would likely
give rise to less economically efficient
tax-related decisions than would relying
on statutory language alone and require
or leave open the possibility of post-
limitation netting.

## 2. Anticipated benefits of proposed § 1.199A-1

The Treasury Department and the IRS
expect that the definitions and guidance pro-
vided in § 1.199A-1 will implement the
199A deduction in an economically efficient
manner. An economically efficient tax sys-
tem generally aims to treat income derived
from similar economic decisions similarly
in order to reduce incentives to make
choices based on tax rather than market in-
centives. In this context, the principal ben-
efit of proposed § 1.199A-1 is to reduce
taxpayer uncertainty regarding the calcula-
tion of the section 199A deduction relative
to an alternative scenario in which no such
regulations were issued. In the absence of
the clarifications in proposed § 1.199A-1
regarding, for example, the definition of an
eligible trade or business, similarly situated
taxpayers might interpret the statutory rules
of section 199A differently, given the stat-
ute's limited prescription of the implemen-
tation details. In addition, without these reg-
ulations it is likely that many taxpayers
impacted by section 199A would take on
more (or less) than the optimal level of risk
in allocating resources within or across their
businesses. Both of these actions would give
rise to economic inefficiencies. The pro-
posed regulations would provide a uniform
signal to businesses and thus lead taxpayers
to make decisions that are more economi-
cally efficient contingent on the overall
Code. As an example, proposed § 1.199A-1
prescribes the steps taxpayers must take to
calculate the QBI deduction in a manner
that avoids perverse incentives for shifting
wages and capital assets across businesses.
The statute does not address the ordering for
how the W-2 wages and UBIA of qualified
property limitations should be applied when
taxpayers have both positive and negative
QBI from different businesses. The pro-
posed regulations clarify that in such cases
the negative QBI should offset positive QBI
prior to applying the wage and capital lim-
itations. For taxpayers who would have as-
sumed in the alternate that negative QBI

offsets positive QBI after applying the wage
and capital limitations, the proposed ap-
proach weakens the incentive to shift W-2
wage labor or capital (in the form of quali-
fied property) from one business to another
to maximize the section 199A deduction.

To illustrate this, consider a taxpayer
who is above the statutory threshold and
owns two non-service sector businesses,
A and B. A has net qualified income of
$10,000, while B has net qualified income
of -$5,000. Suppose that A paid $3,000 in
W-2 wages, B paid $1,000 in W-2 wages,
and neither business has tangible capital.
If negative QBI offsets positive QBI after
applying the wage and capital limitations,
then A generates a tentative deduction of
$1,500, while B generates a tentative de-
duction of -$1,000, for a total deduction
of $500. After moving B's W-2 wages to
A, A's tentative deduction rises to $2,000,
while B's remains -$1,000, increasing the
total deduction to $1,000. If, on the other
hand, negative QBI offsets positive QBI
prior to applying the wage and capital
limitations (as in the proposed regula-
tions), then A and B have combined in-
come of $5,000, and the total deduction is
$1,000 because the wage and capital lim-
itations are non-binding. After moving
B's wages to A, the total deduction re-
mains $1,000. Thus, an incentive to shift
wages arises if negative QBI offsets pos-
itive QBI after applying the wage and
capital limitations. By taking the opposite
approach, proposed § 1.199A-1 reduces
incentives for such tax-motivated, eco-
nomically inefficient reallocations of la-
bor (or capital) relative to a scenario in
which offsets were taken after wage and
capital limitations were applied.

## 3. Anticipated costs of proposed § 1.199A-1

The Treasury Department and the IRS do
not anticipate any meaningful economic
distortions to be induced by proposed
§ 1.199A-1 and request comment regarding
this anticipated impact. However, changes
to the collective paperwork burden arising
from this and other sections of these regu-
lations are discussed in section J, Antici-
pated impacts on administrative and com-
pliance costs, of this analysis.

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## D. Economic Analysis of Proposed § 1.199A-2

### 1. Background

Section 199A provides a deduction of up
to 20 percent of the taxpayer's income from
qualifying trades or businesses. Taxpayers
with incomes above a threshold amount
cannot enjoy the full 20 percent deduction
unless they determine that their businesses
pay a sufficient amount of wages and/or
maintain a sufficient stock of tangible capi-
tal, among other requirements.

Because this deduction has not previ-
ously been available, proposed § 199A-2
provides greater specificity than is avail-
able from the statute regarding the defini-
tions of W-2 wages and UBIA of quali-
fied property (that is, depreciable capital
stock) relevant to this aspect of the deduc-
tion. For example, the proposed regula-
tions make clear that property that
is transferred or acquired within a specific
timeframe with a principal purpose of in-
creasing the section 199A deduction is not
considered qualified property for purposes
of the section 199A deduction. In addi-
tion, proposed § 1.199A-2 generally fol-
lows prior guidance for the former section
199 deduction in determining which W-2
wages are relevant for section 199A pur-
poses, with additional rules for allocating
wages amongst multiple trades or busi-
nesses. In these and other cases, the pro-
posed regulations generally aim, within
the context of the legislative language and
other tax considerations, to ensure that
only genuine business income is eligible
for the section 199A deduction, and to
reduce business compliance costs and
government administrative costs.

Alternative approaches would be to re-
main silent or to choose different defini-
tions of W-2 wages or qualified property
for the purposes of claiming the deduc-
tion. The Treasury Department and the
IRS rejected these alternatives as being
inconsistent with other definitions or re-
quirements under the Code and therefore
unnecessarily costly for taxpayers to com-
ply with and the IRS to administer.

#### 2. Anticipated benefits of proposed § 1.199A-2

The Treasury Department and IRS ex-
pect that proposed § 1.199A-2 will imple-

ment the 199A deduction in an economi-
cally efficient manner. For example,
proposed § 1.199A-2 will discourage
some inefficient transfers of capital given
the statute's silence regarding the circum-
stances in which certain property transfers
would or would not be considered under
section 199A. Specifically, the proposed
rules make clear that property transferred
or acquired within a specific timeframe
with a principal purpose of increasing the
section 199A deduction is not considered
qualified for purposes of the 199A deduc-
tion.

The proposed regulations will also re-
duce taxpayer uncertainty regarding the
implementation of the section 199A de-
duction relative to a scenario in which no
regulations were issued. In the absence of
such clarification, similarly situated tax-
payers would likely interpret the section
199A deduction differently to the extent
that the statute does not adequately spec-
ify the particular implementation issues
addressed by 199A-2; and as a result, tax-
payers might take on more (or less) than
the optimal level of risk in their interpre-
tations. The proposed regulations would
lead taxpayers to make decisions that
were more economically efficient, condi-
tional on the overall Code.

## 3. Anticipated costs of proposed § 1.199A-2

The Treasury Department and the IRS
do not anticipate any meaningful eco-
nomic distortions to be induced by pro-
posed § 1.199A-2, and request comment
regarding this anticipated impact. How-
ever, changes to the collective paperwork
burden arising from this and other sec-
tions of these regulations are discussed in
section J, Anticipated impacts on admin-
istrative and compliance costs, of this
analysis.

## E. Economic Analysis of Proposed § 1.199A-3

### 1. Background

Section 199A provides a deduction of
up to 20 percent of the taxpayer's income
from qualifying trades or businesses. In
the absence of legislative and regulatory
constraints, taxpayers would have an in-
centive to count as income some income

that, from an economic standpoint, did not
accrue specifically from qualifying eco-
nomic activity. The proposed regulations
clarify what does and does not constitute
QBI for purposes of the 199A deduction,
providing greater implementation speci-
ficity than provided by the statute. Be-
cause guaranteed payments for capital, for
example, are not at risk in the same way as
other forms of income, they might reason-
ably be excluded from QBI. Similarly,
Treasury proposes that income that is a
guaranteed payment, but which is filtered
through a tiered partnership in order to
avoid being labeled as such, should be
treated similarly to guaranteed payments
in general and therefore excluded from
QBI. This principle applies to other forms
of income that similarly represent income
that either is not at risk or does not flow
from the specific economic value pro-
vided by a qualifying trade or business,
such as returns on investments of working
capital. The proposed regulations define
and clarify the types of income that might
reasonably be considered QBI, within the
constraints of the legislation.

## 2. Anticipated benefits of proposed § 1.199A-3

The Treasury Department and IRS ex-
pect that proposed § 1.199A-3 regulations
will implement the 199A deduction in an
economically efficient manner. For exam-
ple, 199A-3 will discourage the creation
of tiered partnerships purely for the pur-
poses of increasing the section 199A de-
duction. In the absence of regulation,
some taxpayers would likely create tiered
partnerships under which a lower-tier
partnership would make a guaranteed pay-
ment to an upper-tier partnership, and the
upper-tier partnership would pay out this
income to its partners without guarantee-
ing it. Such an organizational structure
would likely be economically inefficient
because it was, apparently, created
solely for tax minimization purposes
and not for reasons related to efficient
economic decision-making.

The Treasury Department and the IRS
further expect that the proposed regula-
tions will reduce uncertainty over whether
particular forms of income do or do not
constitute QBI relative to a scenario in
which no regulations were issued. In the

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absence of regulations, taxpayers would
still need to determine what income is
considered QBI and similarly situated tax-
payers might interpret the statutory rules
differently and pursue income-generating
activities based on different assumptions
about whether that income would qualify
for QBI. Proposed § 1.199A-3 provides
clearer guidance for how to determine
QBI, helping to ensure that taxpayers face
uniform incentives when making eco-
nomic decisions, a tenet of economic ef-
ficiency.

## 3. Anticipated costs of proposed § 1.199A-3 relative to the baseline

The Treasury Department and the IRS
do not anticipate any meaningful eco-
nomic distortions to be induced by pro-
posed § 1.199A-3, and request comment
regarding this anticipated impact. How-
ever, changes to the collective paperwork
burden arising from this and other sec-
tions of these regulations are discussed in
section J, Anticipated impacts on admin-
istrative and compliance costs, of this
analysis.

## F. Economic Analysis of Proposed § 1.199A-4

### 1. Background

Businesses may organize either as C
corporations, which are owned by stock-
holders, or in a form generally called a
passthrough, which may take one of sev-
eral legal forms including sole proprietor-
ships, under which there does not exist a
clear separation between the owners and
the business's decision-makers. Each or-
ganizational structure, in some circum-
stance, may be economically efficient, de-
pending on the risk profile, information
asymmetries, and decision-making chal-
lenges pertaining to the specific business
and on the risk preferences and economic
situations of the individual owners. An
economically efficient tax system would
keep the choice among organizational
structures neutral contingent on the provi-
sions of the corporate income tax.

This principle of neutral tax treatment
further applies to the various organiza-
tional structures that qualify as pass-
throughs. Many passthrough business en-
tities are connected through ownership,

management, or shared decision-making.
The proposed aggregation rule allows in-
dividuals to aggregate their trades or busi-
nesses for the purposes of calculating the
section 199A deduction. It thus helps en-
sure that significant choices over owner-
ship and management relationships within
businesses are not chosen solely to in-
crease the section 199A deduction.

An alternative approach would be not
to allow aggregation for purposes of
claiming the deduction. The Treasury De-
partment and the IRS decided to allow
aggregation in the specified circumstances
to minimize or avoid distortions in orga-
nizational form that could arise if aggre-
gation were not allowed.

## 2. Anticipated benefits of proposed § 1.199A-4

The Treasury Department and the IRS
expect that the aggregation guidance pro-
vided in proposed § 1.199A-4 will imple-
ment the 199A deduction in an economi-
cally efficient manner. Economic tax
principles are called into play here be-
cause a large number of businesses that
could commonly be thought of as a single
trade or business actually may be divided
across multiple entities for legal or eco-
nomic reasons. Allowing taxpayers to ag-
gregate trades or businesses offers taxpay-
ers a means of putting together what they
think of as their trade or business for the
purposes of claiming the deduction under
section 199A without otherwise changing
ownership and management structures. If
such aggregation were not permitted, certain
taxpayers would restructure solely for tax
purposes, with the resulting structures lead-
ing to less efficient economic decision-
making.

## 3. Anticipated costs of proposed § 1.199A-4

The proposed regulations require com-
mon majority ownership to apply the ag-
gregation rule. If no aggregation were al-
lowed, taxpayers would have to combine
businesses to calculate the deduction
based on the combined income, wages,
and capital. The majority ownership
threshold may thus encourage owners to
concentrate their ownership in order to
benefit from the aggregation rule. The ad-

ditional costs of the proposed regulations
would be limited to those owners who
would find merging entities too costly
based on other market conditions, but un-
der these regulations may find it beneficial
to increase their ownership share in order
to aggregate their businesses and maxi-
mize their QBI deduction.

Changes to the collective paperwork
burden arising from proposed § 1.199A-4
and other sections of these regulations are
discussed in section J, Anticipated impacts
on administrative and compliance costs,
of this analysis. The Treasury Department
and the IRS request comments regarding
these and other potential costs arising
from the regulations.

## G. Economic Analysis of Proposed § 1.199A-5

### 1. Background

Section 199A provides a deduction of
up to 20 percent of the taxpayer's income
from qualifying trades or businesses. In
the absence of legislative and regulatory
constraints, taxpayers have an incentive to
receive labor income as income earned as
a an independent contractor or through
ownership of an RPE, even though this
income may not derive from the risk-
bearing or decision-making efficiencies
that are unique to being an independent
contractor or to owning an equity interest
in an RPE. The Act provided several pro-
visions that bear on this distinction.

Proposed § 1.199A-5 provides guid-
ance on what trades or businesses would
be characterized as an SSTB under each
type of services trade or business listed in
the legislative text. In addition, proposed
§ 1.199A-5 provides an exception to the
SSTB exclusion if the trade or business
only earns a small fraction of its gross
income from specified service activities
(de minimis exception). Finally, the pro-
posed regulations state that former em-
ployees providing services as independent
contractors to their former employer will
be presumed to be acting as employees
unless they provide evidence that they are
providing services in a capacity other than
an employee.

An alternative approach to the de mi-
nimis exception would be to require busi-
nesses or their owners to trigger the SSTB

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exclusion regardless of the share of gross
income from specified service activities.
The Treasury Department concluded that
providing a de minimis exception is nec-
essary to avoid very small amounts of
SSTB activity within a trade or business
making the entire trade or business ineli-
gible for the deduction, an outcome that is
inefficient in the context of section 199A.

### 2. Anticipated benefits of proposed § 1.199A-5

The Treasury Department and the IRS
expect that proposed § 1.199A-5 will im-
plement the 199A deduction in an eco-
nomically efficient manner. To this end,
proposed § 1.199A-5 clarifies the defini-
tion of an SSTB. In the absence of such
clarification, similarly situated taxpayers
might interpret the legislative text differ-
ently, leading some taxpayers to invest in
particular businesses under the assump-
tion income earned from that entity was
eligible for the deduction while other tax-
payers might forgo that investment due to
the opposite assumption. These disparate
investment signals generate economic in-
efficiencies. The proposed regulations re-
duce this inefficiency relative to a sce-
nario in which no regulation providing a
de minimis exception was issued.

Furthermore, in the absence of the pro-
posed regulations, some owners of busi-
nesses may find it advantageous to sepa-
rate their business activity into SSTB and
non-SSTB businesses in order to receive
the section 199A deduction on their non-
SSTB activity. The proposed regulations
would disallow this behavior by stating
that a taxpayer that provides property or
services to an SSTB that is commonly-
owned will have the portion of property or
services provided to the SSTB treated as
attributable to an SSTB. Additionally
without these regulations, some busi-
nesses may have an incentive to pay a
portion of their employees as independent
contractors. Either of these actions would
entail some loss of economic efficiency
due to changes in businesses' decision-
making structures based on tax incentives.
They may also inefficiently provide incen-
tives to change employment relationships
in favor of independent contractors. The
proposed regulations help to avoid these
sources of inefficiency.

### 3. Anticipated costs of proposed § 1.199A-5 relative to the baseline

In addition to the statutory threshold
amount, below which SSTB status is not
relevant, proposed § 1.199A-5 provides a
de minimis rule with tiered-thresholds of
gross revenues arising from specified ser-
vice activity in determining whether a
trade or business with a smaller amount of
specified service activity is classified as an
SSTB. This threshold may cause busi-
nesses near the cutoff to decrease their
specified service activities or increase
their non-specified service activities to
avoid being classified as an SSTB. Addi-
tionally, the de minimis rule may encour-
age smaller entities engaged in SSTBs to
merge with larger entities not engaged in
an SSTB. The economic costs of these
mergers are difficult to quantify.

Changes to the collective paperwork
burden arising from § 1.199A-5 and other
sections of these regulations are discussed
in section J, Anticipated impacts on ad-
ministrative and compliance costs, of this
analysis. The Treasury Department and
IRS request comment regarding these and
other potential costs arising from the reg-
ulations.

## H. Economic Analysis of Proposed § 1.199A-6

### 1. Background

The 199A deduction is reduced below
20 percent for some businesses and tax-
payers. The attributes that determine any
such reduction must be determined by tax-
payers claiming the section 199A deduc-
tion. Proposed § 1.199A-6 provides rules
for RPEs, PTPs, trusts, and estates rele-
vant to making these determinations. In
particular, RPEs are required to calculate
and report their owners' QBI, SSTB sta-
tus, W-2 wages, UBIA of qualified prop-
erty, REIT dividends, and PTP income.
Similarly, PTPs must calculate and report
their owners' QBI, SSTB status, REIT
dividends, and other PTP income.

## 2. Anticipated benefits of proposed § 1.199A-6

The Treasury Department and IRS ex-
pect that proposed § 1.199A-6 will im-
plement the 199A deduction in an eco-

nomically efficient manner. As with other
proposed regulations discussed in this
Analyses, a principal benefit of proposed
§ 1.199A-6 is to increase the likelihood
that all taxpayers interpret the statutory
rules of section 199A similarly. Addition-
ally, we expect that requiring RPEs to
determine and report the information nec-
essary to compute the section 199A de-
duction will result in a more accurate and
uniform application of the regulations and
statute relative to an alternative approach
under which individual owners would
most likely determine these items.

## 3. Anticipated costs of proposed § 1.199A-6 relative to the baseline

The Treasury Department and the IRS
do not anticipate any meaningful eco-
nomic distortions to be induced by pro-
posed § 1.199A-6, and request comment
on these estimated impacts. However,
changes to the collective paperwork bur-
den arising from this and other sections of
these regulations are discussed in section
J, Anticipated impacts on administrative
and compliance costs, of this analysis.

## I. Economic Analysis of Proposed § 1.643(f)-1

## 1. Background

Proposed § 1.643(f)-1 provides that
taxpayers cannot set up multiple trusts in
certain cases with a principal purpose of
tax avoidance, which would include the
avoidance of the statutory threshold
amounts under section 199A.

### 2. Anticipated benefits of proposed § 1.643(f)-1 relative to the baseline

The Treasury Department and IRS ex-
pect that the proposed § 1.643(f)-1 will
implement the 199A deduction in an eco-
nomically efficient manner. Because pro-
posed § 1.643(f)-1 defines the manner in
which trusts are subject to the threshold
amount where the statute is silent, the
Treasury Department and the IRS antici-
pate that the proposed regulations will
lead to fewer resources being devoted to
setting up trusts in attempts to avoid the
threshold amount rules under section
199A. If multiple trusts have substantially
the same grantors and beneficiaries, and a

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principal purpose for establishing such
trusts or contributing additional cash or
other property to such trusts is the avoid-
ance of Federal income tax, then the var-
ious trusts would be generally considered
one trust, including for section 199A pur-
poses.

## 3. Anticipated costs of proposed § 1.643(f)-1 relative to the baseline

The Treasury Department and the IRS
do not anticipate any meaningful eco-
nomic distortions to be induced by pro-
posed § 1.643(f)-1, and request comment
on these estimated impacts. However,
changes to the collective paperwork bur-
den arising from this and other sections of
these regulations are discussed in section
J, Anticipated impacts on administrative
and compliance costs, of this analysis.

### J. Anticipated impacts on administrative and compliance costs

#### 1. Discussion

The proposed regulations have a num-
ber of effects on taxpayers' compliance
costs. Proposed § 1.199A-2 provides
guidance in determining a taxpayer's
share of W-2 wages and UBIA of quali-
fied property. The Treasury Department
and the IRS expect that this guidance re-
duces the tax compliance costs of making
this determination and reduces uncer-
tainty. In the absence of the proposed reg-
ulations, taxpayers would still need to de-
termine how to allocate W-2 wages and
UBIA of qualified property, among other
calculations. These regulations provide
clear instructions for how to do this, sim-
plifying the process of complying with the
law.

Proposed § 1.199A-4 requires that
owners who decide to aggregate their trades
or businesses report the aggregation annu-
ally. This reporting requirement adds to the
tax compliance burden of these owners. For
owners who consider aggregating, these
regulations increase compliance costs be-
cause the owners must calculate their deduc-
tion for both disaggregated and aggregated
trades or businesses to make the aggregation
decision. These additional compliance costs
would be voluntary and accrue only to own-
ers who find it beneficial to aggregate for the

purposes of calculating their section 199A
deduction.

Proposed § 1.199A-5 includes a re-
quirement for former employees working
as independent contractors for their for-
mer employer to show that their employ-
ment relationship has changed in order to
be eligible for the section 199A deduction.
The burden to substantiate employment
status exists without these proposed regu-
lations; however, the proposed regulation
may increase these individuals' compli-
ance costs slightly.

Proposed § 1.199A-6 specifies that
RPEs must report relevant section 199A
information to owners. Due to these entity
reporting requirements, the proposed reg-
ulations will increase compliance costs for
RPEs. These entities will need to keep
records of new information relevant to the
calculation of their owners' section 199A
deduction, such as QBI, W-2 wages,
SSTB status, and UBIA of qualified prop-
erty. This recordkeeping is costly. With-
out these regulations, it is likely that only
some RPEs would engage in this record
keeping.

Proposed § 1.199A-6 reduces the
compliance burden on many individuals
that own RPEs relative a scenario in
which no regulations were issued or reg-
ulatory alternatives that assigned each
owner of an RPE the responsibility to
acquire the required information were is-
sued without any requirement for the RPE
to provide such information. Under the
proposed regulations, owners will receive
information pertaining to the section
199A deduction from the RPE, such as
whether a given trade or business is an
SSTB, whereas in the alternate they could
have been required to make such determi-
nations themselves.

Overall, it is likely to be more efficient
for RPEs, rather than individual owners,
to keep records of section 199A deduction
information. Therefore, the Treasury De-
partment and the IRS expect that proposed
§ 1.199A-6 will reduce compliance costs
on net and relative to these alternative
scenarios.

## 2. Estimated effect on compliance costs

As explained above, key provisions of
proposed §§ 1.199A-1 through 1.199A-6

will reduce compliance costs that taxpayers
would likely have incurred in the absence of
the proposed rule. Most notably, the de mi-
nimis rule of proposed § 1.199A-5 provides
that a trade or business will not be consid-
ered to be an SSTB merely because it pro-
vides a small amount of services in a spec-
ified service activity. This provision is
expected to reduce compliance costs associ-
ated with section 199A for millions of U.S.
businesses. In addition, the aggregation
rules will reduce overall costs for taxpayers
because some taxpayers would restructure
their business arrangements in order to re-
ceive the benefit of the deduction. These and
other discretionary choices by the Treasury
Department and the IRS in the proposed
rule will substantially reduce taxpayers'
compliance costs.

The Treasury Department and the IRS
also assessed the provisions of the pro-
posed rule that could increase compliance
burdens. Estimates of the change in an-
nual reporting burden associated with
these proposed regulations are presented
here and in further detail in the Paperwork
Reduction Act (PRA) section. The Trea-
sury Department and the IRS estimate a
gross (not net) increase in total reporting
burden of 25 million hours annually. The
estimates primarily reflect two effects of
the regulations. First, the Treasury De-
partment and the IRS project that approx-
imately 1.2 million individuals with more
than one directly owned or pass-through
business who voluntarily choose to aggre-
gate will spend 0.66 hours annually com-
plying with proposed § 1.199A-4. Sec-
ond, the Treasury Department and the IRS
project that - in complying with the pro-
posed § 1.199A-6 requirement to report
relevant section 199A information to their
approximately 8.8 million owners - RPEs
will spend 2.75 hours annually per owner.
These estimates do not include the de-
crease in compliance costs to individuals
who would no longer find it necessary to
compute the quantities detailed in pro-
posed § 1.199A-6 because they would
receive this information from each RPE.
Nor do these estimates reflect the decrease
in compliance costs outlined above.

Valuations of the burden hours of $39/
hour in the case of individuals making
aggregation decisions and $53/hour in the
case of RPEs reporting section 199A in-
formation lead to a PRA-based estimate

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of the gross reporting annualized costs to
taxpayers of approximately $1.3 billion
over ten years; this estimate does not ac-
count for the provisions of the proposed
regulations that will substantially reduce
compliance costs. Because these estimates
assume that the costs are the same each
year, the annualized costs do not vary with
the discount rate. It is possible that costs
will be higher in the first years that the
deduction is allowed and lower in future

years once taxpayers have more experi-
ence with the calculations and reporting
requirements associated with the deduc-
tion. Finally, the estimates reflect data for
entities of a size and form expected to be
impacted by section 199A. More specifi-
cally, because of the scope of the section
199A deduction, the Treasury Department
and the IRS expect the majority of af-
fected entities to be largely small, and
medium in size.

The Treasury Department and the IRS
solicit comments on the assumptions and
the methodology used to calculate the
compliance costs imposed by the pro-
posed regulations relative to the baseline.
This includes, among other things, as-
sumptions and methodology regarding the
reporting burden per respondent, the num-
ber of impacted entities, and the hourly
labor cost estimate for reporting.

Annualized Monetized Effect on Compliance Costs from Proposed Regulations

Years 2018 to 2027 (3% Discount Rate, millions $2018)

Years 2018 to 2027 (7% Discount Rate, millions $2018)

Estimated Gross Costs

$1,317

$1,317

Estimated Savings

Not quantified

Not quantified

## K. Executive Order 13771.

The Treasury Department and the IRS
request comment on the Executive Order
13771 designation for these proposed reg-
ulations. Details on the estimated costs of
the proposed regulations can be found in
this economic analysis.

## II. Regulatory Flexibility Act

It is hereby certified that the collections
of information in proposed §§ 1.199A-4
and 1.199A-6 will not have a significant
economic impact on a substantial number
of small entities. Although the Treasury
Department and the IRS believe that the
proposed regulations may affect a sub-
stantial number of small entities, the eco-
nomic impact on small entities as a result
of the collections of information in this
notice of proposed rulemaking is not ex-
pected to be significant.

The collection in proposed § 1.199A-4
may apply to individuals and certain trusts
or estates that can claim the section 199A
deduction and that choose to aggregate
two or more trades or businesses for pur-
poses of section 199A. If a taxpayer chooses
to aggregate its trades or businesses, the
taxpayer, must include an attachment to its
tax return identifying and describing each
trade or business aggregated, describing
changes to the aggregated group, and pro-
viding other information as the Commis-
sioner may require in forms, instructions, or
other published guidance. RPEs are not
subject to the collection in proposed
§ 1.199A-4 because RPEs are not permitted

to aggregate trades or businesses. Aggrega-
tion is not required by a person claiming the
section 199A deduction, and therefore the
collection of information in proposed
§ 1.199A-4 is required only if the person
chooses to aggregate multiple trades or busi-
nesses. It is not known how many small
entities will choose to aggregate multiple
trades or businesses, therefore a number of
affected entities is not estimated at this time.

The small entities subject to the collec-
tion of information in proposed § 1.199A-6
are business entities formed as estates,
trusts, partnerships, or S corporations that
conduct, directly or indirectly, one or more
trades or businesses. Proposed § 1.199A-6
requires such an entity to attach a statement
describing the QBI, W-2 wages, and UBIA
of qualified property for each separate trade
or business to the Schedule K-1 required
under existing law to be issued to each ben-
eficiary, partner, or shareholder. Although
data is not available to estimate the number
of small entities affected by the § 1.199A-6
requirements, the Treasury Department and
the IRS believe that number would include a
substantial number of small entities.

As discussed elsewhere in this pream-
ble, the reporting burden is estimated at 30
minutes to 20 hours, depending on indi-
vidual circumstances, with an estimated
average of 2.5 hours for all affected enti-
ties, regardless of size. The burden on
small entities is expected to be at the
lower end of the range (30 minutes to 2.5
hours). Using the IRS's taxpayer compli-
ance cost estimates, taxpayers who are
self-employed with multiple businesses

are estimated to have a monetization rate
of $39 per hour. Pass-throughs that issue
K-1s have a monetization rate of $53 per
hour.

For these reasons, the Treasury Depart-
ment and the IRS have determined that the
collection of information in this notice of
proposed rulemaking will not have a sig-
nificant economic impact. Accordingly, a
regulatory flexibility analysis under the
Regulatory Flexibility Act (5 U.S.C.
chapter 6) is not required. Notwithstand-
ing this certification, the Treasury Depart-
ment and the IRS invite comments from
interested members of the public on both
the number of entities affected and the
economic impact on small entities.

Pursuant to section 7805(f) of the
Code, this notice of proposed rulemaking
has been submitted to the Chief Counsel
for Advocacy of the Small Business Ad-
ministration for comment on its impact on
small business.

# Comments and Requests for Public Hearing

The Treasury Department and the IRS
request comments on all aspects of the
proposed rules.

Before these proposed regulations are
adopted as final regulations, consideration
will be given to any comments that are
submitted timely to the IRS as prescribed
in this preamble under the "Addresses"
heading. All comments will be available
at www.regulations.gov or upon request.

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# Drafting Information

The principal authors of these regula-
tions are Frank J. Fisher, Wendy L. Kri-
bell, Adrienne M. Mikolashek, and Ben-
jamin H. Weaver, Office of the Associate
Chief Counsel (Passthroughs and Special
Industries). However, other personnel
from the Treasury Department and the
IRS participated in their development.

* * * * *

# Proposed Amendments to the Regulations

Accordingly, 26 CFR part 1 is pro-
posed to be amended as follows:

# PART 1-INCOME TAXES

Paragraph 1. The authority citation for
part 1 are amended by adding sectional
authorities for §§ 1.199A-1 through
1.199A-6 and § 1.643(f) to read in part as
follows:

Authority: 26 U.S.C. 7805

Section § 1.199A-1 also issued under
26 U.S.C. 199A(f)(4).

Section § 1.199A-2 also issued under
26 U.S.C. 199A(b)(5), (f)(1)(A), (f)(4),
and (h).

Section § 1.199A-3 also issued under
26 U.S.C. 199A(c)(4)(C) and (f)(4).

Section § 1.199A-4 also issued under
26 U.S.C. 199A(f)(4).

Section § 1.199A-5 also issued under
26 U.S.C. 199A(f)(4).

Section § 1.199A-6 also issued under
26 U.S.C. 199A(f)(1)(B) and (f)(4).

Section 1.643(f)-1 also issued under
26 U.S.C. 643(f)

Par. 2. Section 1.199A-0 is added to
read as follows:

## § 1.199A-0 Table of Contents.

This section lists the section headings
that appear in §§ 1.199A-1 through
1.199A-6.

§ 1.199A-1 Operational rules.

(a) Overview.

(1) In general.

(2) Usage of term individual.

(b) Definitions.

(1) Aggregated trade or business.

(2) Applicable percentage.

(3) Phase-in range.

(4) Qualified business income (QBI).

(5) QBI component.

(6) Qualified PTP income.

(7) Qualified REIT dividends.

(8) Reduction amount.

(9) Relevant passthrough entity (RPE).

(10) Specified service trade or business
(SSTB).

(11) Threshold amount.

(12) Total QBI amount.

(13) Trade or business.

(14) Unadjusted basis immediately after
the acquisition of qualified property
(UBIA of qualified property).

(15) W-2 Wages.

(c) Computation of the section 199A de-
duction for individuals with taxable in-
come not exceeding threshold amount.

(1) In general.

(2) Carryover rules.

(i) Negative total QBI amount.

(ii) Negative combined qualified REIT

dividends/qualified PTP income.

(3) Examples.

(d) Computation of the section 199A de-
duction for individuals with taxable in-
come above the threshold amount.

(1) In general.

(2) QBI component.

(i) SSTB exclusion.

(ii) Aggregated trade or business.

(iii) Netting and carryover.

(A) Netting.

(B) Carryover of negative total QBI
amount.

(iv) QBI component calculation.

(A) General rule.

(B) Taxpayers with taxable income within
phase-in range.

(3) Carryover of negative combined qualified
REIT dividends/qualified PTP income.

(4) Examples.

(e) Special rules.

(1) Effect of deduction.

(2) Self-employment tax and net invest-
ment income tax.

(3) Commonwealth of Puerto Rico.

(4) Coordinated with alternative minimum
tax.

(5) Imposition of accuracy related penalty
on underpayments.

(6) Reduction for income received from
cooperatives.

(f) Effective/applicability date.

(1) General rule.

(2) Exception for non-calendar year RPE.

§ 1.199A-2 Determination of W-2
Wages and unadjusted basis immediately
after acquisition of qualified property.

(a) Scope.

(1) In general.

(2) W-2 Wages.

(3) UBIA of qualified property.

(b) W-2 Wages.

(1) In general.

(2) Definition of W-2 Wages.

(i) In general.

(ii) Wages paid by a person other than a
common law employer.

(iii) Requirement that wages must be re-
ported on return filed with the Social Se-
curity Administration.

(A) In general.

(B) Corrected return filed to correct a re-
turn that was filed within 60 days of the
due date.

(C) Corrected return filed to correct a re-
turn that was filed later than 60 days after
the due date.

(iv) Methods for calculating W-2 Wages.
(A) In general.

(B) Acquisition or disposition of a trade or
business.

(1) In general.

(2) Acquisition or disposition.

(C) Application in the case of a person
with a short taxable year.

(1) In general.

(2) Short taxable year that does not in-
clude December 31.

(D) Remuneration paid for services per-
formed in the Commonwealth of Puerto
Rico.

(3) Allocation of wages to trades or busi-
nesses.

(4) Allocation of wages to QBI.

(5) Non-duplication rule.

(c) UBIA of qualified property.

(1) Qualified property.

(i) In general.

(ii) Improvements to qualified property.

(iii) Adjustments under sections 734(b)
and 743(b).

(iv) Property acquired at end of year.

(2) Depreciable period.

(i) In general.

(ii) Additional first-year depreciation un-
der section 168.

(iii) Qualified property acquired in trans-
actions subject to section 1031 or section
1033.

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(iv) Qualified property acquired in trans-

(1) General rule.

(2) Services or property provided to an

actions subject to section 168(i)(7).

(2) Exception for non-calendar year RPE.

SSTB.

(3) Unadjusted basis immediately after ac-

(i) In general.

quisition.

§ 199A-5 Specified service trades or

(ii) Less than substantially all of property

(4) Examples.

businesses and the trade or business of

or services provided.

(d) Effective/applicability date. (1) General rule.

performing services as an employee.

(iii) 50 percent or more common owner- ship

(2) Exceptions.

(a) Scope and effect.

(iv) Example.

(i) Anti-abuse rules.

(1) Scope.

(3) Incidental to specified service trade or

(ii) Non-calendar year RPE.

(2) Effect of being an SSTB.

business.

(3) Trade or business of performing ser-

(i) In general.

§ 1.199A-3 Qualified business income,

vices as an employee.

(ii) Example.

qualified REIT dividends, and qualified

(b) Definition of specified service trade or business.

(d) Trade or business of performing ser- vices as an employee.

PTP income.

(a) In general.

(1) Listed SSTBs.

(1) In general.

(b) Definition of qualified business in-

(2) Additional rules for applying section

(2) Employer's Federal employment tax classification of employee immaterial.

come.

199A(d)(2) and paragraph (b) of this sec-

(3) Presumption that former

(1) In general.

tion.

employees

(i) Section 751 gain.

(i) In general.

are still employees. (i) Presumption.

(ii) Guaranteed payments for the use of capital.

(ii) Meaning of services performed in the field of health.

(ii)

Examples.

(iii) Section 481 adjustments.

(iii) Meaning of services performed in the

(e) Effective/applicability date. (1) General rule.

(iv) Previously disallowed losses

field of law.

(2) Exceptions.

(v) Net operating losses.

(iv) Meaning of services performed in the

(i) Anti-abuse rules.

(2) Qualified items of income, gain, de-

field of accounting.

(ii) Non-calendar year RPE.

duction, and loss.

(v) Meaning of services performed in the

(i) In general.

field of actuarial science.

(ii) Items not taken into account.

(vi) Meaning of services performed in the

§ 1.199A-6 Relevant passthrough

(3) Commonwealth of Puerto Rico.

field of performing arts.

entities (RPEs), publicly traded

(4) Wages.

(vii) Meaning of services performed in the

partnerships (PTPs), trusts, and estates.

(5) Allocation of items among multiple

field of consulting.

directly-conducted trades or businesses.

(viii) Meaning of services performed in

(a) Overview.

(c) Qualified REIT dividends and quali- fied PTP income.

the field of athletics. (ix) Meaning of services performed in the

(b) Computational and reporting rules for RPEs.

(1) In general.

field of financial services.

(1) In general.

(2) Qualified REIT dividend.

(x) Meaning of services performed in the ☒

(2) Computational rules.

(3) Qualified PTP income.

field of brokerage services.

(3) Reporting rules for RPEs.

(i) In general.

(xi) Meaning of the provision of services ☒

(i) Trade or business directly engaged in.

(ii) Special rules.

in investing and investment management.

(ii) Other items.

(d) Effective/applicability date.

(xii) Meaning of the provision of services ☒ in trading.

(iii) Failure to report information. (c) Computational and reporting rules for PTPs.

(1) General rule.

(2) Exceptions.

(xiii) Meaning of the provision of services

(1) Computational rules.

(i) Anti-abuse rules.

in dealing.

(2) Reporting rules.

(ii) Non-calendar year RPE.

(A) Dealing in securities.

§ 1.199A-4 Aggregation.

(d) Application to trusts, estates, and ben-

(a) Scope and purpose.

(B) Dealing in commodities.

eficiaries.

(b) Aggregation rules.

(C) Dealing in partnership interests.

(1) In general.

(1) General rule.

(xiv) Meaning of trade or business where

(2) Grantor trusts.

(2) Operating rules.

the principal asset of such trade or busi-

(3) Non-grantor trusts and estates.

(3) Family attribution.

ness is the reputation or skill of one or

(i) Calculation at entity level.

(c) Reporting and consistency.

more of its employees or owners.

(ii) Allocation among trust or estate and beneficiaries.

(1) In general.

(3) Examples.

(2) Individual reporting.

(c) Special rules.

(iii) Threshold amount.

(i) Required annual disclosure.

(1) De minimis rule.

(iv) Electing small business trusts.

(ii) Failure to disclose.

(i) Gross receipts of $25 million or less.

(v) Anti-abuse rule for creation of multi-

(d) Examples.

(ii) Gross receipts of greater than $25 mil-

ple trusts to avoid exceeding the threshold

(e) Effective/applicability date.

lion.

amount.

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(vi) Example.

(e) Effective/applicability date.

(1) General rule.

(2) Exceptions.

(i) Anti-abuse rules.

(ii) Non-calendar year RPE.

Par. 3. Section 1.199A-1 is added to
read as follows:

§ 1.199A-1 Operational rules.

(a) Overview-(1) In general. This
section provides operational rules for cal-
culating the section 199A(a) qualified
business income deduction (section 199A
deduction) under section 199A of the In-
ternal Revenue Code (Code). This section
refers to the rules in §§ 1.199A-2 through
1.199A-6. This paragraph (a) provides
an overview of this section. Paragraph
(b) of this section provides definitions
that apply for purposes of section 199A
and §§ 1.199A-1 through 1.199A-6.
Paragraph (c) of this section provides
computational rules and examples for
individuals whose taxable income does
not exceed the threshold amount. Para-
graph (d) of this section provides com-
putational rules and examples for indi-
viduals whose taxable income exceeds
the threshold amount. Paragraph (e) of this
section provides special rules for purposes
of section 199A and §§ 1.199A-1 through
1.199A-6. This section and §§ 1.199A-2
through 1.199A-6 do not apply for pur-
poses of calculating the deduction in section
199A(g) for specified agricultural and hor-
ticultural cooperatives.

(2) Usage of term individual. For pur-
poses of applying the rules of §§ 1.199A-1
through 1.199A-6, a reference to an indi-
vidual includes a reference to a trust (other
than a grantor trust) or an estate to the extent
that the section 199A deduction is deter-
mined by the trust or estate under the rules
of § 1.199A-6.

(b) Definitions. For purposes of section
199A and §§ 1.199A-1 through 1.199A-6,
the following definitions apply:

(1) Aggregated trade or business
means two or more trades or businesses
that have been aggregated pursuant to
§ 1.199A-4.

(2) Applicable percentage means, with
respect to any taxable year, 100 percent
reduced (not below zero) by the percent-
age equal to the ratio that the taxable

income of the individual for the taxable
year in excess of the threshold amount,
bears to $50,000 (or $100,000 in the case
of a joint return).

(3) Phase-in range means a range of
taxable income, the lower limit of which
is the threshold amount, and the upper
limit of which is the threshold amount
plus $50,000 (or $100,000 in the case of a
joint return).

(4) Qualified business income (QBI)
means the net amount of qualified items of
income, gain, deduction, and loss with
respect to any trade or business as deter-
mined under the rules of § 1.199A-3(b).

(5) QBI component means the amount
determined under paragraph (d)(2) of this
section.

(6) Qualified PTP income is defined in
§ 1.199A-3(c)(3).

(7) Qualified REIT dividends are de-
fined in § 1.199A-3(c)(2).

(8) Reduction amount means, with re-
spect to any taxable year, the excess
amount multiplied by the ratio that the
taxable income of the individual for the
taxable year in excess of the threshold
amount, bears to $50,000 (or $100,000 in
the case of a joint return). For purposes of
this paragraph (b)(8), the excess amount is
20 percent of QBI over the greater of 50
percent of W-2 wages or the sum of 25
percent of W-2 wages plus 2.5 percent of
the UBIA of qualified property.

(9) Relevant passthrough entity (RPE)
means a partnership (other than a PTP) or
an S corporation that is owned, directly or
indirectly by at least one individual, es-
tate, or trust. A trust or estate is treated as
an RPE to the extent it passes through
QBI, W-2 wages, UBIA of qualified
property, qualified REIT dividends, or
qualified PTP income.

(10) Specified service trade or business
(SSTB) means a specified service trade or
business as defined in § 1.199A-5(b).

(11) Threshold amount means, for any
taxable year beginning before 2019,
$157,500 (or $315,000 in the case of a
taxpayer filing a joint return). In the case
of any taxable year beginning after 2018,
the threshold amount is the dollar amount
in the preceding sentence increased by an
amount equal to such dollar amount, mul-
tiplied by the cost-of-living adjustment
determined under section 1(f)(3) of the
Code for the calendar year in which the

taxable year begins, determined by substi-
tuting "calendar year 2017" for "calendar
year 2016" in section 1(f)(3)(A)(ii). The
amount of any increase under the preced-
ing sentence is rounded as provided in
section 1(f)(7) of the Code.

(12) Total QBI amount means the net
total QBI from all trades or businesses
(including the individual's share of QBI
from trades or business conducted by
RPEs).

(13) Trade or business means a section
162 trade or business other than the trade
or business of performing services as an
employee. In addition, rental or licensing
of tangible or intangible property (rental
activity) that does not rise to the level of a
section 162 trade or business is never-
theless treated as a trade or business for
purposes of section 199A, if the prop-
erty is rented or licensed to a trade or
business which is commonly controlled
under § 1.199A-4(b)(1)(i) (regardless
of whether the rental activity and the
trade or business are otherwise eligible
to be aggregated under § 1.199A-
4(b)(1)).

(14) Unadjusted basis immediately after
acquisition of qualified property (UBIA of
qualified property) is defined in § 1.199A-
2(c).

(15) W-2 wages means a trade or busi-
ness's W-2 wages properly allocable to
QBI as defined in § 1.199A-2(b).

(c) Computation of the § 199A deduc-
tion for individuals with taxable income
not exceeding threshold amount-(1) In
general. The section 199A deduction is
determined for individuals with taxable
income for the taxable year that does not
exceed the threshold amount by adding 20
percent of the total QBI amount (includ-
ing QBI attributable to an SSTB) and 20
percent of the combined amount of qual-
ified REIT dividends and qualified PTP
income (including the individual's share
of qualified REIT dividends, and qualified
PTP income from RPEs). That sum is then
compared to 20 percent of the amount by
which the individual's taxable income ex-
ceeds net capital gain. The lesser of these
two amounts is the individual's section
199A deduction.

(2) Carryover rules-(i) Negative total
QBI amount. If the total QBI amount is
less than zero, the portion of the individ-
ual's section 199A deduction related to

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QBI is zero for the taxable year. The neg-
ative total QBI amount is treated as neg-
ative QBI from a separate trade or busi-
ness in the succeeding taxable year of the
individual for purposes of section 199A
and this section. This carryover rule does
not affect the deductibility of the loss for
purposes of other provisions of the Code.

(ii) Negative combined qualified REIT
dividends/qualified PTP income. If the
combined amount of REIT dividends and
qualified PTP income is less than zero, the
portion of the individual's section 199A
deduction related to qualified REIT divi-
dends and qualified PTP income is zero
for the taxable year. The negative com-
bined amount must be carried forward and
used to offset the combined amount of
REIT dividends and qualified PTP income
in the succeeding taxable year of the in-
dividual for purposes of section 199A and
this section. This carryover rule does not
affect the deductibility of the loss for pur-
poses of other provisions of the Code.

(3) Examples. The following examples
illustrate the provisions of this paragraph
(c). For purposes of these examples, un-
less indicated otherwise, assume that all of
the trades or businesses are trades or busi-
nesses as defined in paragraph (b)(1) of
this section and all of tax items are effec-
tively connected to a trade or business
within the United States within the mean-
ing of section 864(c). Total taxable in-
come does not include the section 199A
deduction.

Example 1 to paragraph (c)(3). A, an unmarried
individual, owns and operates a computer repair
shop as a sole proprietorship. The business generated
$100,000 in net taxable income from operations in
2018. A has no capital gains or losses. After allow-
able deductions not relating to the business, A's total
taxable income for 2018 is $81,000. The business's
QBI is $100,000, the net amount of its qualified
items of income, gain, deduction, and loss. A's sec-
tion 199A deduction for 2018 is equal to $16,200,
the lesser of 20% of A's QBI from the business
($100,000 x 20% = $20,000) and 20% of A's total
taxable income for the taxable year ($81,000 x
20% = $16,200).

Example 2 to paragraph (c)(3). Assume the same
facts as in Example 1 of this paragraph (c)(3), except
that A also has $7,000 in net capital gain for 2018
and that, after allowable deductions not relating to
the business, A's taxable income for 2018 is
$74,000. A's taxable income minus net capital gain
is $67,000 ($74,000 - $7,000). A's section 199A
deduction is equal to $13,400, the lesser of 20% of
A's QBI from the business ($100,000 x 20% =
$20,000) and 20% of A's total taxable income minus

net capital gain for the taxable year ($67,000 x
20% = $13,400).

Example 3 to paragraph (c)(3). B and C are
married and file a joint individual income tax return.
B earned $500,000 in wages as an employee of an
unrelated company in 2018. C owns 100% of the
shares of X, an S corporation that provides landscap-
ing services. X generated $100,000 in net income
from operations in 2018. X paid C $150,000 in
wages in 2018. B and C have no capital gains or
losses. After allowable deductions not related to X,
B and C's total taxable income for 2018 is $270,000.
B's and C's wages are not considered to be income
from a trade or business for purposes of the section
199A deduction. Because X is an S corporation, its
QBI is determined at the S corporation level. X's
QBI is $100,000, the net amount of its qualified
items of income, gain, deduction, and loss. The
wages paid by X to C are considered to be a qualified
item of deduction for purposes of determining X's
QBI. The section 199A deduction with respect to X's
QBI is then determined by C, X's sole shareholder,
and is claimed on the joint return filed by B and C.
B and C's section 199A deduction is equal to
$20,000, the lesser of 20% of C's QBI from the
business ($100,000 x 20% = $20,000) and 20% of B
and C's total taxable income for the taxable year
($270,000 x 20% = $54,000).

Example 4 to paragraph (c)(3). Assume the same
facts as in Example 3 of this paragraph (c)(3) except
that B also earns $1,000 in qualified REIT dividends
and $500 in qualified PTP income in 2018, increas-
ing taxable income to $271,500. B and C's section
199A deduction is equal to $20,300, the lesser of (i)
20% of C's QBI from the business ($100,000 x
20% = $20,000) plus 20% of B's combined quali-
fied REIT dividends and qualified PTP income
($1500 x 20% = $300) and (ii) 20% of B and C's
total taxable for the taxable year ($271,500 x 20% =
$54,300).

(d) Computation of the § 199A deduc-
tion for individuals with taxable income
above threshold amount-(1) In general.
The section 199A deduction is determined
for individuals with taxable income for
the taxable year that exceeds the threshold
amount by adding the QBI component and
20 percent of the combined amount of
qualified REIT dividends and qualified
PTP income (including the individual's
share of qualified REIT dividends and
qualified PTP income from RPEs). That
sum is then compared to 20 percent of the
amount by which the individual's taxable
income exceeds net capital gain. The
lesser of these two amounts is the individ-
ual's section 199A deduction.

(2) QBI component. An individual with
taxable income for the taxable year that
exceeds the threshold amount determines
the QBI component using the following
computational rules, which are to be ap-
plied in the order they appear.

(i) SSTB exclusion. If the individual's
taxable income is within the phase-in
range, then only the applicable percentage
of QBI, W-2 wages, and UBIA of quali-
fied property for each SSTB is taken into
account for purposes of determining the
individual's section 199A deduction. If
the individual's taxable income exceeds
the phase-in range, then none of the indi-
vidual's share of QBI, W-2 wages, or
UBIA of qualified property attributable to
an SSTB may be taken into account for
purposes of determining the individual's
section 199A deduction.

(ii) Aggregated trade or business. If an
individual chooses to aggregate trades or
businesses under the rules of § 1.199A-4,
the individual must combine the QBI,
W-2 wages, and UBIA of qualified prop-
erty of each trade or business within an
aggregated trade or business prior to ap-
plying the W-2 wages and UBIA of qual-
ified property limitations described in
paragraph (d)(2)(iv) of this section.

(iii) Netting and Carryover-(A) Net-
ting. If an individual's QBI from at least
one trade or business is less than zero, the
individual must offset the QBI attributable
to each trade or business that produced net
positive QBI with the QBI from each
trade or business that produced net nega-
tive QBI in proportion to the relative
amounts of net QBI in the trades or busi-
nesses with positive QBI. The adjusted
QBI is then used in paragraph (d)(2)(iv) of
this section. The W-2 wages and UBIA of
qualified property from the trades or busi-
nesses which produced net negative QBI
are not taken into account for purposes of
this paragraph (d) and are not carried over
to the subsequent year.

(B) Carryover of negative total QBI
amount. If an individual's QBI from all
trades or businesses combined is less than
zero, the QBI component is zero for the
taxable year. This negative amount is
treated as negative QBI from a separate
trade or business in the succeeding taxable
year of the individual for purposes of sec-
tion 199A and this section. This carryover
rule does not affect the deductibility of the
loss for purposes of other provisions of
the Code. The W-2 wages and UBIA of
qualified property from the trades or busi-
nesses which produced net negative QBI
are not taken into account for purposes of

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this paragraph (d) and are not carried over
to the subsequent year.

(iv) QBI component calculation-(A)
General rule. Except as provided in para-
graph (d)(iv)(B) of this section, the QBI
component is the sum of the amounts deter-
mined under this paragraph (d)(2)(iv)(A) for
each trade or business. For each trade or
business (including trades or businesses op-
erated through RPEs) the individual must
determine the lesser of-

(1) 20 percent of the QBI for that trade
or business; or

(2) The greater of-

(i) 50 percent of W-2 wages with re-
spect to that trade or business, or

(ii) the sum of 25 percent of W-2
wages with respect to that trade or busi-
ness plus 2.5 percent of the UBIA of qual-
ified property with respect to that trade or
business.

(B) Taxpayers with taxable income
within phase-in range. If the individual's
taxable income is within the phase-in range
and the amount determined under paragraph
(d)(2)(iv)(A)(2) of this section for a trade or
business is less than the amount determined
under paragraph (d)(2)(iv)(A)(1) of this sec-
tion for that trade or business, the amount
determined under paragraph (d)(2)(iv)(A) of
this section for such trade or business is
modified. Instead of the amount determined
under paragraph (d)(2)(iv)(A)(2) of this sec-
tion, the QBI component for the trade or
business is the amount determined under
paragraph (d)(2)(iv)(A)(1) of this section re-
duced by the reduction amount as defined in
paragraph (b)(8) of this section. This reduc-
tion amount does not apply if the amount
determined in paragraph (d)(2)(iv)(A)(2) of
this section is greater than the amount de-
termined under paragraph (d)(2)(iv)(A)(1)
of this section (in which circumstance the
QBI component for the trade or business
will be the unreduced amount determined in
paragraph (d)(2)(iv)(A)(1) of this section).

(3) Negative combined qualified REIT
dividends/qualified PTP income. If the
combined amount of REIT dividends and
qualified PTP income is less than zero, the
portion of the individual's section 199A
deduction related to qualified REIT divi-
dends and qualified PTP income is zero
for the taxable year. The negative com-
bined amount must be carried forward and
used to offset the combined amount of
REIT dividends/qualified PTP income in

the succeeding taxable year of the individ-
ual for purposes of section 199A and this
section. This carryover rule does not af-
fect the deductibility of the loss for pur-
poses of other provisions of the Code.

(4) Examples. The following examples
illustrate the provisions of this paragraph
(d). For purposes of these examples, un-
less indicated otherwise, assume that all of
the trades or businesses are trades or busi-
nesses as defined in paragraph (b)(13) of
this section, none of the trades or busi-
nesses are SSTBs as defined in paragraph
(b)(10) of this section and § 1.199A-5(b);
and all of the tax items associated with the
trades or businesses are effectively con-
nected to a trade or business within the
United States within the meaning of sec-
tion 864(c). Also assume that the taxpay-
ers report no capital gains or losses or
other tax items not specified in the exam-
ples. Total taxable income does not in-
clude the section 199A deduction.

Example 1 to paragraph (d)(4). D, an unmarried
individual, owns several parcels of land that D man-
ages and which are leased to several suburban air-
ports for parking lots. The business generated
$1,000,000 of QBI in 2018. The business paid no
wages and the property was not qualified property
because it was not depreciable. After allowable de-
ductions unrelated to the business, D's total taxable
income for 2018 is $980,000. Because D's taxable
income exceeds the applicable threshold amount,
D's section 199A deduction is subject to the W-2
wage and UBIA of qualified property limitations.
D's section 199A deduction is limited to zero be-
cause the business paid no wages and held no qual-
ified property.

Example 2 to paragraph (d)(4). Assume the
same facts as in Example 1 of this paragraph (d)(4),
except that D developed the land parcels in 2019,
expending a total of $10,000,000 to build parking
structures on each of the parcels, all of which is
depreciable. During 2020, D leased the parking
structures and the land to the suburban airports. D
reports $4,000,000 of QBI for 2020. After allowable
deductions unrelated to the business, D's total tax-
able income for 2020 is $3,980,000. Because D's
taxable income is above the threshold amount, the
QBI component of D's section 199A deduction is
subject to the W-2 wage and UBIA of qualified
property limitations. Because the business has no
W-2 wages, the QBI component of D's section
199A deduction will be limited to the lesser of 20%
of the business's QBI or 2.5% of its UBIA of qual-
ified property. Twenty percent of the $4,000,000 of
QBI is $800,000. Two and one-half percent of
the $10,000,000 UBIA of qualified property is
$250,000. The QBI component of D's section 199A
deduction is thus limited to $250,000. D's section
199A deduction is equal to the lesser of (i) 20% of
the QBI from the business as limited ($250,000) or
(ii) 20% of D's taxable income ($3,980,000 x 20%

= $796,000). Therefore, D's section 199A deduction
for 2020 is $250,000.

Example 3 to paragraph (d)(4). E, an unmarried
individual, is a 30% owner of LLC, which is classi-
fied as a partnership for Federal income tax pur-
poses. In 2018, the LLC has a single trade or busi-
ness and reported QBI of $3,000,000. The LLC paid
total W-2 wages of $1,000,000, and its total UBIA
of qualified property is $100,000. E is allocated 30%
of all items of the partnership. For the 2018 taxable
year, E reports $900,000 of QBI from the LLC. After
allowable deductions unrelated to LLC, E's taxable
income is $880,000. Because E's taxable income is
above the threshold amount, the QBI component of
E's section 199A deduction will be limited to the
lesser of 20% of E's share of LLC's QBI or the
greater of the W-2 wage or UBIA of qualified prop-
erty limitations. Twenty percent of E's share of QBI
of $900,000 is $180,000. The W-2 wage limitation
equals 50% of E's share of the LLC's wages
($300,000) or $150,000. The UBIA of qualified
property limitation equals $75,750, the sum of 25%
of E's share of LLC's wages ($300,000) or $75,000
plus 2.5% of E's share of UBIA of qualified property
($30,000) or $750. The greater of the limitation
amounts ($150,000 and $75,750) is $150,000. The
QBI component of E's section 199A deduction is
thus limited to $150,000, the lesser of 20% of QBI
($180,000) and the greater of the limitations amounts
($150,000). E's section 199A deduction is equal to
the lesser of 20% of the QBI from the business as
limited ($150,000) or 20% of E's taxable income
($880,000 x 20% = $176,000). Therefore, E's sec-
tion 199A deduction is $150,000 for 2018.

Example 4 to paragraph (d)(4). F, an unmarried
individual, owns a 50% interest in Z, an S corpora-
tion for Federal income tax purposes that conducts a
single trade or business. In 2018, Z reported QBI of
$6,000,000. Z paid total W-2 wages of $2,000,000,
and its total UBIA of qualified property is $200,000.
For the 2018 taxable year, F reports $3,000,000 of
QBI from Z. F is not an employee of Z and receives
no wages or reasonable compensation from Z. After
allowable deductions unrelated to Z and a deductible
qualified net loss from a PTP of ($10,000), F's
taxable income is $1,880,000. Because F's taxable
income is above the threshold amount, the QBI com-
ponent of F's section 199A deduction will be limited
to the lesser of 20% of F's share of Z's QBI or (ii)
the greater of the W-2 wage and UBIA of qualified
property limitations. Twenty percent of F's share of
QBI of $3,000,000 is $600,000. The W-2 wage
limitation equals 50% of F's share of Z's W-2 wages
($1,000,000) or $500,000. The UBIA of qualified
property limitation equals $252,500, the sum of 25%
of F's share of Z's W-2 wages ($1,000,000) or
$250,000 plus 2.5% of E's share of UBIA of quali-
fied property ($100,000) or $2,500. The greater of
the limitation amounts ($500,000 and $252,500) is
$500,000. The QBI component of F's section 199A
deduction is thus limited to $500,000, the lesser of
20% of QBI ($600,000) and the greater of the limi-
tations amounts ($500,000). F reported a qualified
loss from a PTP and has no qualified REIT dividend.
F does not net the ($10,000) loss against QBI. In-
stead, the portion of F's section 199A deduction
related to qualified REIT dividends and qualified
PTP income is zero for 2018. F's section is 199A

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deduction is equal to the lesser of 20% of the QBI
from the business as limited ($500,000) or 20% of
F's taxable income over net capital gain ($1,880,000
x 20% = $376,000). Therefore, F's section 199A
deduction is $376,000 for 2018. F must also carry
forward the $(10,000) qualified loss from a PTP to
be netted against F's qualified REIT dividends and
qualified PTP income in the succeeding taxable year.

Example 5 to paragraph (d)(4). Phase-in range.
(i) B and C are married and file a joint individual
income tax return. B is a shareholder in M, an entity
taxed as an S corporation for Federal income tax
purposes that conducts a single trade or business. M
holds no qualified property. B's share of M's QBI is
$300,000 in 2018. B's share of the W-2 wages from
M in 2018 is $40,000. C earns wage income from
employment by an unrelated company. After allow-
able deductions unrelated to M, B and C's taxable
income for 2018 is $375,000. B and C are within the
phase-in range because their taxable income exceeds
the applicable threshold amount, $315,000, but does
not exceed the threshold amount plus $100,000, or
$415,000. Consequently, the QBI component of B
and C's section 199A deduction may be limited by
the W-2 wage and UBIA of qualified property lim-
itations but the limitations will be phased in.

(ii) The UBIA of qualified property limitation
amount is zero because M does not hold qualified
property. B and C must apply the W-2 wage limi-
tation by first determining 20% of B's share of M's
QBI. Twenty percent of B's share of M's QBI of
$300,000 is $60,000. Next, B and C must determine
50% of B's share of M's W-2 wages. Fifty percent
of B's share of M's W-2 wages of $40,000 is
$20,000. Because 50% of B's share of M's W-2
wages ($20,000) is less than 20% of B's share of M's
QBI ($60,000), B and C must determine the QBI
component of their section 199A deduction by re-
ducing 20% of B's share of M's QBI by the reduc-
tion amount.

(iii) B and C are 60% through the phase-in range
(that is, their taxable income exceeds the threshold
amount by $60,000 and their phase-in range is
$100,000). B and C must determine the excess
amount, which is the excess of 20% of B's share of
M's QBI, or $60,000, over 50% of B's share of M's
W-2 wages, or $20,000. Thus, the excess amount is
$40,000. The reduction amount is equal to 60% of
the excess amount, or $24,000. Thus, the QBI com-
ponent of B and C's section 199A deduction is equal
to $36,000, 20% of B's $300,000 share M's QBI
(that is, $60,000), reduced by $24,000. B and C's
section 199A deduction is equal to the lesser of 20%
of the QBI from the business as limited ($36,000) or
(ii) 20% of B and C's taxable income ($375,000 x
20% = $75,000). Therefore, B and C's section 199A
deduction is $36,000 for 2018.

Example 6 to paragraph (d)(4). (i) Assume the
same facts as in Example 5 to paragraph (d)(4),
except that M was engaged in an SSTB. Because B
and C are within the phase-in range, B must reduce
the QBI and W-2 wages allocable to B from M to
the applicable percentage of those items. B and C's
applicable percentage is 100% reduced by the per-
centage equal to the ratio that their taxable income
for the taxable year ($375,000) exceeds their thresh-
old amount ($315,000), or $60,000, bears to
$100,000. Their applicable percentage is 40%. The

applicable percentage of B's QBI is ($300,000 x
40% =) $120,000, and the applicable percentage of
B's share of W-2 wages is ($40,000 x 40% =)
$16,000. These reduced numbers must then be used
to determine how B's section 199A deduction is
limited.

(ii) B and C must apply the W-2 wage limitation
by first determining 20% of B's share of M's QBI as
limited by paragraph (i) of this example. Twenty
percent of B's share of M's QBI of $120,000 is
$24,000. Next, B and C must determine 50% of B's
share of M's W-2 wages. Fifty percent of B's share
of M's W-2 wages of $16,000 is $8,000. Because
50% of B's share of M's W-2 wages ($8,000) is less
than 20% of B's share of M's QBI ($24,000), B and
C must determine the QBI component of their sec-
tion 199A deduction by reducing 20% of B's share
of M's QBI by the reduction amount.

(iii) B and C are 60% through the phase-in range
(that is, their taxable income exceeds the threshold
amount by $60,000 and their phase-in range is
$100,000). B and C must determine the excess
amount, which is the excess of 20% of B's share of
M's QBI, as adjusted in paragraph (i) of this example
or $24,000, over 50% of B's share of M's W-2
wages, as adjusted in paragraph (i) of this example,
or $8,000. Thus, the excess amount is $16,000. The
reduction amount is equal to 60% of the excess
amount or $9,600. Thus, the QBI component of B
and C's section 199A deduction is equal to $14,400,
20% of B's share M's QBI of $24,000, reduced by
$9,600. B and C's section 199A deduction is equal to
the lesser of 20% of the QBI from the business as
limited ($14,400) or 20% of B and C's taxable
income ($375,000 x 20% = $75,000). Therefore, B
and C's section 199A deduction is $14,400 for 2018.

Example 7 to paragraph (d)(4). (i) F, an unmar-
ried individual, owns as a sole proprietor 100 percent
of three trades or businesses, Business X, Business
Y, and Business Z. None of the businesses hold
qualified property. F does not aggregate the trades or
businesses under § 1.199A-4. For taxable year 2018,
Business X generates $1 million of QBI and pays
$500,000 of W-2 wages with respect to the business.
Business Y also generates $1 million of QBI but
pays no wages. Business Z generates $2,000 of QBI
and pays $500,000 of W-2 wages with respect to the
business. F also has $750,000 of wage income from
employment with an unrelated company. After al-
lowable deductions unrelated to the businesses, F's
taxable income is $2,722,000.

(ii) Because F's taxable income is above the
threshold amount, the QBI component of F's section
199A deduction is subject to the W-2 wage and
UBIA of qualified property limitations. These limi-
tations must be applied on a business-by-business
basis. None of the businesses hold qualified prop-
erty, therefore only the 50% of W-2 wage limitation
must be calculated. Because QBI from each business
is positive, F applies the limitation by determining
the lesser of 20% of QBI and 50% of W-2 wages for
each business. For Business X, the lesser of 20% of
QBI ($1,000,000 x 20 percent = $200,000) and 50%
of Business X's W-2 wages ($500,000 x 50% =
$250,000) is $200,000. Business Y pays no W-2
wages. The lesser of 20% of Business Y's QBI
($1,000,000 x 20% = $200,000) and 50% of its W-2
wages (zero) is zero. For Business Z, the lesser of

20% of QBI ($2,000 x 20% = $400) and 50% of
W-2 wages ($500,000 x 50% = $250,000) is $400.

(iii) Next, F must then combine the amounts
determined in paragraph (ii) of this example and
compare that sum to 20% of F's taxable income. The
lesser of these two amounts equals F's section 199A
deduction. The total of the combined amounts in
paragraph (ii) is $200,400 ($200,000 + 0 + 400).
Twenty percent of F's taxable income is $544,400
($2,722,000 x 20%). Thus, F's section 199A deduc-
tion for 2018 is $200,400.

Example 8 to paragraph (d)(4). (i) Assume the
same facts as in Example 7 of this paragraph (d)(4),
except that F aggregates Business X, Business Y,
and Business Z under the rules of § 1.199A-4.

(ii) Because F's taxable income is above the
threshold amount, the QBI component of F's section
199A deduction is subject to the W-2 wage and
UBIA of qualified property limitations. Because the
businesses are aggregated, these limitations are ap-
plied on an aggregated basis. None of the businesses
holds qualified property, therefore only the W-2
wage limitation must be calculated. F applies the
limitation by determining the lesser of 20% of the
QBI from the aggregated businesses, which is
$400,400 ($2,002,000 x 20%) and 50% of W-2
wages from the aggregated businesses, which is
$500,000 ($1,000,000 x 50%). F's section 199A
deduction is equal to the lesser of $400,400 and 20%
of F's taxable income ($2,722,000 x 20% =
$544,400). Thus, F's section 199A deduction for
2018 is $400,400.

Example 9 to paragraph (d)(4). (i) Assume the
same facts as in Example 7 of this paragraph (d)(4),
except that for taxable year 2018, Business Z gen-
erates a loss that results in ($600,000) of negative
QBI and pays $500,000 of W-2 wages. After allow-
able deductions unrelated to the businesses, F's tax-
able income is $2,120,000. Because Business Z had
negative QBI, F must offset the positive QBI from
Business X and Business Y with the negative QBI
from Business Z in proportion to the relative
amounts of positive QBI from Business X and Busi-
ness Y. Because Business X and Business Y pro-
duced the same amount of positive QBI, the negative
QBI from Business Z is apportioned equally among
Business X and Business Y. Therefore, the adjusted
QBI for each of Business X and Business Y is
$700,000 ($1 million plus 50% of the negative QBI
of $600,000). The adjusted QBI in Business Z is $0,
because its negative QBI has been fully apportioned
to Business X and Business Y.

(ii) Because F's taxable income is above the
threshold amount, the QBI component of F's section
199A deduction is subject to the W-2 wage and
UBIA of qualified property limitations. These limi-
tations must be applied on a business-by-business
basis. None of the businesses hold qualified prop-
erty, therefore only the 50% of W-2 wage limitation
must be calculated. For Business X, the lesser of
20% of QBI ($700,000 x 20% = $140,000) and 50%
of W-2 wages ($500,000 x 50% = $250,000) is
$140,000. Business Y pays no W-2 wages. The
lesser of 20% of Business Y's QBI ($700,000 x 20%
= $140,000) and 50% of its W-2 wages (zero) is
zero.

(iii) F must combine the amounts determined in
paragraph (ii) of this example and compare the sum

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to 20% of taxable income. F's section 199A deduc-
tion equals the lesser of these two amounts. The
combined amount from paragraph (ii) of this exam-
ple is $140,000 ($140,000 + $0) and 20% of F's
taxable income is $424,000 ($2,120,000 x 20%).
Thus, F's section 199A deduction for 2018 is
$140,000. There is no carryover of any loss into the
following taxable year for purposes of section 199A.

Example 10 to paragraph (d)(4). (i) Assume the
same facts as in Example 9 of this paragraph (d)(4),
except that F aggregates Business X, Business Y,
and Business Z under the rules of § 1.199A-4.

(ii) Because F's taxable income is above the
threshold amount, the QBI component of F's section
199A deduction is subject to the W-2 wage and
UBIA of qualified property limitations. Because the
businesses are aggregated, these limitations are ap-
plied on an aggregated basis. None of the businesses
holds qualified property, therefore only the W-2
wage limitation must be calculated. F applies the
limitation by determining the lesser of 20% of the
QBI from the aggregated businesses ($1,400,000 x
20% = $280,000) and 50% of W-2 wages from the
aggregated businesses ($1,000,000 x 50% =
$500,000), or $280,000. F's section 199A deduction
is equal to the lesser of $280,000 and 20% of F's
taxable income ($2,120,000 x 20% = $424,000).
Thus, F's section 199A deduction for 2018 is
$280,000. There is no carryover of any loss into the
following taxable year for purposes of section 199A.

Example 11 to paragraph (d)(4). (i) Assume the
same facts as in Example 7 of this paragraph (d)(4),
except that Business Z generates a loss that results in
($2,150,000) of negative QBI and pays $500,000 of
W-2 wages with respect to the business in 2018.
Thus, F has a negative combined QBI of ($150,000)
when the QBI from all of the businesses are added
together ($1 million plus $1 million minus the loss of
($2,150,000)). Because F has a negative combined
QBI for 2018, F has no section 199A deduction with
respect to any trade or business for 2018. Instead, the
negative combined QBI of ($150,000) carries for-
ward and will be treated as negative QBI from a
separate trade or business for purposes of computing
the section 199A deduction in the next taxable year.
None of the W-2 wages carry forward. However, for
income tax purposes, the $150,000 loss may offset
F's $750,000 of wage income (assuming the loss is
otherwise allowable under the Code).

(ii) In taxable year 2019, Business X generates
$200,000 of net QBI and pays $100,000 of W-2
wages with respect to the business. Business Y gen-
erates $150,000 of net QBI but pays no wages.
Business Z generates a loss that results in ($120,000)
of negative QBI and pays $500 of W-2 wages with
respect to the business. F also has $750,000 of wage
income from employment with an unrelated com-
pany. After allowable deductions unrelated to the
businesses, F's taxable income is $960,000. Pursuant
to paragraph (d)(2)(iii)(B) of this section, the
($150,000) of negative QBI from 2018 is treated as
arising in 2019 from a separate trade or business.
Thus, F has overall net QBI of $80,000 when all
trades or businesses are taken together ($200,000
plus $150,000 minus $120,000 minus the carryover
loss of $150,000). Because Business Z had negative
QBI and F also has a negative QBI carryover
amount, F must offset the positive QBI from Busi-

ness X and Business Y with the negative QBI from
Business Z and the carryover amount in proportion
to the relative amounts of positive QBI from Busi-
ness X and Business Y. Because Business X pro-
duced 57.14% of the total QBI from Business X and
Business Y, 57.14% of the negative QBI from Busi-
ness Z and the negative QBI carryforward must be
apportioned to Business X, and the remaining
42.86% allocated to Business Y. Therefore, the ad-
justed QBI in Business X is $45,722 ($200,000 mi-
nus 57.14% of the loss from Business Z ($68,568),
minus 57.14% of the carryover loss ($85,710). The
adjusted QBI in Business Y is $34,278 ($150,000,
minus 42.86% of the loss from Business Z ($51,432)
minus 42.86% of the carryover loss ($64,290)). The
adjusted QBI in Business Z is $0, because its nega-
tive QBI has been apportioned to Business X and
Business Y.

(iii) Because F's taxable income is above the
threshold amount, the QBI component of F's section
199A deduction is subject to the W-2 wage and
UBIA of qualified property limitations. These limi-
tations must be applied on a business-by-business
basis. None of the businesses hold qualified prop-
erty, therefore only the 50% of W-2 wage limitation
must be calculated. For Business X, 20% of QBI is
$9,144 ($45,722 x 20%) and 50% of W-2 wages is
$50,000 ($100,000 x 50%), so the lesser amount is
$9,144. Business Y pays no W-2 wages. Twenty
percent of Business Y's QBI is $6,856 ($34,278 x
20%) and 50% of its W-2 wages (zero) is zero, so
the lesser amount is zero.

(iv) F must then compare the combined amounts
determined in paragraph (iii) of this example to 20%
of F's taxable income. The section 199A deduction
equals the lesser of these amounts. F's combined
amount from paragraph (iii) of this example is
$9,144 ($9,144 plus zero) and 20% of F's taxable
income is $192,000 ($960,000 x 20%) Thus, F's
section 199A deduction for 2019 is $9,144. There is
no carryover of any negative QBI into the following
taxable year for purposes of section 199A.

Example 12 to paragraph (d)(4). (i) Assume the
same facts as in Example 11 of this paragraph (d)(4),
except that F aggregates Business X, Business Y,
and Business Z under the rules of § 1.199A-4. For
2018, F's QBI from the aggregated trade or business
is ($150,000). Because F has a combined negative
QBI for 2018, F has no section 199A deduction with
respect to any trade or business for 2018. Instead, the
negative combined QBI of ($150,000) carries for-
ward and will be treated as negative QBI from a
separate trade or business for purposes of computing
the section 199A deduction in the next taxable year.
However, for income tax purposes, the $150,000 loss
may offset taxpayer's $750,000 of wage income
(assuming the loss is otherwise allowable under the
Code).

(ii) In taxable year 2019, F will have QBI of
$230,000 and W-2 wages of $100,500 from the
aggregated trade or business. F also has $750,000 of
wage income from employment with an unrelated
company. After allowable deductions unrelated to
the businesses, F's taxable income is $960,000.
F must treat the negative QBI carryover loss
($150,000) from 2018 as a loss from a separate trade
or business for purposes of section 199A. This loss
will offset the positive QBI from the aggregated

trade or business, resulting in an adjusted QBI of
$80,000 ($230,000 - $150,000).

(iii) Because F's taxable income is above the
threshold amount, the QBI component of F's section
199A deduction is subject to the W-2 wage and
UBIA of qualified property limitations. These limi-
tations must be applied on a business-by-business
basis. None of the businesses hold qualified prop-
erty, therefore only the 50% of W-2 wage limitation
must be calculated. For the aggregated trade or busi-
ness, the lesser of 20% of QBI ($80,000 x 20% =
$16,000) and 50% of W-2 wages ($100,500 x 50%
= $50,250) is $16,000. F's section 199A deduction
equals the lesser of these amounts ($16,000) and
20% of F's taxable income ($960,000 x 20% =
$192,000). Thus, F's section 199A deduction for
2019 is $16,000. There is no carryover of any neg-
ative QBI into the following taxable year for pur-
poses of section 199A.

(e) Special rules- (1) Effect of deduc-
tion. In the case of a partnership or S
corporation, section 199A is applied at the
partner or shareholder level. The section
199A deduction has no effect on the ad-
justed basis of a partner's interest in the
partnership, the adjusted basis of a share-
holder's stock in an S corporation, or an S
corporation's accumulated adjustments
account.

(2) Self-employment tax and net invest-
ment income tax. The deduction under
section 199A does not reduce net earnings
from self-employment under section 1402
or net investment income under section
1411.

(3) Commonwealth of Puerto Rico. If
all of an individual's QBI from sources
within the Commonwealth of Puerto Rico
is taxable under section 1 of the Code for
a taxable year, then for purposes of deter-
mining the QBI of such individual for
such taxable year, the term "United
States" includes the Commonwealth of
Puerto Rico.

(4) Coordination with alternative min-
imum tax. For purposes of determining
alternative minimum taxable income un-
der section 55, the deduction allowed un-
der section 199A(a) for a taxable year is
equal in amount to the deduction allowed
under section 199A(a) in determining tax-
able income for that taxable year (that is,
without regard to any adjustments under
sections 56 through 59).

(5) Imposition of accuracy-related pen-
alty on underpayments. For rules related to
the imposition of the accuracy-related pen-
alty on underpayments for taxpayers who
claim the deduction allowed under section
199A, see section 6662(d)(1)(C).

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(6) Reduction for income received from
cooperatives. In the case of any trade or
business of a patron of a specified agricul-
tural or horticultural cooperative, as de-
fined in section 199A(g)(4), the amount of
section 199A deduction determined under
paragraphs (c) or (d) of this section with
respect to such trade or business must be
reduced by the lesser of:

(i) Nine percent of the QBI with re-
spect to such trade or business as is prop-
erly allocable to qualified payments re-
ceived from such cooperative, or

(ii) 50 percent of the W-2 wages with
respect to such trade or business as are so
allocable as determined under § 1.199A-2.

(f) Effective/ applicability date-(1)
General rule. Except as provided in para-
graph (f)(2) of this section, the provisions
of this section apply to taxable years end-
ing after the date the Treasury decision
adopting these regulations as final regula-
tions is published in the Federal Register.
However, taxpayers may rely on the rules
of this section until the date the Treasury
decision adopting these regulations as fi-
nal regulations is published in the Federal
Register.

(2) Exception for non-calendar year
RPE. For purposes of determining QBI,
W-2 wages, and UBIA of qualified prop-
erty, if an individual receives any of these
items from an RPE with a taxable year
that begins before January 1, 2018 and
ends after December 31, 2017, such items
are treated as having been incurred by the
individual during the individual's taxable
year in which or with which such RPE
taxable year ends.

Par. 4. Section 1.199A-2 is added to
read as follows:

### § 1.199A-2 Determination of W-2

wages and unadjusted basis immediately
after acquisition of qualified property

(a) Scope-(1) In general. This section
provides guidance on calculating a trade
or business's W-2 wages properly alloca-
ble to QBI (W-2 wages) and the trade or
business's unadjusted basis immediately
after acquisition of all qualified property
(UBIA of qualified property). The provi-
sions of this section apply solely for pur-
poses of section 199A of the Internal Rev-
enue Code (Code).

(2) W-2 wages. Paragraph (b) of this
section provides guidance on the determi-
nation of W-2 wages. The determination
of W-2 wages must be made for each
trade or business by the individual or RPE
that directly conducts the trade or business
before applying the aggregation rules of
§ 1.199A-4. In the case of W-2 wages
paid by an RPE, the RPE must determine
and report W-2 wages for each trade or
business conducted by the RPE. W-2
wages are presumed to be zero if not
determined and reported for each trade or
business.

(3) UBIA of qualified property. Para-
graph (c) of this section provides guidance
on the determination of the UBIA of qual-
ified property. The determination of the
UBIA of qualified property must be made
for each trade or business by the individ-
ual or RPE that directly conducts the trade
or business before applying the aggrega-
tion rules of § 1.199A-4. In the case of
qualified property held by an RPE, each
partner's or shareholder's share of the
UBIA of qualified property is an amount
which bears the same proportion to the
total UBIA of qualified property as the
partner's or shareholder's share of tax de-
preciation bears to the RPE's total tax
depreciation with respect to the property
for the year. In the case of qualified prop-
erty held by a partnership which does not
produce tax depreciation during the year
(for example, property that has been held
for less than 10 years but whose recovery
period has ended), each partner's share of
the UBIA of qualified property is based on
how gain would be allocated to the part-
ners pursuant to sections 704(b) and
704(c) if the qualified property were sold
in a hypothetical transaction for cash
equal to the fair market value of the qual-
ified property. In the case of qualified
property held by an S corporation which
does not produce tax depreciation during
the year, each shareholder's share of the
UBIA of qualified property is a share of
the unadjusted basis proportionate to the
ratio of shares in the S corporation held by
the shareholder over the total shares of the
S corporation. The UBIA of qualified
property is presumed to be zero if not
determined and reported for each trade or
business.

(b) W-2 wages-(1) In general. Sec-
tion 199A(b)(2)(B) provides limitations

on the section 199A deduction based on
the W-2 wages paid with respect each
trade or business. Section 199A(b)(4)(B)
provides that W-2 wages do not include
any amount which is not properly alloca-
ble to QBI for purposes of section
199A(c)(1). This section provides a three
step process for determining the W-2
wages paid with respect to a trade or busi-
ness that are properly allocable to QBI.
First, each individual or RPE must deter-
mine its total W-2 wages paid for the
taxable year under the rules in paragraph
(b)(2) of this section. Second, each indi-
vidual or RPE must allocate its W-2
wages between or among one or more
trades or businesses under the rules in
paragraph (b)(3) of this section. Third,
each individual or RPE must determine
the amount of such wages with respect to
each trade or business that are allocable to
the QBI of the trade or business under the
rules in paragraph (b)(4) of this section.

(2) Definition of W-2 wages-(i) In
general. Section 199A(b)(4)(A) provides
that the term W-2 wages means with re-
spect to any person for any taxable year of
such person, the amounts described in sec-
tion 6051(a)(3) and (8) paid by such per-
son with respect to employment of
employees by such person during the cal-
endar year ending during such taxable
year. Thus, the term W-2 wages includes
the total amount of wages as defined in
section 3401(a) plus the total amount of
elective deferrals (within the meaning of
section 402(g)(3)), the compensation de-
ferred under section 457, and the amount of
designated Roth contributions (as defined in
section 402A). For this purpose, except as
provided in paragraphs (b)(2)(iv)(C)(2) and
(b)(2)(iv)(D) of this section, the Forms
W-2, "Wage and Tax Statement," or any
subsequent form or document used in deter-
mining the amount of W-2 wages are those
issued for the calendar year ending during
the individual's or RPE's taxable year for
wages paid to employees (or former em-
ployees) of the individual or RPE for em-
ployment by the individual or RPE. For
purposes of this section, employees of the
individual or RPE are limited to employees
of the individual or RPE as defined in sec-
tion 3121(d)(1) and (2). (For purposes of
section 199A, this includes officers of an S
corporation and employees of an individual
or RPE under common law.)

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(ii) Wages paid by a person other than
a common law employer. In determining
W-2 wages, an individual or RPE may
take into account any W-2 wages paid by
another person and reported by the other
person on Forms W-2 with the other per-
son as the employer listed in Box c of the
Forms W-2, provided that the W-2 wages
were paid to common law employees or
officers of the individual or RPE for em-
ployment by the individual or RPE. In
such cases, the person paying the W-2
wages and reporting the W-2 wages on
Forms W-2 is precluded from taking into
account such wages for purposes of deter-
mining W-2 wages with respect to that
person. For purposes of this paragraph,
persons that pay and report W-2 wages on
behalf of or with respect to others can
include certified professional employer
organizations under section 7705, statu-
tory employers under section 3401(d)(1),
and agents under section 3504.

(iii) Requirement that wages must be
reported on return filed with the Social Se-
curity Administration (SSA)-(A) In gen-
eral. Pursuant to section 199A(b)(4)(C), the
term W-2 wages does not include any
amount that is not properly included in a
return filed with SSA on or before the 60th
day after the due date (including extensions)
for such return. Under § 31.6051-2 of this
chapter, each Form W-2 and the transmittal
Form W-3, "Transmittal of Wage and Tax
Statements," together constitute an informa-
tion return to be filed with SSA. Similarly,
each Form W-2c, "Corrected Wage and
Tax Statement," and the transmittal Form
W-3 or W-3c, "Transmittal of Corrected
Wage and Tax Statements," together consti-
tute an information return to be filed with
SSA. In determining whether any amount
has been properly included in a return filed
with SSA on or before the 60th day after the
due date (including extensions) for such re-
turn, each Form W-2 together with its ac-
companying Form W-3 will be considered
a separate information return and each Form
W-2c together with its accompanying Form
W-3 or Form W-3c will be considered a
separate information return. Section 6071(c)
provides that Forms W-2 and W-3 must be
filed on or before January 31 of the year
following the calendar year to which such
returns relate (but see the special rule in
§ 31.6071(a)-1T(a)(3)(1) of this chapter for
monthly returns filed under § 31.6011(a)-

5(a) of this chapter). Corrected Forms W-2
are required to be filed with SSA on or
before January 31 of the year following the
year in which the correction is made.

(B) Corrected return filed to correct a
return that was filed within 60 days of the
due date. If a corrected information return
(Return B) is filed with SSA on or before
the 60th day after the due date (including
extensions) of Return B to correct an in-
formation return (Return A) that was filed
with SSA on or before the 60th day after
the due date (including extensions) of the
information return (Return A) and para-
graph (b)(2)(iii)(C) of this section does
not apply, then the wage information on
Return B must be included in determining
W-2 wages. If a corrected information
return (Return D) is filed with SSA later
than the 60th day after the due date (in-
cluding extensions) of Return D to correct
an information return (Return C) that was
filed with SSA on or before the 60th day
after the due date (including extensions)
of the information return (Return C), and
if Return D reports an increase (or in-
creases) in wages included in determining
W-2 wages from the wage amounts re-
ported on Return C, then such increase (or
increases) on Return D will be disre-
garded in determining W-2 wages (and
only the wage amounts on Return C may
be included in determining W-2 wages).
If Return D reports a decrease (or de-
creases) in wages included in determining
W-2 wages from the amounts reported on
Return C, then, in determining W-2
wages, the wages reported on Return C
must be reduced by the decrease (or de-
creases) reflected on Return D.

(C) Corrected return filed to correct a
return that was filed later than 60 days
after the due date. If an information return
(Return F) is filed to correct an informa-
tion return (Return E) that was not filed
with SSA on or before the 60th day after
the due date (including extensions) of Re-
turn E, then Return F (and any subsequent
information returns filed with respect to
Return E) will not be considered filed on
or before the 60th day after the due date
(including extensions) of Return F (or the
subsequent corrected information return).
Thus, if a Form W-2c (or corrected Form
W-2) is filed to correct a Form W-2 that
was not filed with SSA on or before the
60th day after the due date (including ex-

tensions) of the information return includ-
ing the Form W-2 (or to correct a Form
W-2c relating to an information return
including a Form W-2 that had not been
filed with SSA on or before the 60th day
after the due date (including extensions)
of the information return including the
Form W-2), then the information return
including this Form W-2c (or corrected
Form W-2) will not be considered to have
been filed with SSA on or before the 60th
day after the due date (including exten-
sions) for this information return includ-
ing the Form W-2c (or corrected Form
W-2), regardless of when the information
return including the Form W-2c (or cor-
rected Form W-2) is filed.

(iv) Methods for calculating W-2 wag-
es-(A) In general. The Secretary may
provide for methods to be used in calcu-
lating W-2 wages, including W-2 wages
for short taxable years by publication in
the Internal Revenue Bulletin (see
§ 601.601(d)(2)(ii)(b) of this chapter).

(B) Acquisition or disposition of a
trade or business-(1) In general. In the
case of an acquisition or disposition of a
trade or business, the major portion of a
trade or business, or the major portion of
a separate unit of a trade or business that
causes more than one individual or entity
to be an employer of the employees of the
acquired or disposed of trade or business
during the calendar year, the W-2 wages
of the individual or entity for the calendar
year of the acquisition or disposition are
allocated between each individual or en-
tity based on the period during which the
employees of the acquired or disposed of
trade or business were employed by the
individual or entity, regardless of which
permissible method is used for reporting
predecessor and successor wages on Form
W-2, "Wage and Tax Statement." For this
purpose, the period of employment is de-
termined consistently with the principles
for determining whether an individual is
an employee described in § 1.199A-2(b).

(2) Acquisition or disposition. For pur-
poses of this paragraph (b)(2)(iv)(B), the
term acquisition or disposition includes
an incorporation, a formation, a liquida-
tion, a reorganization, or a purchase or
sale of assets.

(C) Application in the case of a person
with a short taxable year-(1) In general.
In the case of an individual or RPE with a

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short taxable year, subject to the rules of
paragraph (b)(2) of this section, the W-2
wages of the individual or RPE for the
short taxable year include only those
wages paid during the short taxable year
to employees of the individuals or RPE,
only those elective deferrals (within the
meaning of section 402(g)(3)) made dur-
ing the short taxable year by employees of
the individual or RPE and only compen-
sation actually deferred under section 457
during the short taxable year with respect
to employees of the individual or RPE.

(2) Short taxable year that does not
include December 31. If an individual or
RPE has a short taxable year that does not
contain a calendar year ending during
such short taxable year, wages paid to
employees for employment by such indi-
vidual or RPE during the short taxable
year are treated as W-2 wages for such
short taxable year for purposes of para-
graph (b) of this section (if the wages
would otherwise meet the requirements to
be W-2 wages under this section but for
the requirement that a calendar year must
end during the short taxable year).

(D) Remuneration paid for services
performed in the Commonwealth of
Puerto Rico. In the case of an individual
or RPE that conducts a trade or business
in the Commonwealth of Puerto Rico, the
determination of W-2 wages of such in-
dividual or RPE will be made without
regard to any exclusion under section
3401(a)(8) for remuneration paid for ser-
vices performed in the Commonwealth of
Puerto Rico. The individual or RPE must
maintain sufficient documentation (for ex-
ample, Forms 499R-2/W-2PR) to sub-
stantiate the amount of remuneration paid
for services performed in the Common-
wealth of Puerto Rico that is used in de-
termining the W-2 wages of such individ-
ual or RPE with respect to any trade or
business conducted in the Commonwealth
of Puerto Rico.

(3) Allocation of wages to trades or
businesses. After calculating total W-2
wages for a taxable year, each individual
or RPE that directly conducts more than
one trade or business must allocate those
wages among its various trades or busi-
nesses. W-2 wages must be allocated to
the trade or business that generated those
wages. In the case of W-2 wages that are
allocable to more than one trade or busi-

ness, the portion of the W-2 wages allo-
cable to each trade or business is deter-
mined in the same manner as the expenses
associated with those wages are allocated
among the trades or businesses under
§ 1.199A-3(b)(5).

(4) Allocation of wages to QBI. Once
W-2 wages for each trade or business
have been determined, each individual or
RPE must identify the amount of W-2
wages properly allocable to QBI for each
trade or business. W-2 wages are properly
allocable to QBI if the associated wage
expense is taken into account in comput-
ing QBI under § 1.199A-3. In the case of
an RPE, the wage expense must be allo-
cated and reported to the partners or
shareholders of the RPE as required by the
Code, including subchapters K and S. The
RPE must also identify and report the
associated W-2 wages to its partners or
shareholders.

(5) Non-duplication rule. Amounts that
are treated as W-2 wages for a taxable
year under any method cannot be treated
as W-2 wages of any other taxable year.
Also, an amount cannot be treated as W-2
wages by more than one trade or business.

(c) UBIA of qualified property-(1)
Qualified property-(i) In general. The
term qualified property means, with re-
spect to any trade or business of an indi-
vidual or RPE for a taxable year, tangible
property of a character subject to the al-
lowance for depreciation under section
167(a)-

(A) Which is held by, and available for
use in, the trade or business at the close of
the taxable year,

(B) Which is used at any point during
the taxable year in the trade or business's
production of QBI, and

(C) The depreciable period for which
has not ended before the close of the in-
dividual's or RPE's taxable year.

(ii) Improvements to qualified prop-
erty. In the case of any addition to, or
improvement of, qualified property that
has already been placed in service by the
individual or RPE, such addition or im-
provement is treated as separate qualified
property first placed in service on the date
such addition or improvement is placed in
service for purposes of paragraph (c)(2) of
this section.

(iii) Adjustments under sections 734(b)
and 743(b). Basis adjustments under sec-

tions 734(b) and 743(b) are not treated as
qualified property.

(iv) Property acquired at end of year.
Property is not qualified property if the
property is acquired within 60 days of the
end of the taxable year and disposed of
within 120 days without having been used
in a trade or business for at least 45 days
prior to disposition, unless the taxpayer
demonstrates that the principal purpose of
the acquisition and disposition was a pur-
pose other than increasing the section
199A deduction.

(2) Depreciable period-(i) In general.
The term depreciable period means, with
respect to qualified property of a trade or
business, the period beginning on the date
the property was first placed in service by
the individual or RPE and ending on the
later of-

(A) The date that is 10 years after such
date, or

(B) The last day of the last full year in
the applicable recovery period that would
apply to the property under section 168(c),
regardless of any application of section
168(g).

(ii) Additional first-year depreciation
under section 168. The additional first-
year depreciation deduction allowable un-
der section 168 (for example, under sec-
tion 168(k) or (m)) does not affect the
applicable recovery period under this
paragraph for the qualified property.

(iii) Qualified property acquired in
transactions subject to section 1031 or
section 1033. For purposes of paragraph
(c)(2)(i) of this section, qualified property
that is acquired in a like-kind exchange, as
defined in § 1.168(i)-6(b)(11), or in an
involuntary conversion, as defined in
§ 1.168(i)-6(b)(12), is treated as replace-
ment MACRS property as defined in
§ 1.168(i)-6(b)(1). For purposes of para-
graph (c)(2)(i) of this section, the date on
which the replacement MACRS property
was first placed in service by the individ-
ual or RPE is determined as follows-

(A) Except as provided in paragraph
(c)(2)(iii)(C) of this section, the date the
exchanged basis, as defined in § 1.168(i)-
6(b)(7), in the replacement MACRS prop-
erty was first placed in service by the trade
or business is the date on which the relin-
quished property was first placed in ser-
vice by the individual or RPE; and

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(B) Except as provided in paragraph
(c)(2)(iii)(C) of this section, the date the
excess basis, as defined in § 1.168(i)-
6(b)(8), in the replacement MACRS prop-
erty was first placed in service by the
individual or RPE is the date on which the
replacement MACRS property was first
placed in service by the individual or
RPE; or

(C) If the individual or RPE makes an
election under § 1.168(i)-6(i)(1) (the
election not to apply § 1.168(i)-6)), the
date the exchanged basis and excess basis
in the replacement MACRS property was
first placed in service by the trade or busi-
ness is the date on which the replacement
MACRS property was first placed in ser-
vice by the individual or RPE.

(iv) Qualified property acquired in
transactions subject to section 168(i)(7).
If an individual or RPE acquires qualified
property in a transaction described in sec-
tion 168(i)(7)(B) (pertaining to treatment
of transferees in certain nonrecognition
transactions), the individual or RPE must
determine the date on which the qualified
property was first placed in service for
purposes of paragraph (c)(2)(i) of this sec-
tion as follows-

(A) For the portion of the transferee's
unadjusted basis in the qualified property
that does not exceed the transferor's un-
adjusted basis in such property, the date
such portion was first placed in service by
the transferee is the date on which the
transferor first placed the qualified prop-
erty in service; and

(B) For the portion of the transferee's
unadjusted basis in the qualified property
that exceeds the transferor's unadjusted
basis in such property, such portion is
treated as separate qualified property that
the transferee first placed in service on the
date of the transfer.

(3) Unadjusted basis immediately after
acquisition. The term unadjusted basis
immediately after acquisition (UBIA)
means the basis on the placed in service
date of the property as determined under
section 1012 or other applicable sections
of Chapter 1, including subchapters O (re-
lating to gain or loss on dispositions of
property), C (relating to corporate distri-
butions and adjustments), K (relating to
partners and partnerships), and P (relating
to capital gains and losses). UBIA is de-
termined without regard to any adjust-

ments described in section 1016(a)(2) or
(3), to any adjustments for tax credits
claimed by the individual or RPE (for
example, under section 50(c)), or to any
adjustments for any portion of the basis
for which the individual or RPE has
elected to treat as an expense (for exam-
ple, under sections 179, 179B, or 179C).
However, UBIA does reflect the reduction
in basis for the percentage of the individ-
ual's or RPE's use of property for the
taxable year other than in the trade or
business.

(4) Examples. The provisions of this
paragraph (c) are illustrated by the follow-
ing examples:

Example 1 to paragraph (c)(4). (i) On January 5,
2012, A purchases for $1 million and places in
service Real Property X in A's trade or business. A's
trade or business is not an SSTB. A's basis in Real
Property X under section 1012 is $1 million. Real
Property X is qualified property within the meaning
of section 199A(b)(6). As of December 31, 2018,
A's basis in Real Property X, as adjusted under
section 1016(a)(2) for depreciation deductions under
section 168(a), is $821,550.

(ii) For purposes of section 199A(b)(2)(B)(ii)
and this section, A's UBIA of Real Property X is its
$1 million cost basis under section 1012, regardless
of any later depreciation deductions under section
168(a) and resulting basis adjustments under section
1016(a)(2).

Example 2 to paragraph (c)(4). The facts are the
same as in Example 1 of this paragraph (c)(4),
except that on January 15, 2019, A enters into a
like-kind exchange under section 1031 in which A
exchanges Real Property X for Real Property Y.
Real Property Y has a value of $1 million. No cash
or other property is involved in the exchange. As of
January 15, 2019, A's basis in Real Property X, as
adjusted under section 1016(a)(2) for depreciation
deductions under section 168(a), is $820,482. A's
UBIA in Real Property Y is $820,482 as determined
under section 1031(d) (A's adjusted basis in Real
Property X carried over to Real Property Y). Pursu-
ant to paragraph (c)(2)(iii)(A) of this section, for
purposes of determining the depreciable period of
Real Property Y is first placed in service by A on
January 5, 2012, which is the date on which Property
X was first placed in service by A.

Example 3 to paragraph (c)(4). (i) C operates a
trade or business that is not an SSTB as a sole
proprietorship. On January 5, 2011, C purchases for
$10,000 and places in service Machinery Y in C's
trade or business. C's basis in Machinery Y under
section 1012 is $10,000. Machinery Y is qualified
property within the meaning of section 199A(b)(6).
Assume that Machinery Y's recovery period under
section 168(c) is 10 years, and C depreciates Ma-
chinery Y under the general depreciation system
by using the straight-line depreciation method, a
10-year recovery period, and the half-year conven-
tion. As of December 31, 2018, C's basis in Ma-
chinery Y, as adjusted under section 1016(a)(2)
for depreciation deductions under section 168(a),

is $2,500. On January 1, 2019, C incorporates the
sole proprietorship and elects to treat the newly
formed entity as an S corporation for Federal
income tax purposes. C contributes Machinery Y
and all other assets of the trade or business to the
S corporation in a non-recognition transaction un-
der section 351. The S corporation immediately
places all the assets in service.

(ii) For purposes of section 199A(b)(2)(B)(ii)
and this section, C's UBIA of Machinery Y from
2011 through 2018 is its $10,000 cost basis under
section 1012, regardless of any later depreciation
deductions under section 168(a) and resulting basis
adjustments under section 1016(a)(2). Pursuant to
paragraph (c)(3) of this section, S corporation's
UBIA of Machinery Y is determined under the ap-
plicable rules of subchapter C as of date the S
corporation places it in service. Therefore, the S
corporation's UBIA of Machinery Y is $2,500, the
basis of the property under section 362 at the time
the S corporation places the property in service.
Pursuant to paragraph (c)(2)(iv)(A) of this section,
for purposes of determining the depreciable period
of Machinery Y, the S corporation's placed in ser-
vice date will be the date C originally placed the
property in service in 2011. Therefore, Machinery Y
may be qualified property of the S corporation (as-
suming it continues to be used in the business) for
2019 and 2020 and will not be qualified property of
the S corporation after 2020, because its depreciable
period will have expired.

(d) Effective/ applicability date-(1)
General rule. Except as provided in para-
graph (d)(2) of this section, the provisions
of this section apply to taxable years end-
ing after the date the Treasury decision
adopting these regulations as final regula-
tions is published in the Federal Register.
However, taxpayers may rely on the rules
of this section until the date the Treasury
decision adopting these regulations as fi-
nal regulations is published in the Federal
Register.

(2) Exceptions-(i) Anti-abuse rules.
The provisions of paragraph (c)(1)(iv) of
this section apply to taxable years ending
after December 22, 2017.

(ii) Non-calendar year RPE. For pur-
poses of determining QBI, W-2 wages,
and UBIA of qualified property, if an in-
dividual receives any of these items from
an RPE with a taxable year that begins
before January 1, 2018 and ends after
December 31, 2017, such items are treated
as having been incurred by the individual
during the individual's taxable year in
which or with which such RPE taxable
year ends.

Par. 5. Section 1.199A-3 is added to
read as follows:

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§ 1.199A-3 Qualified business income,
qualified REIT dividends, and qualified
PTP income.

(a) In general. This section provides
rules on the determination of a trade or
business's QBI, as well as the determina-
tion of qualified REIT dividends and qual-
ified PTP income. The provisions of this
section apply solely for purposes of sec-
tion 199A of the Internal Revenue Code
(Code). Paragraph (b) of this section pro-
vides rules for the determination of QBI.
Paragraph (c) of this section provides
rules for the determination of qualified
REIT dividends and qualified PTP in-
come. QBI must be determined and re-
ported for each trade or business by the
individual or RPE that directly conducts
the trade or business before applying the
aggregation rules of § 1.199A-4.

(b) Definition of qualified business in-
come-(1) In general. For purposes of
this section, the term qualified business
income (QBI) means, for any taxable year,
the net amount of qualified items of in-
come, gain, deduction, and loss with re-
spect to any trade or business of the tax-
payer as described in paragraph (b)(2) of
this section, provided the other require-
ments of this section and section 199A are
satisfied (including, for example, the ex-
clusion of income not effectively con-
nected with a United States trade or busi-
ness).

(i) Section 751 gain. With respect to a
partnership, if section 751(a) or (b) ap-
plies, then gain or loss attributable to as-
sets of the partnership giving rise to ordi-
nary income under section 751(a) or (b) is
considered attributable to the trades or
businesses conducted by the partnership,
and is taken into account for purposes of
computing QBI.

(ii) Guaranteed payments for the use of
capital. Income attributable to a guaran-
teed payment for the use of capital is not
considered to be attributable to a trade or
business, and thus is not taken into ac-
count for purposes of computing QBI;
however, the partnership's deduction as-
sociated with the guaranteed payment will
be taken into account for purposes of
computing QBI if such deduction is prop-
erly allocable to the trade or business and
is otherwise deductible for Federal in-
come tax purposes.

(iii) Section 481 adjustments. Section
481 adjustments (whether positive or neg-
ative) are taken into account for purposes
of computing QBI to the extent that the
requirements of this section and section
199A are otherwise satisfied, but only if
the adjustment arises in taxable years end-
ing after December 31, 2017.

(iv) Previously disallowed losses. Gen-
erally, previously disallowed losses or de-
ductions (including under sections 465,
469, 704(d), and 1366(d)) allowed in the
taxable year are taken into account for
purposes of computing QBI. However,
losses or deductions that were disallowed,
suspended, limited, or carried over from
taxable years ending before January 1,
2018 (including under sections 465, 469,
704(d), and 1366(d)), are not taken into
account in a later taxable year for pur-
poses of computing QBI.

(v) Net operating losses. Generally, a
deduction under section 172 for a net op-
erating loss is not considered with respect
to a trade or business and therefore, is not
taken into account in computing QBI.
However, to the extent that the net oper-
ating loss is disallowed under section
461(l), the net operating loss is taken into
account for purposes of computing QBI.

(2) Qualified items of income, gain,
deduction, and loss - (i) In general. The
term qualified items of income, gain, de-
duction, and loss means items of gross
income, gain, deduction, and loss to the
extent such items are-

(A) Effectively connected with the
conduct of a trade or business within the
United States (within the meaning of sec-
tion 864(c), determined by substituting
"trade or business (within the meaning of
section 199A)" for "nonresident alien in-
dividual or a foreign corporation" or for
"a foreign corporation" each place it ap-
pears), and

(B) Included or allowed in determining
taxable income for the taxable year.

(ii) Items not taken into account. Not-
withstanding paragraph (b)(2)(i) of this
section and in accordance with section
199A(c)(3)(B), the following items are
not taken into account as a qualified item
of income, gain, deduction, or loss:

(A) Any item of short-term capital
gain, short-term capital loss, long-term
capital gain, long-term capital loss, in-
cluding any item treated as one of such

items, such as gains or losses under sec-
tion 1231 which are treated as capital
gains or losses.

(B) Any dividend, income equivalent
to a dividend, or payment in lieu of divi-
dends described in section 954(c)(1)(G).
Any amount described in section 1385(a)(1)
is not treated as described in this clause.

(C) Any interest income other than in-
terest income which is properly allocable
to a trade or business. For purposes of
section 199A and this section, interest in-
come attributable to an investment of
working capital, reserves, or similar ac-
counts is not properly allocable to a trade
or business.

(D) Any item of gain or loss described
in section 954(c)(1)(C) (transactions in
commodities) or section 954(c)(1)(D) (ex-
cess foreign currency gains) applied in
each case by substituting "trade or busi-
ness" for "controlled foreign corporation."

(E) Any item of income, gain, deduc-
tion, or loss taken into account under sec-
tion 954(c)(1)(F) (income from notional
principal contracts) determined without
regard to section 954(c)(1)(F)(ii) and
other than items attributable to notional
principal contracts entered into in transac-
tions qualifying under section 1221(a)(7).

(F) Any amount received from an an-
nuity which is not received in connection
with the trade or business.

(G) Any qualified REIT dividends as
defined in paragraph (c)(2) of this section
or qualified PTP income as defined in
paragraph (c)(3) of this section.

(H) Reasonable compensation received
by a shareholder from an S corporation.
However, the S corporation's deduction
for such reasonable compensation will re-
duce QBI if such deduction is properly
allocable to the trade or business and is
otherwise deductible for Federal income
tax purposes.

(I) Any guaranteed payment described
in section 707(c) received by a partner for
services rendered with respect to the trade
or business, regardless of whether the
partner is an individual or an RPE. How-
ever, the partnership's deduction for such
guaranteed payment will reduce QBI if
such deduction is properly allocable to the
trade or business and is otherwise deduct-
ible for Federal income tax purposes.

(J) Any payment described in section
707(a) received by a partner for services

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rendered with respect to the trade or busi-
ness, regardless of whether the partner is
an individual or an RPE. However, the
partnership's deduction for such payment
will reduce QBI if such deduction is prop-
erly allocable to the trade or business and
is otherwise deductible for Federal in-
come tax purposes.

(3) Commonwealth of Puerto Rico. For
the purposes of determining QBI, the term
United States includes the Common-
wealth of Puerto Rico in the case of any
taxpayer with QBI for any taxable year
from sources within the Commonwealth
of Puerto Rico, if all of such receipts are
taxable under section 1 for such taxable
year. This paragraph only applies as pro-
vided in section 199A(f)(1)(C).

(4) Wages. Expenses for all wages paid
(or incurred in the case of an accrual
method taxpayer) must to be taken into
account in computing QBI (if the require-
ments of this section and section 199A are
satisfied) regardless of the application of
the W-2 wage limitation described in
§ 1.199A-1(d)(2)(iv).

(5) Allocation of items among directly-
conducted trades or businesses- If an
individual or an RPE directly conducts
multiple trades or businesses, and has
items of QBI which are properly attribut-
able to more than one trade or business,
the individual or RPE must allocate those
items among the several trades or busi-
nesses to which they are attributable using
a reasonable method based on all the facts
and circumstances. The individual or RPE
may use a different reasonable method for
different items of income, gain, deduction,
and loss. The chosen reasonable method
for each item must be consistently applied
from one taxable year to another and must
clearly reflect the income and expenses of
each trade or business. The overall com-
bination of methods must also be reason-
able based on all facts and circumstances.
The books and records maintained for a
trade or business must be consistent with
any allocations under this paragraph.

(c) Qualified REIT Dividends and
Qualified PTP Income-(1) In general.
Qualified REIT dividends and qualified
PTP income are the sum of qualified REIT
dividends as defined in § 1.199A-3(c)(2)
earned directly or through an RPE and the
net amount of qualified PTP income as

defined in § 1.199A-3(c)(3) earned di-
rectly or through an RPE.

(2) Qualified REIT dividend-(i) The
term qualified REIT dividend means any
dividend from a REIT received during the
taxable year which-

(A) Is not a capital gain dividend, as
defined in section 857(b)(3), and

(B) Is not qualified dividend income, as
defined in section 1(h)(11).

(ii) A REIT dividend is not a qualified
REIT dividend if the stock with respect to
which it is received is held for fewer than
45 days, taking into account the principles
of section 246(c)(3) and (4).

(3) Qualified PTP income-(i) In gen-
eral. The term qualified PTP income
means the sum of-

(A) The net amount of such taxpayer's
allocable share of income, gain, deduc-
tion, and loss from a PTP as defined in
section 7704(b) that is not taxed as a cor-
poration under section 7704(a), plus

(B) Any gain or loss attributable to
assets of the PTP giving rise to ordinary
income under section 751(a) or (b) that is
considered attributable to the trades or
businesses conducted by the partnership.

(ii) Special rules. The rules applicable
to the determination of QBI described in
paragraph (b) of this section also apply to
the determination of a taxpayer's alloca-
ble share of income, gain, deduction, and
loss from a PTP. An individual's allocable
share of income from a PTP, and any
section 751 gain or loss is qualified PTP
income only to the extent the items meet
the qualifications of section 199A and this
section including the requirement that the
item is included or allowed in determining
taxable income for the taxable year, and
the requirement that the item be effec-
tively connected with the conduct of a
trade or business within the United States.
For example, if an individual owns an
interest in a PTP, and for the taxable year
is allocated a distributive share of net loss
which is disallowed under the passive ac-
tivity rules of section 469, such loss is not
taken into account for purposes of section
199A. Furthermore, each PTP is required
to determine its qualified PTP income for
each trade or business and report that in-
formation to its owners as described in
§ 1.199A-6(b)(3).

(d) Effective/ applicability date-(1)
General rule. Except as provided in para-

graph (d)(2) of this section, the provisions
of this section apply to taxable years end-
ing after the date the Treasury decision
adopting these regulations as final regula-
tions is published in the Federal Register.
However, taxpayers may rely on the rules
of this section until the date the Treasury
decision adopting these regulations as fi-
nal regulations is published in the Federal
Register.

(2) Exceptions-(i) Anti-abuse rules.
The provisions of paragraph (c)(2)(ii) of
this section apply to taxable years ending
after December 22, 2017.

(ii) Non -calendar year RPE. For pur-
poses of determining QBI, W-2 wages,
and UBIA of qualified property, if an in-
dividual receives any of these items from
an RPE with a taxable year that begins
before January 1, 2018 and ends after
December 31, 2017, such items are treated
as having been incurred by the individual
during the individual's taxable year in
which or with which such RPE taxable
year ends.

Par. 6. Section 1.199A-4 is added to
read as follows:

§ 1.199A-4 Aggregation.

(a) Scope and purpose. An individual
or Relevant Passthrough Entity (RPE)
may be engaged in more than one trade or
business. Except as provided in this sec-
tion, each trade or business is a separate
trade or business for purposes of applying
the limitations described in § 1.199A-
1(d)(2)(iv). This section sets forth rules to
allow individuals to aggregate trades or
businesses, treating the aggregate as a sin-
gle trade or business for purposes of
applying the limitations described in
§ 1.199A-1(d)(2)(iv). Trades or busi-
nesses may be aggregated only to the ex-
tent provided in this section, but aggrega-
tion by taxpayers is not required.

(b) Aggregation rules-(1) General
rule. Except as provided in paragraph
(b)(3) of this section, trades or businesses
may be aggregated only if an individual
can demonstrate that-

(i) The same person or group of per-
sons, directly or indirectly, owns 50 per-
cent or more of each trade or business to
be aggregated, meaning in the case of
such trades or businesses owned by an S
corporation, 50 percent or more of the

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issued and outstanding shares of the cor-
poration, or, in the case of such trades or
businesses owned by a partnership, 50
percent or more of the capital or profits in
the partnership;

(ii) The ownership described in para-
graph (b)(1)(i) of this section exists for a
majority of the taxable year in which the
items attributable to each trade or business
to be aggregated are included in income;

(iii) All of the items attributable to each
trade or business to be aggregated are
reported on returns with the same taxable
year, not taking into account short taxable
years;

(iv) None of the trades or businesses to
be aggregated is a specified service trade or
business (SSTB) as defined in § 1.199A-5;
and

(v) The trades or businesses to be ag-
gregated satisfy at least two of the follow-
ing factors (based on all of the facts and
circumstances):

(A) The trades or businesses provide
products and services that are the same or
customarily offered together.

(B) The trades or businesses share fa-
cilities or share significant centralized
business elements, such as personnel, ac-
counting, legal, manufacturing, purchas-
ing, human resources, or information
technology resources.

(C) The trades or businesses are oper-
ated in coordination with, or reliance
upon, one or more of the businesses in the
aggregated group (for example, supply
chain interdependencies).

(2) Operating rules. An individual may
aggregate trades or businesses operated
directly and the individual's share of QBI,
W-2 wages, and UBIA of qualified prop-
erty from trades or businesses operated
through RPEs. Multiple owners of an RPE
need not aggregate in the same manner.
For those trades or businesses directly op-
erated by the individual, the individual
computes QBI, W-2 wages, and UBIA of
qualified property for each trade or busi-
ness before applying these aggregation
rules. If an individual aggregates multiple
trades or businesses under paragraph
(b)(1) of this section, the individual must
combine the QBI, W-2 wages, and UBIA
of qualified property for all aggregated
trades or businesses for purposes of ap-
plying the W-2 wage and UBIA of qual-

ified property limitations described in
§ 1.199A-1(d)(2)(iv).

(3) Family attribution. For purposes of
determining ownership under paragraph
(b)(1)(i) of this section an individual is
considered as owning the interest in each
trade or business owned, directly or indi-
rectly, by or for-

(i) The individual's spouse (other than
a spouse who is legally separated from the
individual under a decree of divorce or
separate maintenance), and

(ii) The individual's children, grand-
children, and parents.

(c) Reporting and consistency-(1) In
general. Once an individual chooses to
aggregate two or more trades or busi-
nesses, the individual must consistently
report the aggregated trades or businesses
in all subsequent taxable years. However,
an individual may add a newly created or
newly acquired (including through non-
recognition transfers) trade or business to
an existing aggregated trade or business if
the requirements of paragraph (b)(1) of
this section are satisfied. In a subsequent
year, if there is a change in facts and
circumstances such that an individual's
prior aggregation of trades or businesses
no longer qualifies for aggregation under
the rules of this section, then the trades or
businesses will no longer be aggregated
within the meaning of this section, and the
individual must reapply the rules in para-
graph (b)(1) of this section to determine a
new permissible aggregation (if any).

(2) Individual disclosure-(i) Required
annual disclosure. For each taxable year,
individuals must attach a statement to
their returns identifying each trade or
business aggregated under paragraph
(b)(1) of this section. The statement must
contain -

(A) A description of each trade or busi-
ness;

(B) The name and EIN of each entity in
which a trade or business is operated;

(C) Information identifying any trade
or business that was formed, ceased oper-
ations, was acquired, or was disposed of
during the taxable year; and

(D) Such other information as the
Commissioner may require in forms, in-
structions, or other published guidance.

(ii) Failure to disclose. If an individual
fails to attach the statement required in
paragraph (c)(2)(i) of this section, the

Commissioner may disaggregate the indi-
vidual's trades or businesses.

(d) Examples. The following examples
illustrate the principles of this section. For
purposes of these examples, assume the
taxpayer is a United States citizen, all
individuals and RPEs use a calendar tax-
able year, there are no ownership changes
during the taxable year, all trades or busi-
nesses satisfy the requirements under sec-
tion 162, all tax items are effectively con-
nected to a trade or business within the
United States within the meaning of sec-
tion 864(c), and none of the trades or
businesses is an SSTB within the meaning
of § 1.199A-5. Except as otherwise spec-
ified, a single letter denotes an individual
taxpayer.

Example 1 to paragraph (d). (i) Facts. A wholly
owns and operates a catering business and a restau-
rant through separate disregarded entities. The cater-
ing business and the restaurant share centralized
purchasing to obtain volume discounts and a central-
ized accounting office that performs all of the book-
keeping, tracks and issues statements on all of the
receivables, and prepares the payroll for each busi-
ness. A maintains a website and print advertising
materials that reference both the catering business
and the restaurant. A uses the restaurant kitchen to
prepare food for the catering business. The catering
business employs its own staff and owns equipment
and trucks that are not used or associated with the
restaurant.

(ii) Analysis. Because the restaurant and catering
business are held in disregarded entities, A will be
treated as operating each of these businesses directly
and thereby satisfies paragraph (b)(1)(i) of this section.
Under paragraph (b)(1)(v) of this section, A satisfies
the following factors: Paragraph (b)(1)(v)(A) is met as
both businesses offer prepared food to customers; and
paragraph (b)(1)(v)(B) of this section is met because
the two businesses share the same kitchen facilities in
addition to centralized purchasing, marketing, and
accounting. Having satisfied paragraph (b)(1)(i)
through(v) of this section, A may treat the catering
business and the restaurant as a single trade or business
for purposes of applying § 199A-1(d).

Example 2 to paragraph (d). (i) Facts. Assume
the same facts as in Example 1 of this paragraph, but
the catering and restaurant businesses are owned in
separate partnerships and A, B, C, and D each own
a 25% interest in the capital and profits of each of the
two partnerships. A, B, C, and D are unrelated.

(ii) Analysis. Because under paragraph (b)(1)(i) of
this section A, B, C, and D together own more than
50% of the capital and profits in each of the two
partnerships, they may each treat the catering business
and the restaurant as a single trade or business for
purposes of applying § 1.199A-1(d).

Example 3 to paragraph (d). (i) Facts. W owns a
75% interest in S1, an S corporation, and a 75%
interest in the capital and profits of PRS, a partner-
ship. S1 manufactures clothing and PRS is a retail
pet food store. W manages S1 and PRS.

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(ii) Analysis. W owns more than 50% of the
stock of S1 and more than 50% of the capital and
profits of PRS thereby satisfying paragraph
(b)(1)(i) of this section. Although W manages both
S1 and PRS, W is not able to satisfy the require-
ments of paragraph (b)(1)(v) of this section as the
two businesses do not provide goods or services
that are the same or customarily offered together;
there are no significant centralized business ele-
ments; and no facts indicate that the businesses are
operated in coordination with, or reliance upon,
one another. W must treat S1 and PRS as separate
trades or businesses for purposes of applying
§ 1.199A-1(d).

Example 4 to paragraph (d). (i) Facts. E owns a
60% interest in the capital and profits of each of four
partnerships (PRS1, PRS2, PRS3, and PRS4). Each
partnership operates a hardware store. A team of
executives oversees the operations of all four of the
businesses and controls the policy decisions involv-
ing the business as a whole. Human resources and
accounting are centralized for the four businesses. E
reports PRS1, PRS3, and PRS4 as an aggregated
trade or business under paragraph (b)(1) of this sec-
tion and reports PRS2 as a separate trade or business.
Only PRS2 generates a net taxable loss.

(ii) Analysis. E owns more than 50% of the
capital and profits of each partnership thereby satis-
fying paragraph (b)(1)(i) of this section. Under para-
graph (b)(1)(v) of this section, the following factors
are satisfied: Paragraph (b)(1)(v)(A) of this section
because each partnership operates a hardware store;
and paragraph (b)(1)(v)(B) of this section because
the businesses share accounting and human resource
functions. E's decision to aggregate only PRS1,
PRS3, and PRS4 into a single trade or business for
purposes of applying § 1.199A-1(d) is permissible.
The loss from PRS2 will be netted against the ag-
gregate profits of PRS1, PRS3 and PRS4 pursuant to
§ 1.199A-1(d)(2)(iii).

Example 5 to paragraph (d). (i) Facts. Assume
the same facts as Example 4 of this paragraph, and
that F owns a 10% interest in the capital and profits
of PRS1, PRS2, PRS3, and PRS4.

(ii) Analysis. Because under paragraph (b)(1)(i)
of this section E owns more than 50% of the capital
and profits in the four partnerships, F may aggregate
PRS 1, PRS2, PRS3, and PRS4 as a single trade or
business for purposes of applying § 1.199A-1(d),
provided that F can demonstrate that the ownership
test is met by E.

Example 6 to paragraph (d). (i) Facts. D owns
75% of the stock of S1, S2, and S3, each of which is
an S corporation. Each S corporation operates a
grocery store in a separate state. S1 and S2 share
centralized purchasing functions to obtain volume
discounts and a centralized accounting office that
performs all of the bookkeeping, tracks and issues
statements on all of the receivables, and prepares the
payroll for each business. S3 is operated indepen-
dently from the other businesses.

(ii) Analysis. D owns more than 50% of the stock
of each S corporation thereby satisfying paragraph
(b)(1)(i) of this section. Under paragraph (b)(1)(v) of
this section, the grocery stores satisfy paragraph
(b)(1)(v)(A) of this section because they are in the
same trade or business. Only S1 and S2 satisfy
paragraph (b)(1)(v)(B) of this section because of

their centralized purchasing and accounting offices.
D is only able to show that the requirements of
paragraph (b)(1)(v)(B) of this section are satisfied
for S1 and S2; therefore, D only may aggregate S1
and S2 into a single trade or business for purposes of
§ 1.199A-1(d). D must report S3 as a separate trade
or business for purposes of applying § 1.199A-1(d).

Example 7 to paragraph (d). (i) Facts. Assume
the same facts as Example 6 of this paragraph except
each store is independently operated and S1 and S2
do not have centralized purchasing or accounting
functions.

(ii) Analysis. Although the stores provide the
same products and services within the meaning of
paragraph (b)(1)(v)(A) of this section, D cannot
show that another factor under paragraph (b)(1)(v) of
this section is present. Therefore, D must report S1,
S2, and S3 as separate trades or businesses for pur-
poses of applying § 1.199A-1(d).

Example 8 to paragraph (d). (i) Facts. G owns
80% of the stock in S1, an S corporation and 80% of
the capital and profits in LLC1 and LLC2, each of
which is a partnership for Federal tax purposes.
LLC1 manufactures and supplies all of the widgets
sold by LLC2. LLC2 operates a retail store that sells
LLC1's widgets. S1 owns the real property leased to
LLC1 and LLC2 for use by the factory and retail
store. The entities share common advertising and
management.

(ii) Analysis. G owns more than 50% of the stock
of S1 and more than 50% of the capital and profits in
LLC1 and LLC2 thus satisfying paragraph (b)(1)(i)
of this section. LLC1, LLC2, and S1 share signifi-
cant centralized business elements and are operated
in coordination with, or in reliance upon, one or
more of the businesses in the aggregated group. G
can treat the business operations of LLC1 and LLC2
as a single trade or business for purposes of applying
§ 1.199A-1(d). S1 is eligible to be included in the
aggregated group because it leases property to a
trade or business within the aggregated trade or
business as described in § 1.199A-1(b)(13) and
meets the requirements of paragraph (b)(1) of this
section.

Example 9 to paragraph (d). (i) Assume the
Facts. Same facts as Example 8 of this paragraph,
except G owns 80% of the stock in S1 and 20% of
the capital and profits in each of LLC1 and LLC2. B,
G's son, owns a majority interest in LLC2, and M,
G's mother, owns a majority interest in LLC1. B
does not own an interest in S1 or LLC1, and M does
not own an interest in S1 or LLC2.

(ii) Analysis. Under the rules in paragraph (b)(3)
of this section, B and M's interest in LLC2 and
LLC1, respectively, are attributable to G and G is
treated as owning a majority interest in LLC2 and
LLC; G thus satisfies paragraph (b)(1)(i) of this
section. G may aggregate his interests in LLC1,
LLC2, and S1 as a single trade or business for
purposes of applying § 1.199A-1(d). Under para-
graph (b)(3) of this section, S1 is eligible to be
included in the aggregated group because it leases
property to a trade or business within the aggregated
trade or business as described in § 1.199A-1(b)(13)
and meets the requirements of paragraph (b)(1) of
this section.

Example 10 to paragraph (d). (i) Facts. F owns
a 75% interest and G owns a 5% interest in the

capital and profits of five partnerships (PRS1-
PRS5). H owns a 10% interest in the capital and
profits of PRS1 and PRS2. Each partnership oper-
ates a restaurant and each restaurant separately
constitutes a trade or business for purposes of
section 162. G is the executive chef of all of the
restaurants and as such he creates the menus and
orders the food supplies.

(ii) Analysis. F owns more than 50% of capital
and profits in the partnerships thereby satisfying
paragraph (b)(1)(i) of this section. Under paragraph
(b)(1)(v) of this section, the restaurants satisfy para-
graph (b)(1)(v)(A) of this section because they are in
the same trade or business, and paragraph (b)(1)
(v)(B) of this section is satisfied as G is the executive
chef of all of the restaurants and the businesses share
a centralized function for ordering food and sup-
plies. F can show the requirements under para-
graph (b)(1) of this section are satisfied as to all of
the restaurants. Because F owns a majority interest
in each of the partnerships, G can demonstrate that
paragraph (b)(1)(i) of this section is satisfied. G
can also aggregate all five restaurants into a single
trade or business for purposes of applying
§ 1.199A-1(d). H, however, only owns an interest
in PRS1 and PRS2. Like G, H satisfies paragraph
(b)(1)(i) of this section because F owns a majority
interest. H can, therefore, aggregate PRS1 and
PRS2 into a single trade or business for purposes
of applying § 1.199A-1(d).

Example 11 to paragraph (d). (i) Facts. H, J, K,
and L own interests in PRS1 and PRS2, each a
partnership, and S1 and S2, each an S corporation.
H, J, K and L also own interests in C, an entity
taxable as a C corporation. H owns 30%, J owns
20%, K owns 5%, L owns 45% of each of the five
entities. All of the entities satisfy 2 of the 3 factors
under paragraph (b)(1)(v) of this section. For pur-
poses of section 199A the taxpayers report the fol-
lowing aggregated trades or businesses: H aggre-
gates PRS1 and S1 together and aggregates PRS2
and S2 together; J aggregates PRS1, S1 and S2
together and reports PRS2 separately; K aggregates
PRS1 and PRS2 together and aggregates S1 and S2
together; and L aggregates S1, S2, and PRS2 to-
gether and reports PRS1 separately. C cannot be
aggregated.

(ii) Analysis. Under paragraph (b)(1)(i) of this
section, because H, J, and K together own a majority
interest in PRS1, PRS2, S1, and S2, H, J, K, and L
are permitted to aggregate under paragraph (b)(1).
Further, the aggregations reported by the taxpayers
are permitted, but not required for each of H, J, K,
and L. C's income is not eligible for the section
199A deduction and it cannot be aggregated for
purposes of applying § 1.199A-1(d).

Example 12 to paragraph (d). (i) Facts. L owns
60% of the profits and capital interests in PRS1, a
partnership, a business that sells non-food items to
grocery stores. L also owns 55% of the profits and
capital interests in PRS2, a partnership, which owns
and operates a distribution trucking business. The
predominant portion of PRS2's business is transport-
ing goods for PRS1.

(ii) Analysis. L is able to meet (b)(1)(i) as the
majority owner of PRS1 and PRS2. Under paragraph
(b)(1)(v) of this section, L is only able to show the
operations of PRS1 and PRS2 are operated in reli-

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ance of one another under paragraph (b)(1)(v)(C) of
this section. For purposes of applying § 1.199A-
1(d), L must treat PRS1 and PRS2 as separate trades
or businesses.

Example 13 to paragraph (d). (i) Facts. C owns
a majority interest in a sailboat racing team and also
owns an interest in PRS1 which operates a marina.
PRS1 is a trade or business under section 162, but
the sailboat racing team is not a trade or business
within the meaning of section 162.

(ii) Analysis. C has only one trade or business for
purposes of section 199A and, therefore, cannot ag-
gregate the interest in the racing team with PRS1
under paragraph (b)(1) of this section.

Example 14 to paragraph (d). (i) Facts. Trust
wholly owns LLC1, LLC2, and LLC3. LLC1 oper-
ates a trucking company that delivers lumber and
other supplies sold by LLC2. LLC2 operates a lum-
ber yard and supplies LLC3 with building materials.
LLC3 operates a construction business. LLC1,
LLC2, and LLC3 have a centralized human re-
sources department, payroll, and accounting depart-
ment.

(ii) Analysis. Because Trust owns 100% of the
interests in LLC1, LLC2, and LLC3, Trust satisfies
paragraph (b)(1)(i) of this section. Trust can also
show that it satisfies paragraph (b)(1)(v)(B) of this
section as the trades or businesses have a centralized
human resources department, payroll, and account-
ing department. Trust also can show is meets para-
graph (b)(1)(v)(C) of this section as the trades or
businesses are operated in coordination, or reliance
upon, one or more in the aggregated group. Trust can
aggregate LLC1, LLC2, and LLC3 for purposes of
applying § 1.199A-1(d).

(e) Effective/ applicability date-(1)
General rule. Except as provided in para-
graph (e)(2) of this section, the provisions
of this section apply to taxable years end-
ing after the date the Treasury decision
adopting these regulations as final regula-
tions is published in the Federal Register.
However, taxpayers may rely on the rules
of this section until the date the Treasury
decision adopting these regulations as fi-
nal regulations is published in the Federal
Register.

(2) Exception for non-calendar year
RPE. For purposes of determining QBI,
W-2 wages, and UBIA of qualified prop-
erty, if an individual receives any of these
items from an RPE with a taxable year
that begins before January 1, 2018 and
ends after December 31, 2017, such items
are treated as having been incurred by the
individual during the individual's taxable
year in which or with which such RPE
taxable year ends.

Par. 7. Section 1.199A-5 is added to
read as follows:

§ 1.199A-5 Specified service trades or
businesses and the trade or business of
performing services as an employee.

(a) Scope and Effect-(1) Scope. This
section provides guidance on specified
service trades or businesses (SSTBs) and
the trade or business of performing ser-
vices as an employee. This paragraph (a)
describes the effect of being an SSTB or
the trade or business of performing ser-
vices as an employee. Paragraph (b) of
this section provides definitional guidance
on SSTBs. Paragraph (c) of this section
provides special rules related to SSTBs.
Paragraph (d) of this section provides
guidance on the trade or business of per-
forming services as an employee. The pro-
visions of this section apply solely for
purposes of section 199A of the Internal
Revenue Code (Code).

(2) Effect of being an SSTB. If a trade
or business is an SSTB, no QBI, W-2
wages, or UBIA of qualified property
from the SSTB may be taken into account
by any individual whose taxable income
exceeds the phase-in range as defined in
§ 1.199A-1(b)(3), even if the item is de-
rived from an activity that is not itself a
specified service activity. If a trade or
business conducted by a relevant pass-
through entity (RPE) is an SSTB, this
limitation applies to any direct or indirect
individual owners of the business, regard-
less of whether the owner is passive or
participated in any specified service activ-
ity. However, the SSTB limitation does
not apply to individuals with taxable in-
come below the threshold amount as de-
fined in § 1.199A-1(b)(11). A phase-in
rule, provided in § 1.199A-1(d)(2), ap-
plies to individuals with taxable income
within the phase-in range, allowing them
to take into account a certain "applicable
percentage" of QBI, W-2 wages, and
UBIA of qualified property from an
SSTB. A direct or indirect owner of a
trade or business engaged in the perfor-
mance of a specified service is engaged in
the performance of the specified service
for purposes of section 199A and this sec-
tion, regardless of whether the owner is
passive or participated in the specified ser-
vice activity.

(3) Trade or business of performing
services as an employee. The trade or
business of performing services as an em-

ployee is not a trade or business for pur-
poses of section 199A and the regulations
thereunder. Therefore, no items of in-
come, gain, loss, or deduction from the
trade or business of performing services
as an employee constitute QBI within the
meaning of section 199A and § 1.199A-3.
No taxpayer may claim a section 199A
deduction for wage income, regardless of
the amount of taxable income.

(b) Definition of specified service trade
or business. Except as provided in para-
graph (c)(1) of this section, the term spec-
ified service trade or business (SSTB)
means any of the following:

(1) Listed SSTBs. Any trade or business
involving the performance of services in
one or more of the following fields:

(i) Health as described in paragraph
(b)(2)(ii) of this section;

(ii) Law as described in paragraph
(b)(2)(iii) of this section;

(iii) Accounting as described in para-
graph (b)(2)(iv) of this section;

(iv) Actuarial science as described in
paragraph (b)(2)(v) of this section;

(v) Performing arts as described in
paragraph (b)(2)(vi) of this section;

(vi) Consulting as described in para-
graph (b)(2)(vii) of this section;

(vii) Athletics as described in para-
graph (b)(2)(viii) of this section;

(viii) Financial services as described in
paragraph (b)(2)(ix) of this section;

(ix) Brokerage services as described in
paragraph (b)(2)(x) of this section;

(x) Investing and investment manage-
ment as described in paragraph (b)(2)(xi)
of this section;

(xi) Trading as described in paragraph
(b)(2)(xii) of this section;

(xii) Dealing in securities (as defined in
section 475(c)(2)), partnership interests,
or commodities (as defined in section
475(e)(2)) as described in paragraph
(b)(2)(xiii) of this section; or

(xiii) Any trade or business where the
principal asset of such trade or business is
the reputation or skill of one or more of its
employees or owners as defined in para-
graph (b)(2)(xiv) of this section.

(2) Additional rules for applying sec-
tion 199A(d)(2) and paragraph (b) of this
section-(i) In general. This paragraph
(b)(2) provides additional rules for deter-
mining whether a business is an SSTB
within the meaning of section 199A(d)(2)

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and paragraph (b) of this section only. The
rules of this paragraph (b)(2) may not be
taken into account for purposes of apply-
ing any provision of law or regulation
other than section 199A and the regula-
tions thereunder except to the extent such
provision expressly refers to section
199A(d) or this section.

(ii) Meaning of services performed in
the field of health. For purposes of section
199A(d)(2) and paragraph (b)(1)(i) of this
section only, the performance of services
in the field of health means the provision
of medical services by individuals such as
physicians, pharmacists, nurses, dentists,
veterinarians, physical therapists, psy-
chologists and other similar healthcare
professionals performing services in their
capacity as such who provide medical ser-
vices directly to a patient (service recipi-
ent). The performance of services in the
field of health does not include the provi-
sion of services not directly related to a
medical services field, even though the
services provided may purportedly relate
to the health of the service recipient. For
example, the performance of services in
the field of health does not include the
operation of health clubs or health spas
that provide physical exercise or condi-
tioning to their customers, payment pro-
cessing, or the research, testing, and man-
ufacture and/or sales of pharmaceuticals
or medical devices.

(iii) Meaning of services performed in
the field of law. For purposes of section
199A(d)(2) and paragraph (b)(1)(ii) of
this section only, the performance of ser-
vices in the field of law means the perfor-
mance of services by individuals such as
lawyers, paralegals, legal arbitrators, me-
diators, and similar professionals perform-
ing services in their capacity as such. The
performance of services in the field of law
does not include the provision of services
that do not require skills unique to the
field of law, for example, the provision of
services in the field of law does not in-
clude the provision of services by printers,
delivery services, or stenography services.

(iv) Meaning of services performed in
the field of accounting. For purposes of sec-
tion 199A(d)(2) and paragraph (b)(1)(iii) of
this section only, the performance of ser-
vices in the field of accounting means the
provision of services by individuals such as
accountants, enrolled agents, return prepar-

ers, financial auditors, and similar profes-
sionals performing services in their capacity
as such.

(v) Meaning of services performed in
the field of actuarial science. For purposes
of section 199A(d)(2) and paragraph
(b)(1)(iv) of this section only, the perfor-
mance of services in the field of actuarial
science means the provision of services by
individuals such as actuaries and similar
professionals performing services in their
capacity as such.

(vi) Meaning of services performed in
the field of performing arts. For purposes
of section 199A(d)(2) and paragraph
(b)(1)(v) of this section only, the perfor-
mance of services in the field of the per-
forming arts means the performance of
services by individuals who participate in
the creation of performing arts, such as
actors, singers, musicians, entertainers, di-
rectors, and similar professionals perform-
ing services in their capacity as such. The
performance of services in the field of
performing arts does not include the pro-
vision of services that do not require skills
unique to the creation of performing arts,
such as the maintenance and operation of
equipment or facilities for use in the per-
forming arts. Similarly, the performance
of services in the field of the performing
arts does not include the provision of ser-
vices by persons who broadcast or other-
wise disseminate video or audio of per-
forming arts to the public.

(vii) Meaning of services performed in
the field of consulting. For purposes of sec-
tion 199A(d)(2) and paragraph (b)(1)(vi) of
this section only, the performance of ser-
vices in the field of consulting means the
provision of professional advice and counsel
to clients to assist the client in achieving
goals and solving problems. Consulting in-
cludes providing advice and counsel regard-
ing advocacy with the intention of influenc-
ing decisions made by a government or
governmental agency and all attempts to
influence legislators and other government
officials on behalf of a client by lobbyists
and other similar professionals performing
services in their capacity as such. The per-
formance of services in the field of consult-
ing does not include the performance of
services other than advice and counsel, such
as sales or economically similar services or
the provision of training and educational
courses. For purposes of the preceding sen-

tence, the determination of whether a per-
son's services are sales or economically
similar services will be based on all the facts
and circumstances of that person's business.
Such facts and circumstances include, for
example, the manner in which the taxpayer
is compensated for the services provided.
Performance of services in the field of con-
sulting does not include the performance of
consulting services embedded in, or ancil-
lary to, the sale of goods or performance of
services on behalf of a trade or business that
is otherwise not an SSTB (such as typical
services provided by a building contractor)
if there is no separate payment for the con-
sulting services.

(viii) Meaning of services performed in
the field of athletics. For purposes of sec-
tion 199A(d)(2) and paragraph (b)(1)(vii)
of this section only, the performance of
services in the field of athletics means the
performance of services by individuals
who participate in athletic competition
such as athletes, coaches, and team man-
agers in sports such as baseball, basket-
ball, football, soccer, hockey, martial arts,
boxing, bowling, tennis, golf, skiing,
snowboarding, track and field, billiards,
and racing. The performance of services
in the field of athletics does not include
the provision of services that do not re-
quire skills unique to athletic competition,
such as the maintenance and operation of
equipment or facilities for use in athletic
events. Similarly, the performance of ser-
vices in the field of athletics does not
include the provision of services by per-
sons who broadcast or otherwise dissem-
inate video or audio of athletic events to
the public.

(ix) Meaning of services performed in
the field of financial services. For pur-
poses of section 199A(d)(2) and para-
graph (b)(1)(viii) of this section only, the
performance of services in the field of
financial services means the provision of
financial services to clients including
managing wealth, advising clients with re-
spect to finances, developing retirement
plans, developing wealth transition plans,
the provision of advisory and other similar
services regarding valuations, mergers,
acquisitions, dispositions, restructurings
(including in title 11 or similar cases), and
raising financial capital by underwriting,
or acting as a client's agent in the issuance
of securities and similar services. This

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includes services provided by financial
advisors, investment bankers, wealth
planners, and retirement advisors and
other similar professionals performing
services in their capacity as such.

(x) Meaning of services performed in
the field of brokerage services. For pur-
poses of section 199A(d)(2) and para-
graph (b)(1)(ix) of this section only, the
performance of services in the field of
brokerage services includes services in
which a person arranges transactions be-
tween a buyer and a seller with respect to
securities (as defined in section 475(c)(2))
for a commission or fee. This includes
services provided by stock brokers and
other similar professionals, but does not
include services provided by real estate
agents and brokers, or insurance agents
and brokers.

(xi) Meaning of the provision of ser-
vices in investing and investment manage-
ment. For purposes of section 199A(d)(2)
and paragraph (b)(1)(x) of this section
only, the performance of services that
consist of investing and investment man-
agement refers to a trade or business in-
volving the receipt of fees for providing
investing, asset management, or invest-
ment management services, including
providing advice with respect to buying
and selling investments. The performance
of services of investing and investment
management does not include directly
managing real property.

(xii) Meaning of the provision of ser-
vices in trading. For purposes of section
199A(d)(2) and paragraph (b)(1)(xi) of
this section only, the performance of ser-
vices that consist of trading means a trade
or business of trading in securities (as
defined in section 475(c)(2)), commodi-
ties (as defined in section 475(e)(2)), or
partnership interests. Whether a person is
a trader in securities, commodities, or
partnership interests is determined by tak-
ing into account all relevant facts and cir-
cumstances, including the source and type
of profit that is associated with engaging
in the activity regardless of whether that
person trades for the person's own ac-
count, for the account of others, or any
combination thereof. A taxpayer, such as
a manufacturer or a farmer, who engages
in hedging transactions as part of their
trade or business of manufacturing or
farming is not considered to be engaged in

the trade or business of trading commod-
ities.

(xiii) Meaning of the provision of ser-
vices in dealing-(A) Dealing in securi-
ties. For purposes of section 199A(d)(2)
and paragraph (b)(1)(xii) of this section
only, the performance of services that
consist of dealing in securities (as defined
in section 475(c)(2)) means regularly pur-
chasing securities from and selling secu-
rities to customers in the ordinary course
of a trade or business or regularly offering
to enter into, assume, offset, assign, or
otherwise terminate positions in securities
with customers in the ordinary course of a
trade or business. For purposes of the pre-
ceding sentence, however, a taxpayer that
regularly originates loans in the ordinary
course of a trade or business of making
loans but engages in no more than negligi-
ble sales of the loans is not dealing in secu-
rities for purposes of section 199A(d)(2) and
this section. See § 1.475(c)-1(c)(2) and (4)
for the definition of negligible sales.

(B) Dealing in commodities. For pur-
poses of section 199A(d)(2) and para-
graph (b)(1)(xii) of this section only, the
performance of services that consist of
dealing in commodities (as defined in sec-
tion 475(e)(2)) means regularly purchas-
ing commodities from and selling com-
modities to customers in the ordinary
course of a trade or business or regularly
offering to enter into, assume, offset, as-
sign, or otherwise terminate positions in
commodities with customers in the ordi-
nary course of a trade or business.

(C) Dealing in partnership interests.
For purposes of section 199A(d)(2) and
paragraph (b)(1)(xii) of this section only,
the performance of services that consist of
dealing in partnership interests means reg-
ularly purchasing partnership interests
from and selling partnership interests to
customers in the ordinary course of a trade
or business or regularly offering to enter
into, assume, offset, assign, or otherwise
terminate positions in partnership interests
with customers in the ordinary course of a
trade or business.

(xiv) Meaning of trade or business
where the principal asset of such trade or
business is the reputation or skill of one or
more employees or owners. For purposes
of section 199A(d)(2) and paragraph
(b)(1)(xiii) of this section only, the term
any trade or business where the principal

asset of such trade or business is the rep-
utation or skill of one or more of its em-
ployees or owners means any trade or
business that consists of any of the fol-
lowing (or any combination thereof):

(A) A trade or business in which a
person receives fees, compensation, or
other income for endorsing products or
services,

(B) A trade or business in which a
person licenses or receives fees, compen-
sation or other income for the use of an
individual's image, likeness, name, signa-
ture, voice, trademark, or any other sym-
bols associated with the individual's iden-
tity,

(C) Receiving fees, compensation, or
other income for appearing at an event or
on radio, television, or another media for-
mat.

(D) For purposes of paragraph (b)(2)
(xiv)(A) through (C) of this section, the
term fees, compensation, or other income
includes the receipt of a partnership inter-
est and the corresponding distributive
share of income, deduction, gain or loss
from the partnership, or the receipt of
stock of an S corporation and the corre-
sponding income, deduction, gain or loss
from the S corporation stock.

(3) Examples. The following examples
illustrate the rules in paragraphs (a) and
(b) of this section. The examples do not
address all types of services that may or
may not qualify as specified services. Un-
less otherwise provided, the individual in
each example has taxable income in ex-
cess of the threshold amount.

Example 1 to paragraph (b)(3). A, a singer,
records a song. A is paid a mechanical royalty when
the song is licensed or streamed. A is also paid a
performance royalty when the recorded song is
played publicly. A is engaged in the performance of
services in an SSTB in the field of performing arts
within the meaning of paragraphs (b)(1)(v) and
(b)(2)(vi) of this section. The royalties that A re-
ceives for the song are not eligible for a deduction
under section 199A.

Example 2 to paragraph (b)(3). B is a partner in
Partnership, which solely owns and operates a pro-
fessional sports team. Partnership employs athletes
and sells tickets to the public to attend games in
which the sports team competes. Therefore, Partner-
ship is engaged in the performance of services in an
SSTB in the field of athletics within the meaning of
paragraphs (b)(1)(vii) and (b)(2)(viii) of this section.
B is a passive owner in Partnership and B does not
provide any services with respect to Partnership or
the sports team. However, because Partnership is
engaged in an SSTB in the field of athletics, B's
distributive share of the income, gain, loss, and de-

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duction with respect to Partnership is not eligible for
a deduction under section 199A.

Example 3 to paragraph (b)(3). C is in the busi-
ness of providing services that assist unrelated enti-
ties in making their personnel structures more effi-
cient. C studies its client's organization and structure
and compares it to peers in its industry. C then makes
recommendations and provides advice to its client
regarding possible changes in the client's personnel
structure, including the use of temporary workers. C
is engaged in the performance of services in an
SSTB in the field of consulting within the meaning
of paragraphs (b)(1)(vi) and (b)(2)(vii) of this sec-
tion.

Example 4 to paragraph (b)(3). D is in the busi-
ness of licensing software to customers. D discusses
and evaluates the customer's software needs with the
customer. The taxpayer advises the customer on the
particular software products it licenses. D is paid a
flat price for the software license. After the customer
licenses the software, D helps to implement the
software. D is engaged in the trade or business of
licensing software and not engaged in an SSTB in
the field of consulting within the meaning of para-
graphs (b)(1)(vi) and (b)(2)(vii) of this section.

Example 5 to paragraph (b)(3). E is in the busi-
ness of providing services to assist clients with their
finances. E will study a particular client's financial
situation, including, the client's present income, sav-
ings and investments, and anticipated future eco-
nomic and financial needs. Based on this study, E
will then assist the client in making decisions and
plans regarding the client's financial activities. Such
financial planning includes the design of a personal
budget to assist the client in monitoring the client's
financial situation, the adoption of investment strat-
egies tailored to the client's needs, and other similar
services. E is engaged in the performance of services
in an SSTB in the field of financial services within
the meaning of paragraphs (b)(1)(viii) and (b)(2)(ix)
of this section.

Example 6 to paragraph (b)(3). F is in the busi-
ness of executing transactions for customers involv-
ing various types of securities or commodities gen-
erally traded through organized exchanges or other
similar networks. Customers place orders with F to
trade securities or commodities based on the taxpay-
er's recommendations. F's compensation for its ser-
vices typically is based on completion of the trade
orders. F is engaged in an SSTB in the field of
brokerage services within the meaning of paragraphs
(b)(1)(ix) and (b)(2)(x) of this section.

Example 7 to paragraph (b)(3). G owns 100% of
Corp, an S corporation, which operates a bicycle
sales and repair business. Corp has 8 employees,
including G. Half of Corp's net income is generated
from sales of new and used bicycles and related
goods, such as helmets, and bicycle-related equip-
ment. The other half of Corp's net income is gener-
ated from bicycle repair services performed by G
and Corp's other employees. Corp's assets consist of
inventory, fixtures, bicycle repair equipment, and a
leasehold on its retail location. Several of the em-
ployees and G have worked in the bicycle business
for many years, and have acquired substantial skill
and reputation in the field. Customers often consult
with the employees on the best bicycle for purchase. G
is in the business of sales and repairs of bicycles and is

not engaged in an SSTB within the meaning of para-
graphs (b)(1)(xiii) and (b)(2)(xiv) of this section.

Example 8 to paragraph (b)(3). H is a well-
known chef and the sole owner of multiple restau-
rants each of which is owned in a disregarded entity.
Due to 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 cooking utensils and cookware. H
is in the trade or business of being a chef and owning
restaurants and such trade or business is not an
SSTB. However, H is also in the trade or business of
receiving endorsement income. H's trade or business
consisting of the receipt of the endorsement fee for
H's skill and/or reputation is an SSTB within the
meaning of paragraphs (b)(1)(xiii) and (b)(2)(xiv) of
this section.

Example 9 to paragraph (b)(3). J is a well-
known actor. J entered into a partnership with Shoe
Company, in which J contributed her likeness and
the use of her name to the partnership in exchange
for a 50% interest in the capital and profits of the
partnership and a guaranteed payment. J's trade or
business consisting of the receipt of the partnership
interest and the corresponding distributive share with
respect to the partnership interest for J's likeness and
the use of her name is an SSTB within the meaning
of paragraphs (b)(1)(xiii) and (b)(2)(xiv) of this sec-
tion.

(c) Special rules. (1) De minimis
rule .- (i) Gross receipts of $25 million or
less. For a trade or business with gross
receipts of $25 million dollars or less for
the taxable year, a trade or business is not
an SSTB if less than 10 percent of the
gross receipts of the trade or business are
attributable to the performance of services
in a field described in paragraph (b) of this
section. For purposes of determining
whether this 10 percent test is satisfied,
the performance of any activity incident to
the actual performance of services in the
field is considered the performance of ser-
vices in that field.

(ii) Gross receipts of greater than $25
million. For a trade or business with gross
receipts of greater than $25 million for the
taxable year, the rules of paragraph
(c)(1)(i) of this section are applied by sub-
stituting "5 percent" for "10 percent" each
place it appears.

(2) Services or property provided to an
SSTB-(i) In general. An SSTB includes
any trade or business that provides 80
percent or more of its property or services
to an SSTB if there is 50 percent or more
common ownership of the trades or busi-
nesses.

(ii) Less than substantially all of prop-
erty or services provided. If a trade or
business provides less than 80 percent of
its property or services to an SSTB within
the meaning of this section and there is 50

percent or more common ownership of
the trades or businesses, that portion of
the trade or business of providing prop-
erty or services to the 50 percent or
more commonly-owned SSTB is treated
as a part of the SSTB.

(iii) 50 percent or more common own-
ership. For purposes of paragraphs (c)(2)
(i) and (ii) of this section, 50 percent or
more common ownership includes direct
or indirect ownership by related parties
within the meaning of sections 267(b) or
707(b).

(iv) Example. Law Firm is a partnership that
provides legal services to clients, owns its own office
building and employs its own administrative staff.
Law Firm divides into three partnerships. Partner-
ship 1 performs legal services to clients. Partnership
2 owns the office building and rents the entire build-
ing to Partnership 1. Partnership 3 employs the ad-
ministrative staff and through a contract with Part-
nership 1 provides administrative services to
Partnership 1 in exchange for fees. All three of the
partnerships are owned by the same people (the
original owners of Law Firm). Because there is 50%
or more common ownership of each of the three
partnerships, Partnership 2 provides substantially all
of its property to Partnership 1, and Partnership 3
provides substantially all of its services to Partner-
ship 1, Partnerships 1, 2, and 3 will be treated as one
SSTB under paragraph (a)(6) of this section.

(3) Incidental to specified service trade
or business-(i) In general. If a trade or
business (that would not otherwise be
treated as an SSTB) has 50 percent or
more common ownership with an SSTB,
including related parties (within the mean-
ing of sections 267(b) or 707(b)), and has
shared expenses with the SSTB, including
shared wage or overhead expenses, then
such trade or business is treated as inci-
dental to and, therefore, part of the SSTB
within the meaning of this section if the
gross receipts of the trade or business rep-
resent no more than 5 percent of the total
combined gross receipts of the trade or
business and the SSTB in a taxable year.

(ii) Example. A, a dermatologist, provides med-
ical services to patients on a regular basis through
Dermatology LLC, a disregarded entity owned by A.
In addition to providing medical services, Dermatol-
ogy LLC also sells skin care products to A's patients.
The same employees and office space are used
for the medical services and sale of skin care prod-
ucts. The gross receipts with respect to the skin care
product sales do not exceed 5% of the gross receipts
of Dermatology LLC. Accordingly, the sale of the
skin care products is treated as incidental to A's
SSTB of performing services in the field of health
(within the meaning of paragraph (b)(1)(i) and
(b)(2)(ii) of this section) and is treated under para-
graph (c)(3) of this section as part of such SSTB.

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(d) Trade or business of performing
services as an employee-(1) In general.
The trade or business of performing ser-
vices as an employee is not a trade or
business for purposes of section 199A and
the regulations thereunder. Therefore, no
items of income, gain, loss, and deduction
from the trade or business of performing
services as an employee constitute QBI
within the meaning of section 199A and
§ 1.199A-3. Except as provided in para-
graph (d)(3) of this section, income from
the trade or business of performing ser-
vices as an employee refers to all wages
(within the meaning of section 3401(a))
and other income earned in a capacity as
an employee, including payments de-
scribed in § 1.6041-2(a)(1) (other than
payments to individuals described in sec-
tion 3121(d)(3)) and § 1.6041-2(b)(1).

(2) Employer's Federal employment
tax classification of employee immaterial.
For purposes of determining whether
wages are earned in a capacity as an em-
ployee as provided in paragraph (d)(1) of
this section, the treatment of an employee
by an employer as anything other than an
employee for Federal employment tax
purposes is immaterial. Thus, if a worker
should be properly classified as an em-
ployee, it is of no consequence that the
employee is treated as a non-employee by
the employer for Federal employment tax
purposes.

(3) Presumption that former employ-
ees are still employees-(i) Presump-
tion. Solely for purposes of section
199A(d)(1)(B) and paragraph (d)(1) of
this section, an individual that was prop-
erly treated as an employee for Federal
employment tax purposes by the person
to which he or she provided services and
who is subsequently treated as other
than an employee by such person with
regard to the provision of substantially
the same services directly or indirectly
to the person (or a related person), is
presumed to be in the trade or business
of performing services as an employee
with regard to such services. This pre-
sumption may be rebutted upon a show-
ing by the individual that, under Federal
tax law, regulations, and principles (in-
cluding common-law employee classifi-
cation rules), the individual is perform-
ing services in a capacity other than as
an employee. This presumption applies

regardless of whether the individual
provides services directly or indirectly
through an entity or entities.

(ii) Examples. The following examples
illustrate the provision of paragraph
(b)(3)(i) of this section. Unless otherwise
provided, the individual in each example
has taxable income in excess of the
threshold amount.

Example 1 to paragraph (d)(3). A is employed
by PRS, a partnership, as a fulltime employee and is
treated as such for Federal employment tax purposes.
A quits his job for PRS and enters into a contract
with PRS under which A provides substantially the
same services that A previously provided to PRS in
A's capacity as an employee. Because A was treated
as an employee for services he provided to PRS, and
now is no longer treated as an employee with regard
to such services, A is presumed (solely for purposes
of section 199A(d)(1)(B) and paragraphs (a)(3) and
(d) of this section) to be in the trade or business of
performing services as an employee with regard to
his services performed for PRS. Unless the presump-
tion is rebutted with a showing that, under Federal
tax law, regulations, and principles (including the
common-law employee classification rules), A is not
an employee, any amounts paid by PRS to A with
respect to such services will not be QBI for purposes
of section 199A. The presumption would apply even
if, instead of contracting directly with PRS, A
formed a disregarded entity, or an S corporation, and
the disregarded entity or the S corporation entered
into the contract with PRS.

Example 2 to paragraph (d)(3). C is an attorney
employed as an associate in a law firm (Law Firm 1)
and was treated as such for Federal employment tax
purposes. C and the other associates in Law Firm 1
have taxable income below the threshold amount.
Law Firm 1 terminates its employment relationship
with C and its other associates. C and the other
former associates form a new partnership, Law Firm
2, which contracts to perform legal services for Law
Firm 1. Therefore, in form, C is now a partner in
Law Firm 2 which earns income from providing
legal services to Law Firm 1. C continues to provide
substantially the same legal services to Law Firm 1
and its clients. Because C was previously treated as
an employee for services she provided to Law Firm
1, and now is no longer treated as an employee with
regard to such services, C is presumed (solely for
purposes of section 199A(d)(1)(B) and paragraphs
(a)(3) and (d) of this section) to be in the trade or
business of performing services as an employee with
respect to the services C provides to Law Firm 1
indirectly through Law Firm 2. Unless the presump-
tion is rebutted with a showing that, under Federal
tax law, regulations, and principles (including
common-law employee classification rules), C is not
an employee, C's distributive share of Law Firm 2
income (including any guaranteed payments) will
not be QBI for purposes of section 199A. The results
in this example would not change if, instead of
contracting with Law Firm 1, Law Firm 2 was in-
stead admitted as a partner in Law Firm 1.

Example 3 to paragraph (d)(3). E is an engineer
employed as a senior project engineer in an engi-
neering firm, Engineering Firm. Engineering Firm is

a partnership and structured such that after 10 years,
senior project engineers are considered for partner if
certain career milestones are met. After 10 years, E
meets those career milestones and is admitted as a
partner in Engineering Firm. As a partner in Engi-
neering Firm, E shares in the net profits of Engineer-
ing Firm, and also otherwise satisfies the require-
ments under Federal tax law, regulations, and
principles (including common-law employee classi-
fication rules) to be respected as a partner. E
is presumed (solely for purposes of section
199A(d)(1)(B) and paragraphs (a)(3) and (d) of this
section) to be in the trade or business of performing
services as an employee with respect to the services
E provides to Engineering Firm. However, E is able
to rebut the presumption by showing that E became
a partner in Engineering Firm as a career milestone,
shares in the overall net profits in Engineering Firm,
and otherwise satisfies the requirements under Fed-
eral tax law, regulations, and principles (including
common-law employee classification rules) to be
respected as a partner.

(e) Effective/ applicability date-(1)
General rule. Except as provided in para-
graph (e)(2) of this section, the provisions
of this section apply to taxable years end-
ing after the date the Treasury decision
adopting these regulations as final regula-
tions is published in the Federal Register.
However, taxpayers may rely on the rules
of this section until the date the Treasury
decision adopting these regulations as fi-
nal regulations is published in the Federal
Register.

(2) Exceptions-(i) Anti-abuse rules.
The provisions of paragraphs (c)(2),
(c)(3), and (d)(3) of this section apply to
taxable years ending after December 22,
2017.

(ii) Non-calendar year RPE. For pur-
poses of determining QBI, W-2 wages,
and UBIA of qualified property, if an in-
dividual receives any of these items from
an RPE with a taxable year that begins
before January 1, 2018 and ends after
December 31, 2017, such items are treated
as having been incurred by the individual
during the individual's taxable year in
which or with which such RPE taxable
year ends.

Par. 8. Section 1.199A-6 is added to
read as follows:

§ 1.199A-6 Relevant passthrough
entities (RPEs), publicly traded
partnerships (PTPs), trusts, and estates.

(a) Overview. This section provides
special rules for RPEs, PTPs, trusts, and
estates necessary for the computation of
the section 199A deduction of their own-

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ers or beneficiaries. Paragraph (b) of this
section provides computational and re-
porting rules for RPEs necessary for indi-
viduals who own interests in RPEs to cal-
culate their section 199A deduction.
Paragraph (c) of this section provides
computational and reporting rules for
PTPs necessary for individuals who own
interests in PTPs to calculate their section
199A deduction. Paragraph (d) of this sec-
tion provides computational and reporting
rules for trusts (other than grantor trusts)
and estates necessary for their beneficia-
ries to calculate their section 199A deduc-
tion.

(b) Computational and reporting rules
for RPEs-(1) In general. An RPE must
determine and report information attribut-
able to any trades or businesses it is en-
gaged in necessary for its owners to de-
termine their section 199A deduction.

(2) Computational rules. Using the fol-
lowing four rules, an RPE must determine
the items necessary for individuals who
own interests in the RPE to calculate their
section 199A deduction under § 1.199A-
1(c) or (d):

(i) First, the RPE must determine if it is
engaged in one or more trades or busi-
nesses. The RPE must also determine
whether any of its trades or businesses is
an SSTB under the rules of § 1.199A-5.

(ii) Second, the RPE must apply the
rules in § 1.199A-3 to determine the QBI
for each trade or business engaged in di-
rectly.

(iii) Third, the RPE must apply the
rules in § 1.199A-2 to determine the W-2
wages and UBIA of qualified property for
each trade or business engaged in directly.

(iv) Fourth, the RPE must determine
whether it has any qualified REIT divi-
dends as defined in 1.199A-3(c)(1) earned
directly or through another RPE. The RPE
must also determine the net amount of
qualified PTP income as defined in
§ 1.199A-3(c)(2) earned directly or indi-
rectly through investments in PTPs.

(3) Reporting rules for RPEs-(i)
Trade or business directly engaged in. An
RPE must separately identify and report
on the Schedule K-1 issued to its owners
for any trade or business engaged in di-
rectly by the RPE-

(A) Each owner's allocable share of
QBI, W-2 wages, and UBIA of qualified

property attributable to each such trade or
business, and

(B) Whether any of the trades or busi-
nesses described in paragraph (b)(3)(i)(A)
of this section is an SSTB.

(ii) Other items. An RPE must also
report on an attachment to the Schedule
K-1, any QBI, W-2 wages, UBIA of qual-
ified property, or SSTB determinations,
reported to it by any RPE in which the
RPE owns a direct or indirect interest. The
RPE must also report each owner's allo-
cated share of any qualified REIT divi-
dends or qualified PTP income or loss
received by the RPE (including through
another RPE).

(iii) Failure to report information. If an
RPE fails to separately identify or report
on the Schedule K-1 (or any attachments
thereto) issued to an owner any items de-
scribed in paragraph (b)(3)(i) of this sec-
tion, the owner's share (and the share of
any upper-tier indirect owner) of positive
QBI, W-2 wages, and UBIA of qualified
property attributable to trades or busi-
nesses engaged in by that RPE will be
presumed to be zero.

(c) Computational and reporting rules
for PTPs-(1) Computational rules. Each
PTP must determine its QBI under the
rules of § 1.199A-3 for each trade or
business in which the PTP is engaged in
directly. The PTP must also determine
whether any of the trades or businesses it
is engaged in directly is an SSTB.

(2) Reporting rules. Each PTP is re-
quired to separately identify and report the
information described in paragraph (c)(1)
of this section on Schedules K-1 issued to
its partners. Each PTP must also deter-
mine and report any qualified REIT divi-
dends or qualified PTP income or loss
received by the PTP including through an
RPE, a REIT, or another PTP. A PTP is
not required to determine or report W-2
wages or the UBIA of qualified property
attributable to trades or businesses it is
engaged in directly.

(d) Application to trusts, estates, and
beneficiaries-(1) In general. A trust or
estate computes its section 199A deduc-
tion based on the QBI, W-2 wages, UBIA
of qualified property, qualified REIT div-
idends, and qualified PTP income that are
allocated to the trust or estate. An individ-
ual beneficiary of a trust or estate takes
into account any QBI, W-2 wages, UBIA

of qualified property, qualified REIT div-
idends, and qualified PTP income allo-
cated from a trust or estate in calculating
the beneficiary's section 199A deduction,
in the same manner as though the items
had been allocated from an RPE. For pur-
poses of this section and §§ 1.199A-1
through 1.199A-5, a trust or estate is
treated as an RPE to the extent it allocates
QBI and other items to its beneficiaries,
and is treated as an individual to the extent
it retains the QBI and other items.

(2) Grantor trusts. To the extent that
the grantor or another person is treated as
owning all or part of a trust under sections
671 through 679, such person computes
its section 199A deduction as if that per-
son directly conducted the activities of the
trust with respect to the portion of the trust
treated as owned by the grantor or another
person.

(3) Non-grantor trusts and estates-(i)
Calculation at entity level. A trust or es-
tate must calculate its QBI, W-2 wages,
UBIA of qualified property, qualified
REIT dividends, and qualified PTP in-
come. The QBI of a trust or estate must be
computed by allocating qualified items of
deduction described in section 199A(c)(3)
in accordance with the classification of
those deductions under § 1.652(b)-3(a),
and deductions not directly attributable
within the meaning of § 1.652(b)-3(b)
(other deductions) are allocated in a
manner consistent with the rules in
§ 1.652(b)-3(b). Any depletion and
depreciation deductions described in
section 642(e) and any amortization de-
ductions described in section 642(f) that
otherwise are properly included in the
computation of QBI are included in the
computation of QBI of the trust or es-
tate, regardless of how those deductions
may otherwise be allocated between the
trust or estate and its beneficiaries for
other purposes of the Code.

(ii) Allocation among trust or estate
and beneficiaries. The QBI (including any
amounts that may be less than zero as
calculated at the trust or estate level), W-2
wages, UBIA of qualified property, qual-
ified REIT dividends, and qualified PTP
income of a trust or estate are allocated to
each beneficiary and to the trust or estate
based on the relative proportion of the
trust's or estate's distributable net income
(DNI), as defined by section 643(a), for

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the taxable year that is distributed or re-
quired to be distributed to the beneficiary
or is retained by the trust or estate. For this
purpose, the trust's or estate's DNI is de-
termined with regard to the separate share
rule of section 663(c), but without regard
to section 199A. If the trust or estate has
no DNI for the taxable year, any QBI,
W-2 wages, UBIA of qualified property,
qualified REIT dividends, and qualified
PTP income are allocated entirely to the
trust or estate.

(iii) Threshold amount. The threshold
amount applicable to a trust or estate is
$157,500 for any taxable year beginning
before 2019. For taxable years beginning
after 2018, the threshold amount shall be
$157,500 increased by the cost-of-living
adjustment as outlined in § 1.199A-
1(b)(11). For purposes of determining
whether a trust or estate has taxable in-
come that exceeds the threshold amount,
the taxable income of a trust or estate is
determined before taking into account any
distribution deduction under sections 651
or 661.

(iv) Electing small business trusts. An
electing small business trust (ESBT) is
entitled to the deduction under section
199A. The S portion of the ESBT must
take into account the QBI and other items
from any S corporation owned by the
ESBT, the grantor portion of the ESBT
must take into account the QBI and other
items from any assets treated as owned by
a grantor or another person (owned por-
tion) of a trust under sections 671 through
679, and the non-S portion of the ESBT
must take into account any QBI and other
items from any other entities or assets
owned by the ESBT. See § 1.641(c)-1.

(v) Anti-abuse rule for creation of mul-
tiple trusts to avoid exceeding the thresh-
old amount. Trusts formed or funded with
a significant purpose of receiving a deduc-
tion under section 199A will not be re-
spected for purposes of section 199A. See
also § 1.643(f)-1 of the regulations.

(vi) The following example illustrates
the application of paragraph (d) of this
section.

Example 1 to (d)(3)(vi). (i) Computation of DNI
and inclusion and deduction amounts. (A) Trust's
distributive share of partnership items. Trust, an

irrevocable testamentary complex trust, is a 25%
partner in PRS, a family partnership that operates a
restaurant that generates QBI and W-2 wages. In
2018, PRS properly allocates gross income from the
restaurant of $55,000, and expenses directly alloca-
ble to the restaurant of $50,000 (including W-2
wages of $25,000, miscellaneous expenses of
$20,000, and depreciation deductions of $5,000) to
Trust. These items are properly included in Trust's
DNI. Trust's share of PRS' UBIA of qualified property
is $125,000. PRS distributes $5,000 of cash to Trust in
2018.

(B) Trust's activities. In addition to its interest in
PRS, Trust also operates a family bakery conducted
through an LLC wholly-owned by the Trust that is
treated as a disregarded entity. In 2018, the bakery
produced $100,000 of gross income and $150,000 of
expenses directly allocable to operation of the bak-
ery (including W-2 wages of $50,000, rental ex-
pense of $75,000, and miscellaneous expenses of
$25,000). (The net loss from the bakery operations is
not subject to any loss disallowance provisions out-
side of section 199A.) Trust also has zero UBIA of
qualified property in the bakery. For purposes of
computing its section 199A deduction, Trust has
properly chosen to aggregate the family restaurant
conducted through PRS with the bakery conducted
directly by Trust under § 1.199A-4. Trust also owns
various investment assets that produce portfolio-type
income consisting of dividends ($25,000), interest
($15,000), and tax-exempt interest ($15,000). Ac-
cordingly, Trust has the following items which are
properly included in Trust's DNI:

Interest Income.

15,000

Dividends

25,000

Tax-exempt interest.

15,000

Net business loss from PRS and bakery

(45,000)

Trustee commissions.

3,000

State and local taxes.

5,000

(C) Allocation of deductions under § 1.652(b)-3.
(1) Directly attributable expenses. In computing
Trust's DNI for the taxable year, the distributive
share of expenses of PRS are directly attributable
under § 1.652(b)-3(a) to the distributive share of
income of PRS. Accordingly, Trust has gross busi-
ness income of $155,000 (55,000 from PRS and
100,000 from the bakery) and direct business ex-
penses of $200,000 ($50,000 from PRS and
$150,000 from the bakery). In addition, $1,000 of
the trustee commissions and $1,000 of state and local
taxes are directly attributable under § 1.652(b)-3(a)
to Trust's business income. Accordingly, Trust has
excess business deductions of $47,000. Pursuant to
its authority recognized under § 1.652(b)-3(d), Trust
allocates the $47,000 excess business deductions as
follows: $15,000 to the interest income, resulting in
$0 interest income, $25,000 to the dividends, result-
ing in $0 dividend income, and $7,000 to the tax
exempt interest.

(2) Non-directly attributable expenses. The
trustee must allocate the sum of the balance of the
trustee commissions ($2,000) and state and local
taxes ($4,000) to Trust's remaining tax-exempt in-

terest income, resulting in $2,000 of tax exempt
interest.

(D) Amounts included in taxable income. For
2018, Trust has DNI of $2,000. Pursuant to Trust's
governing instrument, Trustee distributes 50%, or
$1,000, of that DNI to A, an individual who is a
discretionary beneficiary of Trust. In addition,
Trustee is required to distribute 25%, or $500, of that
DNI to B, a current income beneficiary of Trust.
Trust retains the remaining 25% of DNI. Conse-
quently, with respect to the $1,000 distribution A
receives from Trust, A properly excludes $1,000 of
tax-exempt interest income under section 662(b).
With respect to the $500 distribution B receives from
Trust, B properly excludes $500 of tax exempt in-
terest income under section 662(b). Because the DNI
consists entirely of tax-exempt income, Trust de-
ducts $0 under section 661 with respect to the dis-
tributions to A and B.

(ii) Section 199A deduction. (A) Trust's W-2
wages and QBI. For the 2018 taxable year, Trust has
$75,000 ($25,000 from PRS + $50,000 of Trust) of
W-2 wages. Trust also has $125,000 of UBIA of
qualified property. Trust has negative QBI of

($47,000) ($155,000 gross income from aggregated
businesses less the sum of $200,000 direct expenses
from aggregated businesses and $2,000 directly at-
tributable business expenses from Trust under the
rules of § 1.652(b)-3(a)).

(B) Section 199A deduction computation. (1) A's
computation. Because the $1,000 Trust distribution
to A equals one-half of Trust's DNI, A has W-2
wages from Trust of $37,500. A also has W-2 wages
of $2,500 from a trade or business outside of Trust
(computed without regard to A's interest in Trust),
which A has properly aggregated under § 1.199A-4
with the Trust's trade or businesses (the family's
restaurant and bakery), for a total of $40,000 of W-2
wages from the aggregate trade or businesses. A has
$100,000 of QBI from non-Trust trade or businesses
in which A owns an interest. Because the $1,000
Trust distribution to A equals one-half of Trust's
DNI, A has (negative) QBI from Trust of ($23,500).
A's total QBI is determined by combining the
$100,000 QBI from non-Trust sources with the
($23,500) QBI from Trust for a total of $76,500 of
QBI. Assume that A's taxable income exceeds the
threshold amount for 2018 by $200,000. A's tenta-

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tive deduction is $15,300 (.20 x $76,500), limited
under the W-2 wage limitation to $20,000 (50% x
$40,000 W-2 wages). Accordingly, A's section
199A deduction for 2018 is $15,300.

(2) B's computation. For 2018, B's taxable in-
come is below the threshold amount so B is not
subject to the W-2 wage limitation. Because the
$500 Trust distribution to B equals one-quarter of
Trust's DNI, B has a total of ($11,750) of QBI. B
also has no QBI from non-Trust trades or businesses,
so B has a total of ($11,750) of QBI. Accordingly,
B's section 199A deduction for 2018 is zero. The
($11,750) of QBI is carried over to 2019 as a loss
from a qualified business in the hands of B pursuant
to section 199A(c)(2).

(3) Trust's computation. For 2018, Trust's tax-
able income is below the threshold amount so it is
not subject to the W-2 wage limitation. Because
Trust retained 25% of Trust's DNI, Trust is allocated
25% of its QBI, which is ($11,750). Trust's section
199A deduction for 2018 is zero. The ($11,750) of
QBI is carried over to 2019 as a loss from a qualified
business in the hands of Trust pursuant to section
199A(c)(2).

(e) Effective/ applicability date-(1)
General rule. Except as provided in para-
graph (e)(2) of this section, the provisions
of this section apply to taxable years end-
ing after the date the Treasury decision
adopting these regulations as final regula-
tions is published in the Federal Register.
However, taxpayers may rely on the rules
of this section until the date the Treasury
decision adopting these regulations as fi-
nal regulations is published in the Federal
Register.

(2) Exceptions-(i) Anti-abuse rules.
The provisions of paragraph (d)(3)(v) of
this section apply to taxable years ending
after December 22, 2017.

(ii) Non-calendar year RPE. For pur-
poses of determining QBI, W-2 wages,
and UBIA of qualified property, if an in-
dividual receives any of these items from
an RPE with a taxable year that begins
before January 1, 2018 and ends after
December 31, 2017, such items are treated
as having been incurred by the individual
during the individual's taxable year in
which or with which such RPE taxable
year ends.

Par. 9. Section 1.643(f)-1 is added to
read as follows:

§ 1.643(f)-1 Treatment of Multiple
Trusts.

(a) General rule. For purposes of sub-
chapter J of chapter 1 of Title 26 of the
United States Code, two or more trusts
will be aggregated and treated as a single
trust if such trusts have substantially the
same grantor or grantors and substantially
the same primary beneficiary or beneficia-
ries, and if a principal purpose for estab-
lishing such trusts or for contributing ad-
ditional cash or other property to such
trusts is the avoidance of Federal income
tax. For purposes of applying this rule,
spouses will be treated as one person.

(b) A principal purpose. A principal
purpose for establishing or funding a trust
will be presumed if it results in a signifi-
cant income tax benefit unless there is a
significant non-tax (or non-income tax)
purpose that could not have been achieved
without the creation of these separate
trusts.

(c) Examples. The following examples
illustrate the application of this section:

Example 1 to paragraph (c). (i) A owns and
operates a pizzeria and several gas stations. A's
annual income from these businesses and other
sources exceeds the threshold amount in section
199A(e)(2), and the W-2 wages properly allocable
to these businesses are not sufficient for A to max-
imize the deduction allowable under section 199A. A
reads an article in a magazine 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, A
establishes three irrevocable, non-grantor trusts:
Trust 1 for the benefit of A's sister, B, and A's
brothers, C and D; Trust 2 for the benefit of A's
second sister, E, and for C and D; and Trust 3 for the
benefit of E. 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
A's desire to avoid the W-2 wage limitation of that
provision, A would not have created or funded such
trusts. A names A's oldest son, F, as the trustee for

each trust. A 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. A later contributes to each
trust a 15% limited partner interest. Under the part-
nership 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 ap-
proval of the general partner. Each of the trusts
claims the section 199A deduction on its Form 1041
in full based on the amount of qualified business
income (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).

(ii) 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.

Example 2 to paragraph (c). (i) X establishes
two irrevocable trusts: one for the benefit of X's son,
G, and the other for X's daughter, H. G is the income
beneficiary of the first trust and the trustee is re-
quired to apply all income currently to G for G's life.
H is the remainder beneficiary of the first trust. H is
an income beneficiary of the second trust and the
trust instrument permits the trustee to accumulate or
to pay income, in its discretion, to H for H's educa-
tion, support, and maintenance. The trustee also may
pay income or corpus for G's medical expenses. H is
the remainder beneficiary of the second trust and will
receive the trust corpus upon G's death.

(ii) Under these facts, there are significant non-
tax differences between the substantive terms of the
two trusts, so tax avoidance will not be presumed to
be a principal purpose for the establishment or fund-
ing of the separate trusts. Accordingly, in the ab-
sence of other facts or circumstances that would
indicate that a principal purpose for creating the two
separate trusts was income tax avoidance, the two
trusts will not be aggregated and treated as a single
trust for Federal income tax purposes under this
section.

(d) Effective/ applicability date. The
provisions of this section apply to taxable
years ending after August 16, 2018.

Kirsten Wielobob,
Deputy Commissioner for Services and
Enforcement.

(Filed by the Office of the Federal Register on August 10,
2018, 4:15 p.m., and published in the issue of the Federal
Register for August 16, 2018, 83 F.R. 40884)

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# Definition of Terms

Revenue rulings and revenue procedures
(hereinafter referred to as "rulings") that
have an effect on previous rulings use the
following defined terms to describe the
effect:

Amplified describes a situation where
no change is being made in a prior pub-
lished position, but the prior position is
being extended to apply to a variation of
the fact situation set forth therein. Thus, if
an earlier ruling held that a principle ap-
plied to A, and the new ruling holds that
the same principle also applies to B, the
earlier ruling is amplified. (Compare with
modified, below).

Clarified is used in those instances
where the language in a prior ruling is
being made clear because the language
has caused, or may cause, some confu-
sion. It is not used where a position in a
prior ruling is being changed.

Distinguished describes a situation
where a ruling mentions a previously pub-
lished ruling and points out an essential
difference between them.

Modified is used where the substance
of a previously published position is being
changed. Thus, if a prior ruling held that a
principle applied to A but not to B, and the
new ruling holds that it applies to both A

and B, the prior ruling is modified because
it corrects a published position. (Compare
with amplified and clarified, above).

Obsoleted describes a previously pub-
lished ruling that is not considered deter-
minative with respect to future transac-
tions. This term is most commonly used in
a ruling that lists previously published rul-
ings that are obsoleted because of changes
in laws or regulations. A ruling may also
be obsoleted because the substance has
been included in regulations subsequently
adopted.

Revoked describes situations where the
position in the previously published ruling
is not correct and the correct position is
being stated in a new ruling.

Superseded describes a situation where
the new ruling does nothing more than
restate the substance and situation of a
previously published ruling (or rulings).
Thus, the term is used to republish under
the 1986 Code and regulations the same
position published under the 1939 Code
and regulations. The term is also used
when it is desired to republish in a single
ruling a series of situations, names, etc.,
that were previously published over a pe-
riod of time in separate rulings. If the new
ruling does more than restate the sub-

stance of a prior ruling, a combination of
terms is used. For example, modified and
superseded describes a situation where the
substance of a previously published ruling
is being changed in part and is continued
without change in part and it is desired to
restate the valid portion of the previously
published ruling in a new ruling that is
self contained. In this case, the previously
published ruling is first modified and then,
as modified, is superseded.

Supplemented is used in situations in
which a list, such as a list of the names of
countries, is published in a ruling and that
list is expanded by adding further names
in subsequent rulings. After the original
ruling has been supplemented several
times, a new ruling may be published that
includes the list in the original ruling and
the additions, and supersedes all prior rul-
ings in the series.

Suspended is used in rare situations to
show that the previous published rulings
will not be applied pending some future
action such as the issuance of new or
amended regulations, the outcome of
cases in litigation, or the outcome of a
Service study.

# Abbreviations

The following abbreviations in current
use and formerly used will appear in ma-
terial published in the Bulletin.

A-Individual.

Acq .- Acquiescence.

B-Individual.

BE-Beneficiary.

F.R .- Federal Register.

FUTA-Federal Unemployment Tax Act.

FX-Foreign corporation.

G.C.M .- Chief Counsel's Memorandum.

GE-Grantee.

GP-General Partner.

GR-Grantor.

COOP-Cooperative.

IC-Insurance Company.

Ct.D .- Court Decision.

I.R.B .- Internal Revenue Bulletin.

CY-County.

LE-Lessee.

TT-Trustee.

D-Decedent.

LP-Limited Partner.

LR-Lessor.

M-Minor.

Nonacq .- Nonacquiescence.

O Organization.

P-Parent Corporation.

PHC-Personal Holding Company.

PO-Possession of the U.S.

PR-Partner.

PRS-Partnership.

PTE-Prohibited Transaction Exemption.
Pub. L .- Public Law.

REIT-Real Estate Investment Trust.

Rev. Proc .- Revenue Procedure.

Rev. Rul .- Revenue Ruling.

S-Subsidiary.

S.P.R .- Statement of Procedural Rules.

Stat .- Statutes at Large.

BK-Bank.

B.T.A .- Board of Tax Appeals.

C-Individual.

C.B .- Cumulative Bulletin.

CFR-Code of Federal Regulations.

CI-City.

T.I.R .- Technical Information Release.

TP-Taxpayer.
TR-Trust.

U.S.C .- United States Code.

DC-Dummy Corporation.

DE-Donee.

Del. Order-Delegation Order.

DISC-Domestic International Sales Corporation.
DR-Donor.

E-Estate.

EE-Employee.

E.O .- Executive Order.

ER-Employer.

ERISA-Employee Retirement Income Security Act.
EX-Executor.

F-Fiduciary.

FC-Foreign Country.

FICA-Federal Insurance Contributions Act.

FISC-Foreign International Sales Company.

FPH-Foreign Personal Holding Company.

T-Target Corporation.
T.C .- Tax Court.

T.D .- Treasury Decision.

TFE-Transferee.

TFR-Transferor.

X-Corporation.

Y-Corporation.

Z-Corporation.

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## Numerical Finding List1

Bulletin 2018-27 through 2018-35

### Announcements:

2018-09, 2018-28 I.R.B. 206
2018-12, 2018-30 I.R.B. 232

### Notices:

2018-48, 2018-28 I.R.B. 9
2018-56, 2018-27 I.R.B. 3

2018-58, 2018-33 I.R.B. 305

2018-59, 2018-28 I.R.B. 196
2018-60, 2018-31 I.R.B. 275
2018-61, 2018-31 I.R.B. 278
2018-62, 2018-34 I.R.B. 316

2018-63, 2018-34 I.R.B. 318
2018-64, 2018-35 I.R.B. 347

2018-65, 2018-35 I.R.B. 350

### Proposed Regulations:

REG-103474-18, 2018-32 I.R.B. 284
REG-106977-18, 2018-27 I.R.B. 6
REG-107892-18, 2018-35 I.R.B. 353

## Revenue Procedures:

2018-35, 2018-28 I.R.B. 204
2018-37, 2018-29 I.R.B. 210

2018-38, 2018-31 I.R.B. 280
2018-39, 2018-34 I.R.B. 319
2018-40, 2018-34 I.R.B. 320

## Revenue Rulings:

2018-19, 2018-27 I.R.B. 1
2018-20, 2018-28 I.R.B. 8
2018-21, 2018-32 I.R.B. 282

2018-22, 2018-34 I.R.B. 308

## Treasury Decisions:

9834, 2018-31 I.R.B. 233
9835, 2018-33 I.R.B. 288
9836, 2018-33 I.R.B. 291

9838, 2018-34 I.R.B. 309
9839, 2018-35 I.R.B. 325

1A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2018-01 through 2018-26 is in Internal Revenue Bulletin
2018-26, dated June 27, 2018.

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## Finding List of Current Actions on Previously Published Items1

Bulletin 2018-27 through 2018-35

### Revenue Procedures:

2015-27
Amplified by
Rev. Proc. 2018-39, 2018-34 I.R.B. 319

2017-24
Amplified by
Rev. Proc. 2018-39, 2018-34 I.R.B. 319

1A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2018-01 through 2018-26 is in Internal Revenue Bulletin
2018-26, dated June 27, 2018.

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# Internal Revenue Service Washington, DC 20224

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# INTERNAL REVENUE BULLETIN

The Introduction at the beginning of this issue describes the purpose and content of this publication. The weekly Internal Revenue
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