Freeman Law advises domestic and international ventures with corporate and tax compliance. Clients with flow-through entity structures may need to consider the impact of section 199A. Planning for section 199A may significantly impact a client’s bottom line and investor returns. This resource provides additional background on the concept of a trade or business for section 199A purposes.
Section 199A was enacted as part of the Tax Cuts and Jobs Acts of 2017, P.L. 115-97 (the “TCJA”). Its rules are currently effective for tax years beginning after 2017 and before 2026.
Proposed Regulations at §1.199A-1(b) define the phrase trade or business for purposes of section 199A. Under that proposed regulation, the IRS generally determined that the phrase trade or business should take on the meaning of that phrase that has been developed under section 162(a) of the Code. Section 162(a) lends the benefits of a large body of existing case law and administrative guidance interpreting the phrase across a wide variety of industries.
Under section 162(a), the question of whether an activity rises to the level of a trade or business is based on facts and circumstances. Generally, the phrase connotes an activity conducted with “continuity and regularity” and with the primary purpose of earning income or making profit. Comm’r v. Groetzinger, 480 U.S. 23, 35 (1987). It has generally not encompassed mere investment activities or rental activities that do not rise to the level of a trade or business.
The proposed regulations, however, specifically extend the definition of trade or business beyond the scope of section 162 with respect to the rental or licensing of tangible or intangible property to a related trade or business. Under the proposed regulations, such rental and licensing activities are treated as a trade or business if the rental or licensing and the other trade or business are “commonly controlled” within the meaning of proposed regulation §1.199A-4(b)(1)(i). The Service noted that taxpayers often segregate rental activities from operating businesses for legal and other non-tax reasons.
A taxpayer can have more than one trade or business for purposes of section 162—and thus for purposes of section 199A. The Treasury’s proposed regulations thus address the concept of aggregation. Allowing taxpayers to aggregate trades or businesses provides a means of combining their trades or businesses for purposes of applying the W-2 wage and UBIA of qualified property limitations, thus potentially maximizing the deduction under section 199A.
For more on section 199A, see prior Insights, such as A Practical Roadmap Through Section 199A, Advising Domestic Business Ventures: Section 199A and Flow-Through Structures, and Choice of Entity After Tax Reform.