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Section 199A in General
As published in the first post to this blog, Section 199A, added to the Code by the Tax Cuts and Jobs Act of 2017, P.L. 115-97, and effective for taxable years beginning in 2018, allows certain noncorporate taxpayers to deduct from taxable income an amount equal to 20% of their “qualified business income”. Specified business are precluded from using section 199A and taxpayers entitled to claim a deduction under section 199A are further subject to a ceiling rule in reducing the amount of allowable deduction to the extent of 50% of W-2 wages, or, if greater, the sum of 25% of the W-2 wages paid with respect to a qualified trade or business plus 2.5% of the unadjusted asset basis immediately after acquisition of the qualified property. 
The term “qualified trade or business” is defined under section 199A(d)(1) does not include a “specified service trade or business”. A specified service trade or business for this purposes, means, by cross-reference to section 1202(e)(3), as modified, any trade or business involving the performance of services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or 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 (emphasis in italics added). This is the definition included in section 1202(e)(3)(partial exclusion of gain from certain small business stock provision) but excludes for purposes of section 199A the fields of engineering and architecture.
The “reputation or skill” exclusion from what would otherwise be a qualified trade or business under section 199A is most controversial and applied literally could cast a very wide net. Where taxpayers potentially vulnerable to the “reputation or skill” argument but nevertheless report, in good faith, that section 199A still applies, may in certain instances depending on the facts of the case be properly advised to file a disclosure statement or otherwise obtain a (pre-return) favorable opinion from tax counsel. Another option would be to obtain a “more likely than not” due diligence legal opinion that the income is qualified business income prior to filing the informational return (as to a partnership or S corporation) or a tax return for an individual engaged in a qualified business. The issue would of course be that of “penalty protection” in the event the Service were to later successfully challenge the applicability of section 199A. Another procedural choice in a “reputation or skill” situation is to self-assess the increased tax or wait until audit and then pay the Service’s proposed adjustments on this issue and then file a claim for refund. Tax refund litigation may follow but the taxpayer would first have the right to an administrative appeal with respect to the denial of the claim for refund by the audit division.
Section 199A applies to income from pass-thru entities, such as qualified business income derived by a partnership or S corporation, as well as by a sole proprietor. For a partnership, limited liability taxed as a partnership or S corporation, section 199A is applied at the partner, LLC member or S shareholder level by taking into account each such partner’s or shareholder’s share of each item of qualified income, gain, deduction, and loss as well as each partner’ or shareholder’s share of W-2 wages and unadjusted basis in qualified property as to each such qualified trade or business of the taxpayer. The deduction does not apply with respect to an eligible taxpayer’s net capital gain. §199A(a).
Where a taxpayer such as an individual realizes “qualified business income” such taxpayer’s normal 37% rate under section 1, the qualified business income is, by virtue of the deduction under section 199A, reduced to 29.6%. The section 199A deduction, which is scheduled to terminate for tax years after 2025, is not a deduction allowed in computing adjusted gross income under section 62(a) and is not to be treated as an itemized deduction per section 63(d)(3).
A special rule applies for a taxpayer whose taxable income (computed without regard to §199A) does not exceed a “threshold amount”. In such instance, the taxpayer can claim the full 20% deduction if he has sufficient “qualified business income”. The limitation for W-2 wages and qualified property are inapplicable in this situation. However, a special, favorable rule applies for a taxpayer whose taxable income (without regard to Section 199A) does not exceed a “threshold amount.” Where this special rule applies, the taxpayer has a clear path to the full 20% deduction if the taxpayer has sufficient “qualified business income,” because the limitations, just discussed, relating to W-2 wages and qualified property do not apply. §199A(b)(3)(A). The threshold amount is $157,500 ($315,000 in the case of a joint return, with inflation adjustments). §199A(e)(2). The favorable rule phases out if the taxpayer’s taxable income is up to $50,000 more than the threshold amount ($100,000 more for a joint return).
Tax advisors have been weighing planning alternative in an effort to mitigate the 37% rate of Federal income tax on business income attributable to a specified service business and other subjects. Examples include the spin-off of administrative personnel and property into a separate business operation from the applicable service organization such as a law or accounting firm. There may be other methods to attempted to divide functional aspects of a trade or business so that a portion of such separated function may result in converting part of a non-qualified business into one which qualifies under section 199A.
Application of Section 199A to Non-Grantor Trusts
Trusts and estates qualify for the section 199A deduction. Beneficiaries of non-grantor trusts are similarly part of the section 199A landscape with respect to their beneficial interest in a trust. Under section 199A(f)(1)(B), rules similar to section 199(d)(1)(B)(i) in effect on December 31, 2017, for the apportionment of W-2 wages will apply with respect to the apportionment of W-2 wages and the apportionment of unadjusted basis immediately after acquisition of qualified property. 
Taxation of Trusts and Estates
It is common knowledge that estates and trusts are subject to federal income tax. In contrast, a grantor trust is not subject to federal income tax since it serves a conduit for the grantor who is taxable on the income of the trust. While the “grantor” of a grantor trust typically is an individual it may also be a corporation. 
Under the TCJA, for tax years beginning after December 31, 2017 or before January 1, 2026, the brackets and rates for trusts and estates, including capital gains, are set out under §1(j). The bracket thresholds are adjusted for inflation beginning after December 31, 2018. For tax years beginning before January 1, 2018 and after December 31, 2025, §1(e) sets forth the brackets applicable to trusts and estates, and §1(i) sets forth rate reductions. The bracket thresholds are adjusted annually for inflation under pre-2018 §1(f). Section 1(h) sets out capital gain rates and holding periods, as well as requirements for the reduced tax rate on dividends.
Tax Rate Comparison Under the Tax Cuts and Jobs Act
Under the TCJA, for tax years beginning after December 31, 2017, and before January 1, 2026, the maximum tax rate differential between between individuals (37%) and corporations (21% flat rate) has increased significantly (the maximum preferential tax rates on dividends and capital gains remain at 28%). The individual income tax brackets provide tax rates lower than the corporate flat 21% rate. For maximum tax rate individuals, the effect of the new tax law will be to make a renewed comparison between C corporation status versus the use of an S corporation or unincorporated entity.
Trusts and estates begin to be taxed at maximum at low levels of taxable income. In determining taxable income, trusts and estates are eligible for the 20% qualified business income deduction (as well as having the ability to deduct 20% of qualified REIT dividends and qualified publicly traded partnership income.  As mentioned, the section 199A deduction is equal to the lesser of: (i) the taxpayer’s combined QBI, or (ii) an amount equal to 20% of the excess (if any) of: (a) taxable income less (b) net capital gain which for this purpose includes qualified dividend income. Section 199A(f)(4) authorizes the IRS the authority to issue regulations with respect to tiered entities eligible for the section 199A deduction.
The Conference Report to the TCJA, H.R. Conf. Rep. No. 466, 115th Cong., 1st Sess. 224 (2017) confirms that trusts and estates are eligible for the section 199A deduction. At this time, however, it is uncertain how the section 199A deduction will be apportioned between a trust or estate and its beneficiaries. The same holds true for an “electing small business trust” for purposes of Subchapter S. In anticipating guidance in this area the Service may further issue regulations under section 199A(h), the “anti-abuse rules” provision. It provides: (i) rules similar to section 179(d)(2) will be adopted in regulations to prevent the manipulation of the depreciable period of qualified property through the use of related party transactions. 
Use of Multiple Non-Grantor Trusts?
The W-2 wage (or W-2 wage and 2.5% acquisition cost of qualified property) limitation does not apply with respect to taxpayers whose taxable income does not exceed $157,500 ($315,000 for married individuals filing a joint return), indexed for inflation. The W-2 wage limitation is phased-in where taxable income exceeds $50,000 for individuals, including a trust or estate. Section 199A(f)(4) instructs that the IRS will issue regulations to carry out the purposes of section 199A.
Some tax practitioners have suggested that the formation of separate trusts will allow each trust to qualify for the 20% deduction with respect to its pro rata share of the trust’s qualified business income where its taxable income does not exceed $157,500. Alternatively, a wealthy individual instead of setting up multiple trusts funded with QBAI property (and income) may instead make gifts of interest in the business to his children or grandchildren who have little or no income. The idea is to avoid the W-2 limitation for the non-grantor trusts and/or each family member donee. Is it an “abuse” of section 199A for a shareholder in a highly successful S corporation with throws of $5,000,000 in annual (net) taxable income to fund 30 trusts taxable under Subchapter J in order the aggregate threshold amount to approach $5,000,000? The Service should be expected to challenge the creation multiple trusts whose primary purpose is the avoidance of Federal income tax and require the trusts to be treated as one trust for Federal income tax purposes. On the other hand, what will the Service’s response be to multiple trusts established for different beneficiaries and with a business purpose? Where multiple trusts can survive judicial review (and avoid consolidation for federal income tax purposes) not only will there be multiple surtax exemptions but more importantly, using multiple trusts, in certain instances, will avoid application of the W-2 wage limitation rule.
Section 643(f) provides for the mandatory consolidation of two or more trusts into one trust under certain circumstances. In particular, it indicates that, under rules prescribed in Treasury Department regulations, for purposes of subchapter J of chapter 1 of the Code (dealing with the taxation of estates, trusts, beneficiaries, and decedents), two or more trusts must be treated as one trust if “(1) such trusts have substantially the same grantor or grantors and substantially the same primary beneficiary or beneficiaries, and (2) a principal purpose of such trusts is the avoidance of” the federal income tax.
In Commissioner v. Duncan, T.C. Memo. 2011-255, the Court took note of the fact that courts have treated multiple trusts as a single trust where the trusts were actually administered as one trust citing Sence v. U.S., 394 F.2d 842 (Ct. Cl. 1968); Boyce v. U.S., 190 F.Supp. 950 (W.D. La. 1961). In the Sense case, the taxpayer and his wife established 19 trusts naming their grandson as the primary income beneficiary of each trust. For each of the years in issue, 1958-1960, 7 of the trust had sufficient income to require filing of a federal income tax return and 7 forms 1041 were filed. The Commissioner asserted deficiencies in income tax with respect to the 7 returns in the sum of approximately $500,000. The trustees paid the alleged deficiencies in federal income tax and filed claims for refund that were denied. The trustees then filed suit in the Court of Claims. The plaintiffs argued that each of the 19 trusts should be respected for federal income tax purposes. The government countered that the trusts should be consolidated and treated as one trust in order to prevent the desired income splitting outcome that the grantors had desired. The Sences’ argued that the individual trusts were created in good faith for non-income tax purposes and therefore should be treated as separate entities for Federal income tax purposes.
Based on the evidence presented at trial, the trial commissioner held that the trusts must be treated as one because tax avoidance was the reason for the creation of the separate trusts. On appeal, the Court of Claims noted that it did not have to consider or entertain the issue of whether separate trusts can be established for a tax minimization (avoidance) motive where, as was the case here, taxpayers failed to demonstrate that the trusts were separate and distinct entities.
“As applied here, that principle means that the taxpayer with tax avoidance motivation must affirmatively show that he created and maintained truly separate trusts before he can claim that they should be taxed individually and not as one. In that respect plaintiffs have fallen down. Cf. Boyce v. United States, 190 F.Supp. 950, 957 (W.D.La.), aff'd per curiam, 296 F.2d 731 (5th Cir. 1961). "When a taxpayer thus boldly proclaims that his intent, at least in part, in attempting to create a trust is to evade taxes, the court should examine the forms used by him for the accomplishment of his purpose with particular care; and, if his ingenuity fails at any point, the court should not lend him its aid by resolving doubts in his favor." Morsman v. Commissioner of Internal Revenue, 90 F.2d 18, 22, 113 A.L.R. 441 (8th Cir.), cert. denied, 302 U.S. 701, 58 S.Ct. 20, 82 L.Ed. 542 (1937).” 394F.2d @852.”
The Court agreed with the trial commissioner’s holding denying the plaintiffs claims for refund for the overpayments in federal income tax on the basis that the 7 separate trusts should be treated as consolidated as a single trust for federal income tax purposes.
Taxpayers seeking to successfully apply a multiple (non-grantor) trust strategy whether to benefit to a greater extent under section 199A or in overall sense for income-splitting among family members need to take a careful look at section 641(f) and underlying case law, the anti-abuse rule in new section 199A and the forthcoming regulations.
 Section 199A(b)(2)(B).
 But see, e.g., PLR 201717010 (4/28/2017)(developer of tool used to provide complete and timely information to healthcare providers was engaged in qualified trade or business under §1203(e)(3); where it didn't provide health care professionals with diagnosis or treatment recommendations for treating patients, taxpayer wasn't aware of health care provider's diagnosis or treatment of patients, and skills that its employees have were unique to work they perform for taxpayer and weren't useful to other employers).
 Under §199A(f)(1) with respect to a partnership or an S corporation, §199A is applied at the partner or shareholder level with each partner or shareholder taking into account her allocable share of each qualified item of income, gain, deduction, and loss, and each partner or shareholder is viewed as having W-2 wages and unadjusted basis immediately after acquisition of qualified property for the taxable year in an amount equal to such person’s allocable share of the W-2 wages and unadjusted basis immediately after the acquisition of qualified property of the partnership or S corporation for the taxable year in the manner provided by regulations. partner's or shareholder's allocable share of W–2 wages shall be determined in the same manner as the partner's or shareholder's allocable share of wage expenses. A partner's or shareholder's allocable share of the unadjusted basis immediately after acquisition of qualified property is determined in the same manner as the partner's or shareholder's allocable share of depreciation.
 The maximum federal income tax rate for trusts and estates is reached at taxable income of $12,501. The lowest rate of 10% is applied for trust or estate taxable income between $0 and $2,500.
 See §§671-679.
 P.L. §115-97, §11001(a).
 Distributions from accumulated trust income may be subject to the “throwback” rules under §§665-668 which continue to apply albeit with less frequency. See §665(c).
 Section 62(a).
 The §199A deduction reduces “taxable income” and is not a deduction used in computing adjusted gross income.
 See §641(c)(special rules with respect to ESBTs).
 Section 179(a) allows a taxpayer to treat the cost of §179 property as an expense not chargeable to capital and allowed as a deduction in the year such property is placed in service. The TCJA increases the limitation §179 property placed in service in a taxable year to $2,500,000. See §179(b)(2). Section 179(d)(2) defines the term “purchase” of property that is eligible for §179 expensing as “any acquisition of property” other than property that is acquired from a related party as defined in §§179(d)(2)(A)(modified §267 and §707(b) rules), 179(d)(2)(B)(between members of the same controlled group, and 179(d)(2)(C) where basis is not determined in whole or in part by the transferor’s basis or for property acquired from a decedent under §1014. Note that as a technical matter §179 does not apply to estates and trusts. See §179(d)(4).