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The Final Section 199A Regulations Eliminate Anti-Abuse Rule from the Proposed Regulations

February 15, 2019 199A Business & Tax Blog

The proposed Section 199A regulations provide anti-abuse rules to limit the ability of taxpayers to separate a specified service trade or business (“SSTB”) from a non-SSTB. One of those rules provides that if a non-SSTB has both 50 percent or more common ownership with an SSTB and shared expenses with the SSTB, then the non-SSTB will be considered incidental to, and part of, the SSTB if the gross receipts of the non-SSTB represent 5 percent or less of the total combined gross receipts of the non-SSTB and SSTB.

The proposed regulations provide an example of this rule where a dermatologist provides medical services to patients and also sells skincare products to patients. The same employees and office space are used for the medical services and the sale of skincare products. The gross receipts of the skincare product sales do not exceed 5% of the combined gross receipts. Under the rule, the sale of the skincare products (which is not an SSTB) will be treated as incident to, and part of, the medical service SSTB. Therefore, the qualified business income, W-2 wages, and any unadjusted basis of qualified property attributable to the skincare products business will not be eligible for Section 199A purposes unless the dermatologist is under the taxable income thresholds specified in Section 199A.

Treasury received numerous comments, including from Williams Parker, critical of this rule for various reasons, including uncertainty as to the meaning of shared expenses and how to allocate gross receipts, and also the negative impact to owners of SSTB’s that create start-up businesses that are non-SSTBs. Thankfully, in response to these comments, Treasury eliminated this so-called “incidental rule” from the final Section 199A regulations.

View the final regulations.

This post is one in a series of posts on the 199A regulations. 

Michael J. Wilson