IRS Proposed Regs on Pass-Through Entity Deduction Offers Guidance for Trusts and Estates

Section 199A of the Tax Cuts and Jobs Act (TCJA) allows up to a 20 percent deduction on qualified pass-through business income to all noncorporate taxpayers — including trusts and estates. The IRS recently issued guidance clarifying many provisions within the new code section. Particularly, Proposed Regulation 1.199A-6(d) addresses the applicability of Section 199A to trusts and estates. Below are is key information for various types of trusts hoping to qualify for the deduction. 

Grantor Trusts

A grantor trust is a trust whereby the grantor, or another person, is treated as owning all or a portion of the trust. In this case, the 199A deduction is not applicable at the trust level; instead, it is applied at the individual level. 

Non-Grantor Trusts and Estates

All other trusts and estates are subject to the following requirements to be eligible for the deduction: 

• The trust or estate must calculate its qualified business income (QBI), W-2 wages and unadjusted basis immediately after acquisition (UBIA) of qualified property;
• In the calculation of QBI, any depreciation and depletion deductions must reduce QBI, no matter where the deductions are ultimately allocated; and
• The QBI, W-2 wages and UBIA of qualified property must be allocated to each beneficiary and to the estate or trust based on its share of distributable net income (DNI) — if there is no DNI in a given year, all are allocated to the estate or trust. 

Electing Small Business Trusts (ESBT)

This is the portion of a non-grantor trust that holds S Corporation stock, subject to an ESBT election. The election requires the trust to be taxed as two separate trusts (all on one tax return):  the ESBT portion and the non-ESBT portion. The ESBT portion of the trust is allowed to take the 199A deduction, and it is calculated separately from any 199A deduction in the non-ESBT portion of the trust. 

Anti-Abuse Provision

Articles published over the past eight months, since the passing of the TCJA, have suggested taxpayers use multiple trusts with similar provisions to work around the limitations of Section 199A and other TCJA law changes. In response, the proposed regulations include Regulation 1.643(f)-1, which explains under what circumstances the IRS will be able to combine similar trusts and treat them as one trust for the purposes of 199-A. 

The comment period is open on the proposed regulations to Section 199A, with final regulations expected in October. However, this guidance gives us a fairly clear picture of how to plan. If a trust is part of your estate and tax planning strategy, contact your team now to begin discussing any appropriate action.

Contact Alane Boffa or a member of your service team to discuss this topic further.

Cohen & Company is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law with your professional advisers.