IRS expands §199A FAQs.
The IRS has published an updated set of frequently asked questions (FAQs) on their website related to the §199A qualified business income deduction. The April 11, 2019 update expanded the FAQ from 12 questions to 33 and saved what many will see as the bombshell for the last question.
Many of the answers will not be surprising at all to most practitioners. One will likely cause some who had elected to use the proposed regulations to question whether that accomplished what they though it did, but the IRS position is one that many commentators had already suggested might be the position. And one update may affect a large number of taxpayers, as the author of the FAQ has written that the language of §199A(c)(3)(A) allows the IRS to force a double deduction for an S corporation shareholder’s self-employed health insurance deduction.
The most surprising answer for many is found in question and answer 33, which provides:
Q33. Health insurance premiums paid by an S-Corporation for greater than 2% shareholders reduce qualified business income (QBI) at the entity level by reducing the ordinary income used to compute allocable QBI. If I take the self-employed health insurance deduction for these premiums on my individual tax return, do I have to also include this deduction when calculating my QBI from the S-Corporation?
A33. Generally, the self-employed health insurance deduction under section 162(l) is considered attributable to a trade or business for purposes of section 199A and will be a deduction in determining QBI.This may result in QBI being reduced at both the entity and the shareholder level.(underline added)
The IRS had not provided for the treatment of self-employed health insurance in the original proposed regulations, adding the provision specifically including them as a deduction in computing qualified business income only in the final regulations.
The final provision of Reg.§1.199A-3(b)(1)(vi) provides:
(vi) Other deductions. Generally, deductions attributable to a trade or business are taken into account for purposes of computing QBI to the extent that the requirements of section 199A and this section are otherwise satisfied. For purposes of section 199A only, deductions such as the deductible portion of the tax on self-employment income under section 164(f), the self-employed health insurance deduction under section 162(l), and the deduction for contributions to qualified retirement plans under section 404 are considered attributable to a trade or business to the extent that the individual’s gross income from the trade or business is taken into account in calculating the allowable deduction, on a proportionate basis to the gross income received from the trade or business.
Given the impact of that provision as interpreted by the FAQ, some might argue that the IRS should have issued the above in proposed form first where it seems likely commentators would have objected to a doubling up of the deduction. But that was not the route the IRS decided to take.
Some practitioners had suggested that the use of the proposed regulations, where none of the issues of the deduction for self-employment taxes, qualified plan contributions for a self-employed person or the self-employed health insurance deduction were directly addressed, would allow for ignoring those deductions on 2018 returns in computing QBI. In question 32 the IRS took the position many had suspected they would—the final regulations represented only a clarification and not a change in treatment for those items. Even if the 2018 proposed regulations were used, QBI is still reduced for those items.
The FAQs regarding this and other new questions are available on the IRS website newsroom page.
Tax professionals should remember that IRS website FAQs are not authority, nor are they subjected to the level of review that would face a more formal IRS document. But it is reasonable to expect that, unless the provisions are revised by the IRS, that agents are likely to turn to these FAQs for use in interpreting the regulations and law.