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IRS Extends Tax Break for REIT Income to Regulated Investment Companies

Jun 29, 2020 by Marc Rapport

Regulated investment companies (RICs) that receive dividends from real estate investment trusts (REITs) and pass that income on to shareholders can now claim those as section 199A dividends.

That's according to final regulations the IRS posted in the Federal Register on June 25. Section 199A is part of the Tax Cuts and Jobs Act that through 2025, among other relief, allows pass-through businesses to deduct up to 20% of their qualified business income (QBI).

Here's how KPMG describes the tax break: "Section 199A provides taxpayers, other than corporations, a deduction of up to 20% of QBI from domestic businesses plus up to 20% of their combined qualified REIT dividends and qualified publicly traded partnership income."

Building on breaks for individuals

Aside from pass-through businesses, the IRS had already said that eligible taxpayers can also deduct up to 20% of their qualified REIT dividends and publicly traded partnership income. (Consult an expert to determine your eligibility.)

This guidance adds RICs as an eligible source of that income. This definition of RICs is from Westlaw: "A U.S. investment company that meets certain tax requirements regarding its assets, income and distributions, and has made an election to be taxed as a RIC. Mutual funds and closed-end investment companies typically are taxed as RICs."

QBI from qualified trades, including partnerships, trusts, and estates

"The regulations issued today provide that a shareholder in a RIC may, subject to limitations, treat a section 199A dividend received from a RIC as a qualified REIT dividend for purposes of determining the section 199A deduction," the IRS said in its announcement.

Along with RICs, the final guidance reiterates that eligible taxpayers can take that deduction from QBI from qualified trades or businesses operated as sole proprietorships or through partnerships, S corporations, trusts, or estates. C corporations are not eligible for the deduction.

A list of exclusions

Again, consult a qualified CPA or tax lawyer to know for sure, but here's how an article posted by The Tax Adviser defines those businesses for section 199A purposes: "A qualified trade or business is any trade or business that is not a specified service trade or business (SSTB) or the trade or business of performing services as an employee (Sec. 199A(d)(1))."

No income from SSTBs meet 199A eligibility. The Tax Adviser says those include "trades or businesses that provide services in the following fields: health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, investment management, trading, dealing in securities, partnership interests or commodities, and a trade or business the principal asset of which is the reputation or skill of one or more of its employees."

The IRS says the regulations also provide additional guidance for taxpayers with investments in split-interest trusts or charitable remainder trusts, as well as previously disallowed losses that are included in QBI in following years.

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