From the issuance of Section 199A final regulations to COVID-19-related guidance under the Family and Medical Leave Act, we have recently seen some significant developments in estate planning and business law. To help you stay abreast of these legal changes, we’ve highlighted a few noteworthy developments and analyzed how they may impact your estate planning and business law practice.
IRS Issues Final Regulations Under Section 199A: Treatment of Suspended Losses and Computation of Deductions for Regulated Investment Companies, Split Trusts, and Charitable Remainder Trusts
TD 9899 (June 25, 2020)
Internal Revenue Code section 199A, effective for tax years beginning after December 31, 2017 and before January 1, 2026, was added to the I.R.C. by the 2017 Tax Cuts and Jobs Act. In general, section 199A allows non-corporate taxpayers—partnerships, S corporations, sole proprietorships, and some trust and estates—to deduct the combined qualified business income (QBI) amount, that is, the sum of 20 percent of QBI from each “qualified trade or business,” 20 percent of qualified real estate investment trust (REIT) dividends, and 20 percent of qualified publicly traded partnership (PTP) income. The taxpayer’s deduction can be no greater than 20 percent of the taxpayer’s taxable income, less net capital gain, and the amount of deductible QBI from a trade or business is limited for higher-income taxpayers based on the W-2 wages paid by the trade or business, and in some situations, the unadjusted basis immediately after the acquisition of qualified property used in the trade or business. These statutory limitations are subject to phase-in rules in section 199A based upon taxable income above the threshold amount.
The newly released 2020 Final Regulations, which amend two substantive sections of the February 2019 Final Regulations, are effective for tax years beginning after August 24, 2020, but taxpayers may continue to rely on the February 2019 Proposed Regulations for tax years beginning on or before that date.
Treatment of Previously Suspended Losses Included in QBI
Final regulations under I.R.C. section 199A issued in February 2019 provided that previously disallowed losses or deductions under sections 465 (deductions limited to amount at risk), 469 (passive activity losses and credits limited), 704(d) (limitation on allowance of partnership losses), and 1366(d) (special rules for shareholder’s losses and deductions) allowed in the taxable year are generally taken into account in calculating QBI, except to the extent that they were disallowed, suspended, limited, or carried over from taxable years ending before January 1, 2018. Under section 199A, such losses are used in order from the oldest to the newest on a first-in, first-out (FIFO) basis. This rule was expanded under the February 2019 Proposed Regulations to treat previously disallowed losses or deductions as losses from a separate trade or business in the year they are taken into account in determining taxable income. Further, the determination of the attributes of previously disallowed losses or deductions, i.e., whether they are attributable to a tax or business and whether they should otherwise be included in QBI, is in the year the loss or deduction is incurred rather than the year the loss or deduction is allowed. The 2020 Final Regulations adopt the 2019 Proposed Regulations but amend them to specifically reference excess business losses disallowed by section 461(l) in a non-exhaustive list of disallowed losses to which this treatment applies.
The 2020 Final Regulations also answer the question of how the phase-in rules apply when a taxpayer has a suspended or disallowed loss or deduction from a Specified Service Trade or Business (SSTB): (1) If an individual’s taxable income is at or below the threshold amount in the year that the loss or deduction is incurred, and the loss would otherwise be QBI, the entire disallowed loss or deduction is treated as QBI from a separate trade or business in the next tax year in which the loss is allowed; (2) Within the phase-in range, only the applicable percentage of the disallowed loss or deduction is taken into account in the next tax year in which the loss is allowed; and (3) Above the phase-in range, none of the disallowed loss or deduction may be taken into account in the next tax year in which the loss is allowed. The determination of whether a suspended or disallowed loss or deduction attributable to an SSTB is from a qualified trade or business is made in the year the loss or deduction is incurred, regardless of the amount of the individual’s taxable income.
Regulated Investment Companies with Interests in Real Estate Investment Trusts and Qualified Publicly Traded Partnership Income
The Internal Revenue Code provides that if a regulated investment company (RIC) has certain items of income or gain, a RIC may pay dividends that a shareholder in the RIC may treat in the same or a similar manner as the shareholder would treat the underlying item of income or gain if the shareholder had realized it directly. In other words, those dividends will be given “conduit treatment.” The 2020 Final Regulations adopt the rules set forth in the February 2019 Proposed Regulations providing conduit treatment for qualified REIT dividends earned by a RIC. Conduit treatment was not adopted for PTP income earned by a RIC in the February 2019 Proposed Regulations. The Treasury Department and the IRS also declined to provide it in the 2020 Final Regulations. However, it has not been ruled out, as they continue to consider the suggestions of commenters and to evaluate whether conduit treatment is “appropriate and practicable.”
Special Rules for Trusts and Estates
Treas. Reg. section 1.199A-6(d) contains special rules applying section 199A to trusts and decedents’ estates. Under that section, the QBI, W-2 wages, unadjusted basis immediately after acquisition (UBIA) of qualified property, qualified REIT dividends, and qualified PTP income of a trust or estate are allocated to each beneficiary and to the trust or estate based on the relative proportion of its distributable net income for the taxable year that is distributed or required to be distributed to the beneficiary or is retained by the trust or estate. Under the 2019 Proposed Regulations, a new provision was added stating that a trust described in I.R.C. section 663(d) with substantially separate and independent shares for multiple beneficiaries will be treated as a single trust for purposes of determining whether the trust’s taxable income exceeds the threshold amount. The Treasury and the IRS clarified the separate share rule in the 2020 Final Regulations to provide that in the case of a trust or estate described in IRC section 663(c) with substantially separate and independent shares for multiple beneficiaries, the trust or estate will be treated as a single trust or estate not only for the purposes of determining whether the taxable income of the trust or estate exceeds the threshold amount but also in determining taxable income, net capital gain, net QBI, W-2 wages, UBIA of qualified property, qualified REIT dividends, and qualified PTP income for each trade or business of the trust or estate, and computing the W-2 wage and UBIA of qualified property limitations.
In addition, the 2020 Final Regulations adopted, with no change, the rules provided by the February 2019 Proposed Regulations pursuant to which the taxable recipient of a unitrust or annuity amount from a charitable remainder trust described in section 664 can take into account QBI, qualified REIT dividends, or qualified PTP income for the purpose of determining the recipient’s section 199A deduction.
Takeaways: The 2020 Final Regulations adopt and clarify the 2019 Proposed Regulations, but leave a few questions unanswered: Will conduit treatment be adopted for qualified PTP income earned by a RIC? Will the IRS and the Department of the Treasury provide new worksheets or forms to assist in the calculation of the deduction using the loss ordering rules? It remains to be seen if and/or when these questions will be answered.
Department of Labor Issues New COVID-19-Related Guidance Regarding the Family and Medical Leave Act
On July 20, 2020, the Department of Labor (DOL) added new guidance to its ongoing list of COVID-19 and the Family and Medical Leave Act Questions and Answers. Under the Family and Medical Leave Act (FMLA), which covers private employers with at least 50 employees within 75 miles of its worksite, a serious health condition is defined, in part, as an illness involving continuing treatment by a health care provider: One of the circumstances falling within the definition of continuing treatment is when there is a period of incapacity requiring an absence from work of more than three full, consecutive calendar days that also involves an in-person visit to a health care provider within the first seven days of the illness, as well as a second visit within 30 days or a regimen of continuing treatment. Under the new guidance, until December 31, 2020, a telemedicine visit, i.e., a face-to-face examination or treatment of patients by remote video conference, will be considered to be an in-person visit for the purpose of establishing a serious health condition. In addition, electronic signatures will be considered signatures for the purposes of establishing a serious health condition through December 31, 2020. Thus, where an employer requires an employee seeking leave under the FMLA to provide a medical certification issued by the employee’s health care provider, it is acceptable for the health care provider to provide an electronic signature on the certification form.
Takeaways: Employers should make sure that their human resources or other personnel who approve leave are aware that a telemedicine visit qualifies as an in-person visit for FMLA purposes and that electronic signatures are acceptable for certifications by healthcare providers. In addition, employers should consider informing their employees of the new guidance to minimize employees’ exposure to COVID-19 that might occur if they seek care at a health care provider’s office. State paid family and medical leave statutes may have different requirements, so it is important to ascertain whether telemedicine visits are sufficient for employees to satisfy state eligibility requirements.
Virginia Adopts Mandatory Emergency Workplace Safety and Health Standards for COVID-19
Emergency Temporary Standard Infectious Disease Prevention: SARS-CoV-2 Virus That Causes COVID-19, 16VAC25-220 (Safety and Health Codes Board, July 15, 2020)
On July 15, 2020, Virginia became the first state to adopt a temporary mandatory workplace safety and health standard to address the prevention, mitigation, and control of COVID-19 in the workplace. Although the federal Occupational Safety and Health Administration has issued extensive recommendations, its standards are not mandatory. Virginia’s temporary emergency standard, which is effective July 27, 2020, requires all companies under the jurisdiction of the Virginia Occupational Safety and Health program, which is applicable to most private sector employers and state and local governments, to comply with certain safety mandates, including:
- providing policies and procedures designed to protect employees within the workplace, including ensuring physical distancing between employees, limited occupancy, and disinfection of common spaces;
- developing policies and procedures for employees to report COVID-19 symptoms and barring employees who are or may be infected from the workplace; and
- determining the risk of exposure to COVID-19 for each job task employees perform, establishing COVID-19 protection based on the level of exposure, and providing training for employees in very high, high, or medium risk categories, demonstrating compliance through a written certification.
Virginia’s emergency temporary standard is set to expire within six months of the effective date, upon the expiration of the Governor’s State of Emergency, or when superseded by a permanent standard, whichever occurs first, or when repealed by the Virginia Safety and Health Codes Board.
Takeaways: Although Virginia is currently the only state that has adopted a temporary emergency COVID-19 standard, a growing number of other states, including California, Illinois, Kentucky, Massachusetts, Michigan, Minnesota, Nevada, New Jersey, New York, Oregon, Pennsylvania, Rhode Island, and Washington state, have established fairly comprehensive executive orders or guidelines addressing worker safety, some of which they intend to enforce. It is likely that other states will follow Virginia’s lead and adopt a mandatory worker safety standard.
Virginia employers should assess their workplaces to determine the level of risk to which their employees are exposed, categorize each worker into very high, high, medium, and low risk positions, certify completion of the hazard assessment, determine and implement the necessary physical barriers and PPE to protect employees, create policies and procedures for the reporting of COVID-19 symptoms, for barring employees who have or may have COVID-19, and for the return of those employees after their recovery, create a preparedness and response plan for employees in certain higher risk positions, and provide training for those employees on COVID-19 preparedness and response. Failure to comply could result in substantial monetary penalties.
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