At this stage, I am not paying a TON of attention to the Blue Book. Perhaps naively, I’m hoping final regs deliver clarity on all this stuff soon after new year. The one thing, though, that I think about with regard to “consulting” is all the people who call themselves “consultants” when really they aren’t consultants but independent contractors doing programming or hourly knowledge worker work. I worry now the final regs will call all these people consultants or say they all get scooped up as “principal asset is reputation or skill” situations.

P.S. If I did want to get nervous about the Blue Book, I would probably be grinding my teeth and wringing my hands about the phrase, “complete and separable set of books and records” which appears a couple of times.

P.P.S. I wonder if taxpayers will, due to final regs arriving in 2019, take option to use the friendlier proposed regs.

What do you think of footnote 125 and the functional examples under Treas. Reg. sec. 1.448–1T(e)(4)(iv)?

I cannot believe the consulting description in the draft Pub 535 instructions. Why focus on political consulting? Of course they use the big word INCLUDING… so they are not excluding anything….

First, FinancialDave, thanks for taking time to articulate your thoughts. Everybody wins from a healthy debate!

Second, sorry, I’m not sure I understand your comment. So I can’t really respond fully. BTW, we may agree! Nevertheless, what I will say is this: the fact that the last 20% of the income one earns from a REIT held in a taxable account (and probably from REITs held by an mutual fund too) isn’t taxed makes a difference. Even if someone pays the same marginal rates while working as while retired and drawing from retirement accounts, the fact that the marginal rate on REIT income is only 80% of the taxpayer’s marginal rate needs to be considered.

For those you care, we’ve discussed the counter-intuitive nature of Roth-style accounts before. Here’s a starter blog post: Are Roth-IRAs and Roth-401(s)s Really a Good Deal?

The relevant taxable income is what shows on the tax return. So, for a married filing joint tax return, you look at the married filing joint income.

Is ‘taxable income” considered on a joint basis? In your example, if this was a joint return, and spouse had $50,000 of taxable income, would the 199A deduction still be 20,000?

I have to strongly disagree that it is ever going to be an advantage to hold REITs in a taxable account, Section 199A or not. The reason is actually quite simple when you stop and think about it. Tax-advantaged accounts Roth or Traditional are equivalent given the same marginal rate on Roth contributions vs the withdrawal taxable rate on the Traditional path. Fairly easy concept to grasp – if you have a low tax rate in retirement the Traditional wins because you have more spendable income. Now most people understand the reason the taxable account loses to both the tax-advantaged accounts is the minute you spend $1 on extra tax from the taxable account that is a drag, SO getting a 20% pass-through means that you are still liable for that “extra” 80% as ordinary income. That is an extra 80% that would not happen if you kept the investment in the tax-deferred or the Roth!

The fact that your tax-deferred REIT income is taxed at 100% ordinary income only gets you to the point of say putting the same investment in a Roth account and paying NO extra tax. So even if your taxable account holds all qualified dividends and you are in the 12% bracket, zero tax on your taxable account dividends is still only EQUAL to the same investment in a Roth or Traditional account and not better. No way for a REIT to win because it is always going to create SOME tax drag. If your tax bracket is zero (or actually anything less than the tax you paid on the REIT investment when you put it in the taxable account) then certainly the Traditional will win.

Dave

Sorry for lack of clarity. I was just trying to say that having $100,000 of qualified business income doesn’t mean one gets a $20,000 Section 199A deduction… because the taxable income may limit the deduction.

E.g., if someone’s tax return only shows a sole proprietorship making $100,000 a year and then $50,000 of deductions ($15K pension, $10K self-employed health insurance, $25K itemized deductions) so $50,000 of taxable income, the Section 199A deduction equals 20% of $50,000, or $10,000.

And then to your point about taxable income and capital gains, yes you’re of course right, that figures into calculations too. And just the way, I’m sure, you understand.

E.g., if someone has $100K of sole proprietorship income, $20K of capital gains, and $50K of deductions, the Section 199A deduction equals lessor of 20% of the $100K of QBI (so $20K) or 20% of the $50K of “regularly taxed” taxable income. I.e., this example person’s *real* taxable income equals $70K (that’s $100K of sole proprietorship income plus $20K of capital gains less $50K of deductions)… but that doesn’t mean the taxpayer gets a Section 199A deduction equal to 20% of $70K. They only get 20% of the the $50K.

This last subtlety shows how taxpayers can’t use Section 199A to shelter preferentially taxed income.