On June 24, the IRS and Treasury issued final regulations under Section 199A of the tax code. The final regulations adopt 2019 proposed regulations with clarifying changes and additional modifications.

The Tax Cuts and Jobs Act added Section 199A to the tax code. Very generally, under that section, non-corporate taxpayers may deduct up to 20% of (i) their income from a U.S. trade or business operated as a sole proprietorship or through a partnership, S corporation, trust, or estate (qualified business income) and (ii) their combined (a) qualified REIT dividends (very generally, REIT dividends that are subject to tax at ordinary income rates) and (b) qualified publicly traded partnership income (very generally, their allocable share of the partnership's ordinary income). 

Notably, the final regulations establish parity between individuals who hold interests directly in REITs and individuals who hold interests indirectly in REITs through RICs (i.e., mutual funds) by providing that an individual who is a shareholder of a RIC may, for purposes of calculating his or her Section 199A deduction, treat as qualified REIT dividends any dividends received from a RIC that are attributable to qualified REIT dividends received by the RIC. This guidance comes as welcome news to taxpayers, although many are hoping the IRS will issue similar guidance with respect to the qualified publicly traded partnership income of a RIC (which, in the preamble to the final regulations, the IRS noted it is considering).

The final regulations apply to taxable years beginning after August 24, 2020, although taxpayers may choose to apply the final regulations to taxable years beginning on or before August 24, 2020 if they consistently apply the final regulations for each such year.