Section 446 Separate Trade or Business Rules: Identifying Distinct Business Lines

The STB rules found in Section 446 have long challenged tax practitioners due to the lack of guidance clearly defining what constitutes distinct trades or businesses among multiple activities. While the IRS has provided some framework for determining whether activities could be considered "separate," the analysis remains highly dependent on the facts and circumstances of the activity and the entity.

Before the 2017 tax reform legislation (P.L. 115-97, the Tax Cuts and Jobs Act or TCJA), the Section 446 rules served primarily to set the framework for whether entities with multiple lines of business could use different accounting methods. However, the passage of Section 199A and its provisions limiting aggregation of separate activities for purposes of calculating the 20% qualified business income (QBI) deduction has increased the urgency for tax advisers to pass-through entities to determine the magnitude of separate activities and whether they rise to the level of constituting a distinct trade or business.

Additionally, the latest proposed guidance by Treasury detailing a "safe harbor" for rental real estate activities to be treated as STBs creates additional planning opportunities for tax advisers able to fully discern the facts and circumstances tests for ensuring that business lines will be treated as separate. Understanding the STB rules of Section 446 may help tax advisers avoid costly misclassifications.

Listen as our panel of tax specialists provides a deep dive into what constitutes a "trade or business" and the context to which the determination is relevant, focusing on real estate activities for purposes of the 199A deduction in light of the recently proposed revenue procedure.

1. Section 446 general rules and initial guidance
2. The intersection of Section 446 with Section 162
3. Facts and circumstances analysis
4. Tests for determining whether distinct activities are STBs under Section 446
5. Impact of Section 199A deduction on separate trade or business analysis
   1. Clarifications on STBs
   2. Cross-references to Section 1202 capital gains exclusion rules
   3. Differences between Section 199A STB definitions and other IRS provisions regarding service businesses
6. Notice 2019-07 Safe Harbor for real estate pass-through entities

The panel will discuss these and other vital questions:

• How Section 446 rules operate for purposes of adopting or changing accounting methods for separate trades or businesses
• How the Section 199A regulation definitions of STBs differ from other provisions in the Internal Revenue Code regarding service-related businesses
• The safe harbor test for rental real estate businesses held in pass-through entities for STB calculations to qualify for the Section 199A deduction
• How the STB determination works for real estate businesses in general and STB factors unique to rental real estate activities

Learning Objectives

After completing this course, you will be able to:

• Recognize tests and factors the IRS and various Courts have upheld in determining that distinct activities qualify as separate trades or businesses under Section 446
• Identify the opportunities in adopting different accounting methods for STBs held by the same entity
• Determine the impact of Section 199A on making threshold identifications of STBs
• Discern the Safe Harbor provisions for rental real estate STB determination

• Field of Study: Taxes
• Level of Knowledge: Intermediate
• Advance Preparation: None
• Teaching Method: Seminar/Lecture
• Delivery Method: Group-Internet (via computer)
• Attendance Monitoring Method: Attendance is monitored electronically via a participant's PIN and through a series of attendance verification prompts displayed throughout the program
• Prerequisite: Three years+ business or public firm experience preparing complex tax forms and schedules, supervising other preparers or accountants. Specific knowledge and understanding of pass-through taxation, including taxation of partnerships, S corporations and sole proprietorships, qualified business income, net operating losses and loss limitation rules. The webinar assumes familiarity with the basics of the Section 199A QBI pass-through deduction.

Strafford Publications, Inc. is registered with the National Association of State Boards of Accountancy (NASBA) as a sponsor of continuing professional education on the National Registry of CPE Sponsors. State boards of Accountancy have final authority on the acceptance of individual courses for CPE Credits. Complaints regarding registered sponsons may be submitted to NASBA through its website: www.nasbaregistry.org.

IRS Approved Provider

Strafford is an IRS-approved continuing education provider offering certified courses for Enrolled Agents (EA) and Tax Return Preparers (RTRP).