the final regs say no if there is net 1231 gain but a net 1231 loss reduces QBI income
To avoid any unintended inferences, the final regulations remove the specific
reference to section 1231 and provide that any item of short-term capital gain, short-term
capital loss, long-term capital gain, or long-term capital loss, including any item
treated as one of such items under any other provision of the Code, is not taken into
account as a qualified item of income, gain, deduction, or loss. To the extent an item is
not treated as an item of capital gain or capital loss under any other provision of the
Code, it is taken into account as a qualified item of income, gain, deduction, or loss
unless otherwise excluded by section 199A or these regulations.
so section 1245 gain is ordinary so would be part of QBI. gain on sale of real property would be capital gain reported entirely on schedule D line 11 of which a portion would be 1250 recapture. the 1250 recapture as an element of capital gain would not be QBI.
10. Items Treated as Capital Gain or Loss
The proposed regulations provide that any item of short-term capital gain, short-term
capital loss, long-term capital gain, or long-term capital loss, including any item
treated as one of such items, such as gains or losses under section 1231, that are
treated as capital gains or losses, are not taken into account as a qualified item of
income, gain, deduction, or loss in computing QBI.
The Treasury Department and the IRS acknowledge the added challenges in
applying section 1231 in the context of calculating QBI under section 199A. Generally,
under section 1231, a taxpayer nets all of its section 1231 gains and losses from
multiple trades or businesses before determining their ultimate character. In other
words, the section 1231 determination is not made until the taxpayer combines its
section 1231 gain or loss from all sources. This does not change in the context of
section 199A. Thus, the section 1231 rules remain the same in the context of section
199A. For purposes of calculating QBI, taxpayers should continue to net their section
1231 gains and losses from their multiple trades or businesses to determine whether
they have excess gain (which characterizes all of the gain or loss as capital and so all
are excluded from QBI) or excess loss (which characterizes all of the gain or loss as
ordinary and so all are included in QBI). As would be the case outside the section 199A
context, the character tracks back to the trade or business that disposed of the asset.
Another potential complication noted by commenters is the section 1231(c)
recapture rule. Under the rule, a taxpayer that has a section 1231 capital gain in the
current year must look back to any section 1231 ordinary loss taken in the previous five
years and convert a portion of the current year section 1231 capital gain to ordinary
gain, based on the previous losses taken. One commenter asked for further guidance
on how to allocate ordinary gains and losses that may result from the section 1231
calculation to multiple trades or businesses. While the Treasury Department and the
IRS recognize the complexity in applying the section 1231(c) recapture rules and
allocating gain to multiple trades or businesses, providing additional guidance with
respect to section 1231(c) is beyond the scope of these regulations. For purposes of
determining whether ordinary income is included in QBI, taxpayers should apply the
section 1231(c) recapture rules in the same manner as they would otherwise. Notice
97-59, 1997-2 C.B. 309, provides guidance on netting capital gains and losses and how
that netting incorporates the section 1231(c) recapture rule.
Given the specific reference to section 1231 gain in the proposed regulations,
other commenters requested guidance with respect to whether gain or loss under other
provisions of the Code would be included in QBI. One commenter asked for clarification
about whether real estate gain, which is taxed at a preferential rate, is included in QBI.
Additionally, other commenters requested clarification regarding whether items treated
as ordinary income, such as gain under sections 475, 1245, and 1250, are included in
QBI.
To avoid any unintended inferences, the final regulations remove the specific
reference to section 1231 and provide that any item of short-term capital gain, shortterm
capital loss, long-term capital gain, or long-term capital loss, including any item
treated as one of such items under any other provision of the Code, is not taken into
account as a qualified item of income, gain, deduction, or loss. To the extent an item is
not treated as an item of capital gain or capital loss under any other provision of the
Code, it is taken into account as a qualified item of income, gain, deduction, or loss
unless otherwise excluded by section 199A or these regulations.
Similarly, another commenter requested clarification regarding whether income
from foreign currencies and notional principal contracts are excluded from QBI if they
are ordinary income. Section 199A(c)(3)(B)(iv) and §1.199A-3(b)(3)(D) provide that any
item of gain or loss described in section 954(c)(1)(C) (transactions in commodities) or
section 954(c)(1)(D) (excess foreign currency gains) is not included as a qualified item
of income, gain, deduction, or loss. Section 199A(c)(3)(B)(v) and §1.199A-3(b)(3)(E)
provide any item of income, gain, deduction, or loss described in section 954(c)(1)(F)
(income from notional principal contracts) determined without regard to section
954(c)(1)(F)(ii) and other than items attributable to notional principal contracts entered
into in transactions qualifying under section 1221(a)(7) is not included as a qualified
- 57 -
item of income, gain, deduction, or loss. The statutory language does not provide for
the ability to permit an exception to these rules based on the character of the income.
Accordingly, income from foreign currencies and notional principal contracts described
in the listed sections is excluded from QBI, regardless of whether it is ordinary income
