And what if your client read this in the Proposed Regs (preamble)…how would your client interpret it?
Similarly, the fact that a deduction is allowed for purposes of computing effectively connected taxable income does not necessarily mean that it is taken into account for purposes of section 199A. For example, for purposes of computing effectively connected taxable income, section 873(b) allows certain deductions, including for theft losses of property located within the United States and charitable contributions allowed under section 170, to be taken into account regardless of whether they are connected with income that is effectively connected with the conduct of a trade or business within the United States. However, for purposes of section 199A, these items would not be taken into account because section 199A only permits a deduction for income that is both attributable to a trade or business and that is also effectively connected income.
There’s some wording like “does not necessarily mean” and “whether they are connected with income that is effectively connected.” Does this imply that such deductions could still possibly be effectively connected (even though they are automatically treated as such)? I think so. But then there’s the “however” and the clear statement that follows. It seems that it’s saying that even if the charitable deduction is effectively connected, it’s not “attributable” to a trade or business. At least that’s one interpretation. This position, which would mean we don’t have a QBI reduction, is bolstered by this sentence in the final regs:
Whether a deduction is attributable to a trade or business must be determined under the section of the Code governing the deduction.
Another interpretation is that the charitable deduction isn’t “effectively connected,” it is simply treated as such under Sec 873(b). If we go that route, it too would mean we don’t have a QBI reduction.
The final Regs say this, unrelated to charitable contributions, per se:
Thus, for purposes of section 199A, deductions such as the deductible portion of the tax on self-employment income under section 164(f), the self-employed health insurance deduction under section 162(l), and the deduction for contributions to qualified retirement plans under section 404 are considered attributable to a trade or business to the extent that the individual’s gross income from the trade or business is taken into account in calculating the allowable deduction, on a proportionate basis.
To me, these things have has a definite link to the business income, as per the Code Sections authorizing these deductions. If there is no business income, for a Schedule C filer, for example, we don’t get any of these deductions. That’s not the case with charity.