Minimizing NII tax with grouping and recharacterization

Any Taxpayer Who:

1. Owns interests in more than one trade or business and is subject to the Net Investment Income Tax (NIIT) for the first time, or

2. Who has been subject to the NIIT in the past but has acquired an interest in a trade or business in the current year. Taxpayers who do not meet these criteria may also be candidates, although additional care is required due to limitations on reconsidering prior grouping elections.

At the time the net investment income tax (NIIT) was introduced, taxpayers spent significant time analyzing whether opportunities existed to regroup their activities in order to minimize exposure to the tax. That regrouping opportunity expired for most taxpayers after 2014.

However, opportunities continue to exist for taxpayers to evaluate whether they can use the grouping and recharacterization rules in section 469 to minimize their exposure to the NIIT. These opportunities might continue to exist where:

1. The taxpayer is subject to the NIIT for the first time
2. The taxpayer has acquired a trade or business for which a grouping election has not yet been made
3. The taxpayer is in the real estate business and has not previously made the election to treat rental activities as a single activity
4. The taxpayer rents property to or receives interest income from a trade or business in which he or she is active
5. The taxpayer has sold a trade or business recently but has retained real estate that was previously self-rental property

The NIIT analysis is not a one-time endeavor. Opportunities are still available, and taxpayers (and their tax advisors) should reassess the NIIT circumstances each year, particularly when new businesses are acquired or the taxpayer is first subject to the tax.