IRS Issues New Regulations on 20% Business Deduction

The IRS issued highly anticipated proposed regulations on Wednesday, August 8th regarding the new 20-percent Section 199A deduction created by the 2017 Tax Cuts and Jobs Act.

Also known as the pass-through or qualified business income deduction, the Section 199A deduction allows business owners to deduct up to 20-percent of qualified business income (QBI) from sole proprietorships, partnerships, trusts, and S Corporations beginning in 2018.

The 184 pages of regulations clarify several issues by providing:

  • The definition of a trade or business that generates QBI.
  • Detailed rules for determining a business’s W-2 wages and unadjusted basis in property, which are used to determine if the deduction is limited for that business when the owner’s taxable income exceeds $315,000 married filing jointly ($157,500 for other filers).
  • A method for aggregating separate trades or businesses for determining QBI and the W-2 wage and property limitations if certain conditions, such as common ownership, are met.
  • A method for allocating W-2 wages to common law employers, for example, in cases where wages are paid by a management company on behalf of an operating company.
  • The definition of a specified service trade or business (SSTB), which is significant because no Section 199A deduction is allowed for a SSTB if the owner’s taxable income exceeds $415,000 married filing jointly ($207,500 for other filers).
  • A de minimis exception allowing some businesses to escape designation as a SSTB if less than 5% of gross receipts are from services (10% if the business has less than $25M gross receipts).
  • An anti-abuse rule to prevent taxpayers from carving out parts of a business otherwise disqualified from the Section 199A deduction so that the carved out part can qualify for the Section 199A deduction on its own.

Taxpayers may rely on the proposed regulations until final regulations are established.

Notice 2018-64 was also released to provide methods for calculating W-2 wages for the deduction.

Our firm will be analyzing this recent guidance and communicating how it may affect our clients. Please contact our office if you have questions.

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