On August 8, 2018, the Internal Revenue Service released much anticipated guidance on the new 20% pass-through deduction under the new Internal Revenue Code Section 199A.
Background – The Tax Cuts and Jobs Act (TCJA) created a 20% deduction for qualified business income to reduce the tax burden on sole proprietors and owners of S corporations and partnerships. This new Section 199A deduction is effective for taxable years beginning January 1, 2018.
Qualified trades or businesses include those operated through a partnership, S corporation, sole proprietorship, trust or estate. Special rules apply to businesses operating as specified service trade or businesses (SSTB), such as businesses in the fields of health, law, accounting, consulting and numerous other fields where the principal asset is the reputation or skill of one or more of its employees.
The deduction for eligible taxpayers, including taxpayers in specified service trade or business, whose 2018 taxable income is $315,000 or less for joint returns and $157,500 for other taxpayers, is the lesser of 20% of qualified business income plus 20% of their qualified REIT dividends and qualified PTP income or 20% of taxable income minus capital gains.
Taxpayers whose taxable income exceeds $315,000/$157,500 may have further limitations to determine the deduction amount. For specified service trade or businesses the deduction is completely eliminated when the taxpayer’s taxable income exceeds $415,000/$207,500; for other qualified trades or businesses W-2 wages and/or unadjusted basis of depreciable property come into determination of the allowable deduction amount.
The proposed regulations provide much needed definitional, interpretive and computational guidance on various aspects of this new deduction.
- What constitutes a “specified service trade or business” and what services that are provided in certain related fields are not considered to be SSTB income
- De minimis rule to assist a trade or business not to be considered a SSTB if its gross income consists of only a small percentage (up to 10%) of income from specified service activity
- Definition of a trade or business for this code section purposes
- Determination of W-2 wages when “W-2 wages” may limit the amount of this deduction.
- Determination of unadjusted basis of property for this deduction purposes
- Aggregation rules for taxpayers with multiple trade or businesses
- This additional guidance gives us a better understanding of how to apply these rules to various situations. Each taxpayer’s situation is different with different considerations and planning options. We would welcome the opportunity to speak with you and help you plan to get the most out of this new 20% deduction.