The IRS has finally released regulations for the IRC §199A deduction for qualified business income, also known as “pass-through deduction.”
What is Section 199A and Who Does it Apply To?
Section 199A allows business owners to deduct up to 20% of their Qualified Business Income (QBI) from sole proprietorships, partnerships, trusts and S corporations. Individuals, estates and trusts can also deduct 20% of their qualified REIT dividends and Qualified Income from a Publicly Traded Partnership (PTP). The deduction was one of the most high-profile pieces of the Tax Cuts and Jobs Act.
- Individuals can aggregate businesses and treat them as a single business, which can effectively increase the wage limits and capital limits on the deduction
- A qualified business can get up to 10% of its gross receipts from services
- A qualified business can include a related rental activity
- Broadens the “service-business” category to include some non-service businesses that are incidental or related to a service business. This can limit the effectiveness of “crack and pack” strategies that try to create a qualified business by spinning off part of a service business
- A rebuttable presumption that a former employee who continues to perform the same services for the employer is still an employee. I.e. the worker’s compensation is not qualified business income.
- Defines terms such as:
- “Trade or Business”
- “Unadjusted basis immediately after acquisition”
- Explains how to calculate the deduction
- Detailed rules for determining the wage limits and capital limits
- More clearly illustrates the three components of the deduction:
- Qualified Business Income
- REIT dividends
- PTP income
- Better explanations of:
- Service business categories
- Reporting requirements for pass-through entities (S corps and partnerships)
- How an estate or trust can qualify for the deduction.
These changes and clarifications open up great opportunities for tax planning. Please contact us to discuss these new regulations will apply to your specific situation. Our team can review your current tax structure to ensure that you are receiving the maximum benefit of these new rules.