August 17, 2018
August 17, 2018
On Aug. 8, the U.S. Treasury Department and Internal Revenue Service (IRS) released proposed regulations (REG-107892-18) concerning a provision enacted under the new tax law that allows certain owners of sole proprietorships, partnerships, trusts, and S corporations to deduct 20 percent of their qualified business income (QBI).
The IRS also released in connection with the proposed regulations a list of “frequently asked questions” (FAQs) and Notice 2018-64 as a proposed revenue procedure for guidance on methods for calculating W-2 wages for purposes of section 199A.
The new deduction under section 199A was added to the Code by the tax law enacted Dec. 22, 2017. Under section 199A, non-corporate taxpayers may deduct up to 20 percent of their QBI from a partnership, S corporation, sole proprietorship, or trust for tax years beginning after Dec. 31, 2017. Eligible taxpayers can claim the 20 percent deduction for the first time on their 2018 federal income tax returns. The proposed regulations also address how to treat income received from a fiscal-year passthrough when part of the income received by an individual is received before Jan. 1, 2018. The proposed regulations allow an individual to take a deduction for all of the income received from a fiscal-year filer, which could include money earned by the pass-through entity in 2017.
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However, for taxpayers with taxable income exceeding a threshold amount ($157,500 for single filers and $315,000 for joint filers), the deduction may be significantly reduced. In such cases, the deduction is limited based upon the W-2 wages paid by the qualified business or the business’ basis in certain depreciable property combined with a more limited amount of W-2 wages. Also, for taxpayers with income over the threshold amount, most income earned in service professions (SSTB) does not qualify for the deduction. The Section 199A deduction will expire for tax years beginning after Dec. 31, 2025.
The proposed regulations provide guidance on six major topics with various definitions and computational rules. Some of the topics addressed, include:
In addition to the proposed regulations, the IRS also issued Notice 2018-64 containing a proposed revenue procedure for calculating W-2 wages for purposes of Section 199A. The proposed revenue procedure provides three methods for calculating W-2 wages, largely based upon methods used for calculating wages under former Section 199 (the qualified domestic production activities deduction) which was repealed by the Tax Cuts and Jobs Act.
The proposed regulations also shut down a few strategies that have surfaced since the enactment of Section 199A. For example, because the threshold amount of taxable income with respect to trusts is calculated at the trust level, the proposed regulations prevent taxpayers from dividing trust assets into multiple trusts to avoid reaching the threshold and consequently being subject to the deduction limitations. Also, the proposed regulations limit the “crack-and-pack” strategy of separating out the service parts of a business so that the remainder of the business can qualify for the deduction.
The notice of proposed rulemaking (NPRM) calls for written or electronic comments to be submitted in time to be received by 45 days after its publication in the Federal Register. Additionally, Treasury has scheduled a hearing on the proposed 199A regulations for October 16, 2018. The NPRM specifically invites comments on a variety of topics, ranging from the regulatory burden of the regulations to specific complicated matters that the proposed 199A regulations address. The scheduling of a hearing and the short time frame for submitting comments appears to indicate a desire on the part of Treasury and the IRS to move quickly to finalize these regulations.
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