On 8 August 2018, the IRS issued proposed reliance regulations concerning the 20 percent deduction for certain pass-through business income under IRC Section 199A, which was enacted under the Tax Cuts and Jobs Act of 2017 (TCJA) on 22 December 2017. The purpose of the proposed regulations is to provide taxpayers with computational, definitional and anti-avoidance guidance regarding the application of Section 199A.
The regulations will affect individuals, partnerships, S corporations, trusts and estates engaged in US trades or businesses and may provide for a 20 percent deduction for qualified business income (QBI). Taxpayers have been eagerly awaiting further guidance on this broad-reaching deduction, which may effectively provide for a 7.4 percent reduction in the top individual income tax rate (from 37 percent to 29.6 percent) for qualifying business income.
A public hearing is scheduled for 16 October 2018, to address comments before the regulations may become finalised, however, taxpayers may rely on the proposed regulations until they are adopted as final.
The basic premise for the 20 percent deduction hinges on a number of potential limitations, including but not limited to, qualified business income, W-2 wages, qualified property basis (UBIA) and overall taxable income.
Authored by Jeffrey Richman
Taxpayers now have additional guidance to navigate this complex tax benefit, although many questions likely remain. How can companies pro-actively maximize their §199A deduction while avoiding the anti-abuse provisions? How do complex companies navigate the impact of SSTB’s within their structures? Will §1231 gains remain outside of QBI? Will partnership basis adjustments remain outside of UBIA? How will W-2 classifications impact the calculations and application to passthrough structures? Over the coming weeks we will discuss additional insights as we take a deeper dive into each section of the proposed regulations.