Tax
Insights

IRS proposes regulations on new 20% deduction for passthrough entities



The IRS recently proposed regulations for the new Section 199A deduction for qualified business income, which was introduced as part of the Tax Cuts and Jobs Act.

This new deduction, allows many owners of sole proprietorships, partnerships, trusts and S corporations to deduct up to 20 percent of their qualified business income. The deduction is generally available to eligible taxpayers whose 2018 taxable incomes fall below $315,000 for joint returns and $157,500 for other taxpayers.

The deduction will generally be equal to the lesser of:

  • 20 percent of the qualified business income plus 20 percent of the qualified real estate investment trust dividends and qualified publicly traded partnership income, or
  • 20 percent of taxable income minus net capital gains.

There are certain limitations for business in the health, law, accounting, consulting, financial services and other similar categories defined as “Specified Services,” and for those businesses that exceed the taxable income threshold.

Businesses defined as Specified Services:

Taxable Income

199A Deduction

Below $157,500 (single)
$315,000 (married)

Eligible for full 20% deduction with no limitations.

Between $157, 500 - $207,500 (single)
$315,000 - $415,000 (married)

Might be able to get some of the 20% deduction with some limitations

Above $207, 500 (single)
$415,000 (married)

Not eligible for deduction

 

Businesses Not in a Specified Service:

Taxable Income

199A Deduction

Below $157,500 (single)
$315,000 (married)

Eligible for full 20% deduction with no limitations.

Between $157, 500 - $207,500 (single)
$315,000 - $415,000 (married)

Might be able to get the 20% deduction with some limitations

Above $207, 500 (single)
$415,000 (married)

Might be able to get the 20% deduction with some limitations

 

The IRS mentioned that Taxpayers may rely on the rules in these proposed regulations until final regulations are published in the Federal Register.

The deduction is available for tax years beginning after Dec. 31, 2017. Eligible taxpayers can claim it for the first time on the 2018 federal income tax return they file next year.

For better explanation of eligibility for the deduction, we compiled a list of frequently asked questions provided by the IRS:

Who is eligible?

Individuals, trusts and estates with qualified business income, qualified REIT dividends or qualified PTP income may qualify for the deduction.

What are the limitations?

For taxpayers with taxable income that exceeds $315,000 for a married couple filing a joint return, or $157,500 for all other taxpayers, the deduction is subject to limitations such as the type of trade or business, the taxpayer’s taxable income, the amount of W-2 wages paid by the qualified trade or business and the unadjusted basis immediately after acquisition (UBIA) of qualified property held by the trade or business. Income earned through a C corporation or by providing services as an employee is not eligible for the deduction.

What is qualified business income (QBI)?

QBI is the net amount of qualified items of income, gain, deduction and loss from any qualified trade or business. Only items included in taxable income are counted. In addition, the items must be effectively connected with a U.S. trade or business. Items such as capital gains and losses, certain dividends and interest income are excluded.

What is a qualified trade or business?

A qualified trade or business is any trade or business, with two exceptions:

  • Specified service trade or business (SSTB), which includes a trade or business involving the performance of services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, investing and investment management, trading, dealing in certain assets or any trade or business where the principal asset is the reputation or skill of one or more of its employees. This exception only applies if a taxpayer’s taxable income exceeds $315,000 for a married couple filing a joint return, or $157,500 for all other taxpayer.
  • Performing services as an employee

 

For more information about how this new regulation or other changes under the Tax Cuts and Jobs Act might affect your business, please contact us.

 

 

Source:
Internal Revenue Service (IRS)