The 20% Tax Break for Pass Through Entities Just Got Some Clarification

Many of our clients who own small-businesses have been asking for months to help them determine whether they’ll end up as winners or losers with the new pass-through tax deduction.sunset gull

As we’ve written previously, the Tax Cut and Jobs Act contains language that could potentially benefit most of our small to medium sized business clients who formed their entities under pass through rules. The key word there is “could” because how the deduction is implemented was not precisely spelled out in the legislation.

A week ago, on August 8th, the IRS issued IR-2018-162 which contains proposed regulations for what are now referred to as Section 199A deductions. The IRS and the Treasury Department reportedly worked for the past six months to distill the law’s language into feasible regulations.

Even with these new regulations, though, many small business owners will likely be disappointed because there’s still lots of room for confusion.

We’ve been following that specific part of the new law closely, since Section 199A directly impacts owners of sole proprietorships, partnerships, trusts, and S corporations. Briefly, the law allows qualified taxpayers to deduct 20 percent of their qualified business income from their personal tax return.

The questions then become: What constitutes a) a “qualified” taxpayer and, b) “qualified” business income?

The deduction is generally available to eligible taxpayers whose 2018 taxable income is below $157,000 for single taxpayers and $315,000 for those filing joint returns. Deductions for taxpayers above the $157,500/$315,000 taxable income thresholds may be limited.

Qualified business income includes domestic income from a trade or business. (Employee wages and capital gains, as well as interest and dividend income are excluded.)

This year is the first time taxpayers can benefit from the Section 199A deduction, so we need to get as much clarity as possible to effectively tax plan for the remainder of calendar year 2018.

It’s important to note that last week’s announcement focused on “proposed regulations” which indicates that they can be amended between now and the end of the year. (For starters, there’s a 45-day public comment period.) We’re hoping for greater elaboration in the coming months . . . there are still many questions that need to be answered for taxpayers.

We’ll continue to monitor this situation, so we can better advise our clients.

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