The 199A passthrough business deduction was created under the Tax Cuts and Jobs Act that was signed into law on December 22, 2017. The creation of the 199A section within this legislation has since created many questions and needed clarifications.
On August 8, 2018, the Internal Revenue Service (IRS) issued proposed regulations that provide guidance that further clarifies which passthrough businesses are able to take advantage of this deduction as well as how taxpayers and tax professionals alike can navigate this new deduction. Section 199A allows domestic businesses operated as a sole proprietorship or through a partnership, Limited Liability Company (LLC), S corporation, trust, or estate to deduct up to 20% of qualified business income from tax years between 2018 and 2025.
Those who have taxable income of $315,000 or less for joint filers and $157,500 or less for single filers will now be able to take advantage of the deduction. Those who exceed these taxable incomes will be subject to certain limitations. These limitations could include the taxpayer’s taxable income and limitation by 50% of W-2 wages. These regulations clarify that individuals and certain trusts and estates may be able to take a deduction of up to 20 percent of their combined qualified real estate investment trust (REIT) dividends and qualified publicly traded partnership (PTP) income, including qualified REIT dividends and qualified PTP income earned through passthrough entities.
The 199A deduction can be used at the partner or shareholder level and takes into account the shareholder’s allocable share of items of qualified income and loss, unadjusted basis of the partnership or S-corporation, and W-2 wages. This proposed regulation reinforces that income earned through a C-corporation is not entitled to the deduction. Those who are in favor of this deduction maintain that it will help to reduce the tax rate on pass through and small businesses in order to provide increased parity between pass throughs and C-corporations.
The IRS released guidance with the proposed regulation that includes methods to calculate W-2 wages for purposes of section 199A. Additionally, the IRS published a FAQ page that can also be used as a resource in navigating this new deduction and can be found here.
There is a 45-day comment period where comments can be submitted to the IRS. This comment period is a great opportunity for AAA members who could benefit from the deduction to weigh in, especially where the proposed rule specifically seeks comment in the area of whether a pass-through entity should be able to aggregate its trades or businesses and whether there are proper times to include Section 707(a) payment in qualified business income. A hearing was scheduled by the Department of Treasury on the 199A regulations that will be held on October 16, 2018.