IRS Issues Proposed Regulations on 199A Deduction

IRS Issues Proposed Regulations on New TCJA 20% Deduction for Passthrough Businesses

On August 8th, the IRS has released proposed regulations on the new Section 199A deduction which permits qualified taxpayers to take up to a 20% deduction on qualified business income from passthrough activities. This regulation is nearly 200 pages and offers up the first guidance and insight from the IRS on one of the major provisions for small business owners.

We are currently reviewing this complex piece of legislation which will be a very hot topic of discussion in the months ahead, but here are some highlights:

Passthrough Entity Reporting & Individual Tax Return Calculating

It is important to remember that this deduction is calculated on the individual taxpayer’s 1040 and subject to various limits if your taxable income exceeds $315,000 on a joint return or $157,500 for any other return.  The passthrough return will report the appropriate figures that will be needed to calculate the deduction at the 1040 level.

Qualified Business Income Calculated on an Business by Business basis

If you have multiple trades or businesses, the individual must calculate the QBI from each trade or business and then net the amounts. This does mean if one business has positive QBI but the other has negative QBI – these two amounts will be combined when figuring the calculation. If the combined overall net number is negative, this amount will carryforward to the following tax year.

Income over $315k (or $157.5k) – limits come into play

The 199A deduction is subject to various limits if your taxable income (calculated without regard to the deduction itself) is over $315,000 (MFJ) or $157,500 (all other returns). This complex limitation is calculated based using the amount of W-2 wages and qualified property a business uses. This will make it important to have all W-2s and W-3s properly filed, as well as potentially reviewing pay for employees, owners, and a review of fixed assets to determine if planning opportunities exist to maximize the deduction.

Wages paid by Third Party Providers

Don’t worry if you are using a third-party vendor to pay your wages. The proposed regulation indicates that the W-2 wages should be included for the employment by the taxpayer. This means you can include those wages paid by a third-party vendor as well as a common paymaster. This means proper reporting and tracking needs to be done on a business by business basis and consistent application is important.

Much more to come

This is just the tip of a very large iceberg as the regulation touches base on which specified services that qualify (or don’t), aggregation of activities, discussion of rental properties, treatment of losses, and more. We will continue to monitor developments related to the 2017 tax law.  Should you have any questions do not hesitate to contact our office to discuss your specific situation, 517.323.7500.