New Deduction Created by The Tax Cuts and Jobs Act

Thanks to the Tax Cuts and Jobs Act, there is a new deduction for those individuals and companies who have pass through income from Partnerships and S Corps. IRS Code Sec. 199A creates a deduction for those qualifying businesses. The deduction currently is temporary and begins this tax year, 2018.

Generally, qualified taxpayers may deduct up to 20 percent of domestic Qualified Business Income (QBI) from a partnership, S corporation or sole proprietorship. Although this sounds quite simple, it is not a case of deducting 20% right off the top of your pass-through income.  Congress put in place a limitation based on wages paid, or on wages paid plus a capital element, among other requirements.  There are also certain businesses and trades that cannot take advantage of the deductions.

Almost immediately after passage of the new tax law, the AICPA and other tax professional groups urged the IRS to move quickly on guidance. Recently, the National Society of Accountants (NSA) reported that the IRS would issue guidance on Code Sec. 199A this summer.

The AICPA identified several areas of immediate concern. They are:

  • Definition of Code Sec. 199A qualified business income.
  • Aggregation method for calculation of QBI of pass-through businesses.
  • Deductible amount of QBI for a pass-through entity with business in net loss.
  • Qualification of wages paid by an employee leasing company.
  • Application of Code Sec. 199A to an owner of a fiscal year pass-through entity ending in 2018.
  • Availability of deduction for Electing Small Business Trusts (ESBTs).

The letter also included a list of other issues affecting QBI that the AICPA believes warrant guidance.

Please contact us for more information if you feel this is of concern to your company. Maner Costerisan is prepared to assist you with any questions or concerns you have regarding this or any other tax matters.