On August 8, 2018 the IRS issued proposed regulations for the highly-anticipated 20% deduction for pass-through businesses and sole proprietors. While the proposed regulations have 184 pages of clarifications to address issues with the new Tax Cuts and Jobs Act introduced in December, there are still many unanswered questions. However, there are certain details that you should know in order to begin the conversation as to how this will affect you and your 2018 tax liability. Highlights of the proposed regulations are as follows:
The new deduction, (referred to as the Section 199A deduction or the QBI “Qualified Business Income” deduction), is available to individuals in 2018 for income from eligible businesses with tax years ending after December 31, 2017.
The deduction is generally available to eligible individual taxpayers whose 2018 taxable income falls below $157,500 (increased to $315,000 for joint returns). For those with taxable income over the taxable income threshold certain limitations and exceptions will apply.
The deduction can be up to 20% of qualified income but is limited by factors such as total taxable income, eligible business wages, etc. Qualified income can come from certain trades or businesses, real estate investment trusts and income from certain publicly traded partnerships.
If taxable income is over the limitations noted above, qualified business income will not include income earned within Specified Service Trades or Businesses (“SSTB”). SSTBs which are not eligible include (but are not limited to) service businesses in the following areas,):
health care industry (examples include physicians, dentists, vets, etc.)
legal and accounting services (examples include lawyers, accountants, etc.)
the performing arts or athletics (examples include actors, singers, athletes, etc.); and
most consulting and financial services.
While brokerage services related to the buying and selling of securities are SSTBs. Insurance and real estate agents and brokers are not.
Any trade or business that has common ownership with an SSTB (50% or more) and provides 80% or more of its services to an SSTB would also be considered an SSTB. If there is common ownership but less than 80% of services are provided to an SSTB proportional SSTB status will apply.
Please contact your Citrin Cooperman adviser or a member of our Federal Tax Policy Team to discuss how the proposed regulations may impact your ability to claim the deduction on your 2018 Federal Income Tax Returns.