IRS issues final regulations under section 199A (20% deduction)
The U.S. Department of the Treasury has issued final regulations and other guidance on a substantial provision of the Tax Cuts and Jobs Act, which allows owners of sole proprietorships, partnerships, trusts, and S corporations to deduct up to 20 percent of their qualified business income. The final regulations ensure that this historic tax cut will be available to the broadest spectrum of American businesses, consistent with the law, while minimizing compliance costs and streamlining the process for claiming the deduction.
It is estimated that between 17 and 40 million American business owners will be able to take advantage of this deduction. The deduction is generally available to small business owners with income below $315,000 for married couples filing jointly and $157,500 for single filers without limitations. For business owners above those thresholds, the regulations also provide certainty and flexibility by clarifying the definitions of “specified service trade or business” and “unadjusted basis immediately after acquisition” of qualified property, and by including “aggregation rules” for filers with pass-through income from multiple sources. Treasury also issued a revenue procedure on computing W-2 wages for purposes of the limitations that apply to owners with income above the threshold amounts.
In addition, proposed regulationswere released as guidance concerning the deduction for qualified business income under section 199A. The proposed regulations provide guidance on the determination of the section 199A deduction for taxpayers that hold interests in regulated investment companies (RICs), charitable remainder trusts, and split-interest trusts.
The IRS also released an advance version of Notice 2019-07 that contains a proposed revenue procedure providing a safe harbor under which a rental real estate enterprise will be treated as a trade or business solely for purposes of section 199A and Reg. sections 1.199A-1 through 1.199A-6.
A Treasury Department release explains that the related proposed regulations “provide further certainty for determining the deduction for REIT dividends taxpayers own through mutual funds” and that the proposed revenue procedure in Notice 2019-07 provides the safe harbor so that certain rental real estate enterprises may be treated as a trade or business for purposes of the deduction.
Lastly, the IRS released an advance version of Rev. Proc. 2019-11 [PDF 95 KB] that provides methods for calculating W-2 wages (as defined in section 199A(b)(4) and Reg. section 1.199A-2) for purposes of:
- Section 199A(b)(2) which for certain taxpayers, provides a limitation based on W-2 wages to the amount of the deduction for qualified business income (QBI)
- Section 199A(b)(7) which for certain specified agricultural and horticultural cooperative patrons, provides a reduction to the section 199A deduction based on W-2 wages
For more information on how you can take advantage of this and other provisions of the TCJA, contact your ShindelRock tax professional today.