Tax Reform Update: Proposed Regulation Released on Qualified Business Income Deduction

On August 8, the IRS released proposed regulations around the Qualified Business Income Deduction (“QBID”) which allows certain taxpayers to claim a 20% deduction on their qualified business income (“QBI”) from sole proprietorships, S corporations, and partnerships that pass-through income to the owners. All passthrough businesses will qualify for the 20% QBI deduction if taxable income is below $157,500 for single taxpayers and $315,000 for married filing joint taxpayers. The 20% QBI deduction for specified service trade or businesses (addressed below) starts to phase out once taxable income is above these amounts and the deduction is reduced to zero if taxable income reaches $207,500 for single taxpayers and $415,000 married filing joint taxpayers. These regulations provide much needed guidance around the deduction and clear up many questions that arose when the Tax Cuts and Jobs Act was signed into law in December of 2017.

Here are some of the areas where the IRS addressed outstanding questions that many tax professionals had:

• Aggregation of Activities – A taxpayer is permitted to aggregate activities for purposes of the QBID, but those activities must meet certain tests.
• Basis of Property – The unadjusted basis of property used for the QBID is determined before any bonus depreciation or Section 179 immediate expensing.
• Previously Suspended Losses – If a taxpayer carries forward previously suspended losses and uses that against income, those losses are not factored into the QBID.
• Specified Service Trade or Business – The IRS addressed many of the concerns tax professionals had and defined many of these businesses in detail. Specifically, the IRS gave detail into the following fields that are not eligible for the 20% QBI deduction if the owner’s taxable income exceeds the thresholds mentioned above: health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, investment and investment management, trading, and dealing in securities.
• W-2 Wages – For purposes of calculating the QBID, wages paid through a common paymaster or Professional Employer Organization (PEO) do count.
• 1231 Gains/Losses – To the extent these gains or losses are treated as capital gains or losses on the individual’s return (after netting), they are not included in the QBID. If the 1231 gains or losses are treated as ordinary income/loss, they are included in the QBID.

While these proposed regulations provide many answers to questions, there are still outstanding issues to work through. However, this is a great start that can be used for planning opportunities today. Please contact us to see how we can help you maximize this potential deduction. We will continue to provide communication in future weeks as issues are resolved.