IRS issues Proposed Regulations explaining Code Section 199A Deduction
On August 8th the IRS issued proposed regulations explaining the Code Section 199A deduction and providing anti-abuse rules. Section 199A of the Internal Revenue Code provides some taxpayers a deduction for qualified business income from a qualified trade or business operated directly or through a pass-through entity.
Eligible taxpayers may be entitled to a deduction of up to 20% of qualified business income (QBI) from a domestic business operated as a sole proprietorship or through a partnership, S corporation, trust or estate. For taxpayers with taxable income that exceeds $315,000 for a married couple filing a joint return, or $157.500 for all other taxpayers, the deduction is subject to limitations.
Qualified Business Income (QBI) is the net amount of qualified items of income, gain, deduction and loss from any qualified trade or business. Only items included in taxable income are counted. In addition, the items must be effectively connected with a U.S. trade or business. Items such as capital gains and losses, certain dividends and interest income are excluded.
What is a Qualified Trade or Business?
A qualified trade or business is any trade or business that is carried on regularly and for profit, with 2 exceptions.
1) A Specified Service trade or business (SSTB), which includes a trade or business involving the performance of services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, investing and investment management, trading, dealing in certain assets or any trade or business where the principal asset is the reputation or skill of one or more of it’s employees. This exception only applies if a taxpayer’s taxable income exceeds $315,00 for a married filing joint return, or $157,500 for all other taxpayers.
2) Performing services as an employee
The regulations contain some good news and some bad news. For example, the regulations define a specified service trade or business (SSTB) more narrowly than most envisioned. For example, real estate brokers (including real estate agents) and insurance salespersons, are not SSTB’s and, therefore are not prohibited from taking the Code Section 199A deduction on their qualified business income (QBI) when taxable income exceeds $415,000 on a joint return and $207,500 for others. In addition, if certain requirements are met, businesses owned 50% or more by the same individuals can be aggregated in determining the Qualified Business income and the W-2 Wage and Qualified Property Limitation.
The calculation for the 20% is not straight forward and requires several calculations in order to determine the actual amount allowable for the deduction. In addition, these are proposed regulations and could be slightly different when final, but we can use them for planning.