Written by: Marci Gietl, CPA
Under the pass-through deduction implemented with Tax Cuts and Jobs Act (TCJA), eligible taxpayers could be entitled up to a 20% deduction of qualified business income (QBI). This article will address recent IRS guidance on this new deduction but please also refer to our previous article from January 2018 for more details.
The IRS has recently issued proposed regulations working to clarify components related to the pass through deduction. Part of the regulations clarify further what will or will not be considered as QBI in relation to gains and losses, reasonable compensation, guaranteed payments and other items. Additionally, if an individual or applicable pass-through entity conducts multiple trade or businesses directly, some items of QBI may be properly allocated across those multiple businesses. These proposed regs define that those items should be allocated in a reasonable manner that is consistently used from one tax year to the next; reasonable manner should be determined based on facts and circumstances.
The proposed regulations outline rules for how pass-through entities must provide the necessary information for their owners or beneficiaries to be able to determine QBI even though the pass through deduction isn’t claimed at the entity level.
Aggregation rules are included in the proposed regs as well. A taxpayer may, but are not required to, aggregate more than one trade or business and treat as a single trade or business for purposes of calculations related to the deduction if certain criteria are met. These criteria include, but are not limited to: more than 50% ownership in each aggregated business, none of the aggregated trade or businesses can be a specified service trade or business, and the aggregated businesses must meet two of three factors based on facts and circumstances.
The IRS has also issued Frequently Asked Questions (FAQs) in relation to the new deduction. These questions cover basic definitions and scenarios related to the new pass-through deduction so if you would like to further discuss how the pass through deduction may relate specifically to your tax planning, please contact us.
Health Care Reform Bills
In July, the House passed a number of bills aimed at health care reform but which would also have tax impacts. Many of the bills involve the use of Health Savings Accounts (HSA) or affect individuals with HSAs or Flexible Spending Accounts. Other bills are aimed at reforming taxes and credits implemented from the Affordable Care Act’s mandates for health care coverage. Continued monitoring of these developing bills is needed but they could provide great tax planning opportunities.
Please contact us if you would like to discuss further.