On August 8, 2018, the IRS released proposed regulations on Code Sec. 199A, one of the major tax breaks enacted as part of the Tax Cuts and Jobs Act of 2017. The proposed rules, which run to 184 pages, address many issues that had been of concern to practitioners, such as the definition of a “specified trade or business,” the calculation of qualified business income flowing through to multiple entities, the treatment of wages paid to employees through third parties, and the definition of “reputation or skill.” The rules allow for grouping of related trades or businesses for purposes of applying Code Sec. 199A and provide for narrow applicability of Code Section 199A’s “reputation or skill” clause. The IRS separately issued a proposed revenue procedure addressing the calculation of W-2 wages for purposes of the W-2 wage limitation on the deduction.
Code Section 199A Deduction in General
Code Sec. 199A provides a deduction of up to 20 percent of income from a domestic business operated as a sole proprietorship or through a partnership, S corporation, trust, or estate. The Code Sec. 199A deduction may be taken by individuals and by some estates and trusts. A Code Sec. 199A deduction is not available for wage income or for business income earned through a C corporation. For taxpayers whose taxable income exceeds a statutorily-defined amount, the deduction may be limited based on:
(1) the type of trade or business engaged in by the taxpayer;
(2) the amount of W-2 wages paid with respect to the trade or business (W-2 wages); and/or
(3) the unadjusted basis immediately after acquisition (UBIA) of qualified property held for use in the trade or business (UBIA of qualified property).
These limitations are subject to phase-in rules based upon taxable income above the threshold amount. The threshold amount is, for any tax year beginning before 2019, $157,500 (or $315,000 in the case of a taxpayer filing a joint return). In the case of any tax year beginning after 2018, the threshold amount is adjusted for inflation.
Additionally, Code Sec. 199A(g) provides that specified agricultural or horticultural cooperatives may claim a special entity-level deduction that is substantially similar to the domestic production activities deduction under former Code Sec. 199.
This is quite a bit of information to absorb in one session, so we are going to our analysis of this law in various sections. One should read all the issued sections in order to gain an understanding the new deduction.
