Update from N.S.B.A. National Small Business Association Proposed Tax Deductions

The Internal Revenue Service (IRS) and Treasury Department recently published proposed regulations under Section 199A, dealing with a non-corporate taxpayer’s 20 percent deduction of ‘combined qualified business income’ (generally, qualified business income from partnerships, S corporations, sole proprietorships, trusts, and estates, plus real estate investment trust (REIT) dividends and publicly traded partnership (PTP) income). Section 199A was added by the recently enacted Tax Cuts and Jobs Act. The proposed regulations also provide rules under Section 643 dealing with trusts. Contemporaneously with release of these regulations, the IRS released Notice 2018-64, proposing a Section 199A revenue procedure on methods for calculating W-2 wages, and frequently asked questions on the Section 199A deduction.

The preamble to the proposed regulations indicates that guidance is being provided for computational, definitional, and anti-avoidance purposes. The proposed regulations under Section 199A are organized into six sections addressing definitions and computation; application of limitations; rules relating to qualified business income, real estate investment trust dividends, and income from publicly traded partnerships; aggregation of trades or businesses; rules relating to specified service trades or businesses and the trade or business of performing services as an employee; and special rules for trusts, REITs, and PTPs. The deduction applies in calendar tax years 2018 through 2025 (tax years beginning after Dec. 31, 2017, and before Jan. 1, 2026).

The proposed computational and definitional rules under Section 199A are proposed to be effective prospectively for tax years ending after the date final regulations are published in the Federal Register, however taxpayers may rely on the proposed regulations until the final regulations are published. Certain Section 199A anti-abuse rules are proposed to apply to tax years ending after December 22, 2017, the date of enactment of the tax law. The proposed revenue procedure in Notice 2018-64 describes required methods for calculating W-2 wages for purposes of Section 199A. The revenue procedure is proposed to apply to tax years ending after December 31, 2017. The notice permits taxpayers to use the methods in the proposed revenue procedure until the proposed revenue procedure is finalized.