The Tax Cuts and Jobs Act (the Act), enacted December 22, 2017, provided many taxpayer-friendly benefits, including a 20% deduction against flow-through income from certain qualifying businesses. Much has been discussed and written about the need for additional guidance (see Our Thoughts On article from February 12) necessary to allow taxpayers (and their advisors) to interpret and apply the new rules. At the same time, the guidance needs to facilitate Internal Revenue Service (IRS) administration of the law effectively and efficiently.
The rules surrounding the new deduction are complex, do not affect all types of business equally, and leave undefined terms and concepts necessary to calculate the deduction. However, it has been three months since the Act’s signing, and there has been very little substantive guidance issued, leaving taxpayers frustrated. The IRS has communicated that guidance would be available by the end of June. Given the task ahead of them, though, query whether that goal is realistic.
The American Institute of Certified Public Accountants, in a letter addressed to the Assistant Secretary for Tax Policy at the Department of the Treasury (Treasury) and Principal Deputy Chief Counsel at the IRS and dated February 21, 2018, called for specific detailed guidance on:
The definition of Qualified Business Income (QBI);
How businesses may be aggregated in the calculation of QBI;
The impact of losses from flow-through business on QBI;
Whether wages paid by related-party employee leasing companies are utilized in the determination of QBI;
The application of the rules to pass-through entities with fiscal years ending in 2018; and
The availability of deductions for Electing Small Business Trusts.
On March 19, a coalition called “Parity for Main Street Employers” (the coalition) delivered a letter to the Treasury and IRS calling for similar guidance in certain areas. The coalition is a group representing a wide range of Trade Groups including the National Automobile Association, the U.S. Chamber of Commerce, and the S Corporation Association. They requested that Treasury and IRS use their regulatory authority to adopt reasonable methods for calculating the new 20% pass-through deduction, so businesses are not penalized in how they choose to organize their business operations. More specifically, the group is requesting guidance for (1) allowing taxpayers to group activities conducted through S corporations and partnerships, and (2) permitting businesses with existing groups under the Passive Activity rules of the Internal Revenue Code to reorganize those groups to reflect the new law.
Guidance needs to be issued as soon as possible so that taxpayers can plan to utilize, and benefit from, the law as Congress intended. Until that time, the tax professional community cannot be certain whether the IRS will interpret ambiguous provisions in the law broadly or narrowly and whether those interpretations will be favorable or unfavorable to taxpayers. However, whether that guidance is ultimately forthcoming or not, the Schneider Downs’ tax professionals will be there to guide you.
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Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.