The Tax Cuts and Jobs Act (TCJA), which was enacted in December 2017, included a new deduction for 20% of qualified business income passing through to equity owners from enterprises electing to be taxed as pass-through businesses (i.e., S corporations, partnerships and sole proprietorships). Under the new tax reform provisions, non-corporate taxpayers may deduct up to 20% of domestic qualified business income from a partnership, S corporation, or sole proprietorship. A similar deduction is allowed for specified agricultural or horticultural cooperatives. A limitation based on wages paid, or on wages paid plus a capital element, is phased in for taxpayers with taxable income above a threshold amount. The deduction is not allowed for certain service trades or businesses, but this disallowance is phased in for lower income taxpayers. The deduction applies to tax years 2018 through 2025.
While this provision, which is colloquially referenced as the “pass-through” deduction, is a welcome relief for owners conducting business in such entities, numerous open matters remain in its application. Advisors, as well as taxpayers, have been clamoring for further assistance and clarification from the Internal Revenue Service since the law was passed. The Acting Internal Revenue Service Commissioner, David Kautter, recently confirmed that the Service expects to release additional guidance on the Code Sec. 199A pass-through deduction by the end of July.
The new pass-through deduction under Code Sec. 199A is likely to present a major income tax planning opportunity for affected taxpayers, and it is important that developments be monitored so the latest information can be used in 2018 planning.