The IRS and Treasury recently published proposed regulations under Section 199A, dealing with the deduction for up to 20% of ‘combined qualified business income’ from partnerships, S corporations, sole proprietorships, trusts, and estates. Section 199A was added by the 2017 tax reform act (the Act).
The Section 199A deduction is based, in part, on ‘qualified business income’ (QBI) from a ‘qualified trade or business.’ Generally, a specified service trade or business (SSTB) and the trade or business of performing services as an employee are not qualified trades or businesses, and income from these trades or businesses is not QBI. However, certain taxpayers’ income from an SSTB may be QBI and taken into account in whole or in part in computing the Section 199A deduction.
Understanding the rules for determining whether a trade or business is an SSTB or the trade or business of performing services as an employee is critical in obtaining and maximizing the Section 199A deduction. This insight discusses those rules. For a detailed discussion of computational rules, including limitations on the deduction and aggregating trades or businesses, see our previous Insight, Proposed regulations provide guidance on computing the Section 199A deduction.
The rules generally are proposed to be effective prospectively for tax years ending after the date final regulations are published in the Federal Register. Certain Section 199A anti-abuse rules are proposed to apply to tax years ending after December 22, 2017, the date of enactment of the Act. However, the proposed regulations allow taxpayers to rely on the proposed regulations until the final regulations are published.
The IRS also released frequently asked questions on the Section 199A deduction explaining, in part, the rules relating to SSTBs.
PwC professionals will discuss the new Section 199A guidance, including rules relating to SSTBs, in a Tax Reform Readiness series webcast on Wednesday, October 10, at 2:00 PM EDT. Registration details for the webcast are available here. A Tax Reform Readiness webcast on August 30, 2018 that discussed these rules may be viewed here.
Section 199A provides a permanent benefit to eligible taxpayers for the next several tax years. Understanding the rules relating to SSTBs and performing services as an employee will help eligible taxpayers seeking the maximum benefit from the Section 199A deduction.