The IRS has finally released guidance on the new Code Sec. 199A, or more commonly referred to as the “pass-through deduction”, or “qualified business income”. The new code brought forth by the Tax Cuts and Jobs Act, allows specific businesses to deduct up to 20% of their qualified business income from sole proprietorships, partnerships, trusts, and S corporations.
The proposed regulations incorporate Section 162 into 199A, which will help determine what constitutes a trade or business. Confusion came when filing because a taxpayer may have multiple businesses or trade, but they had to be limited to one entity. The regulations will allow a taxpayer to aggregate trades or businesses if:
Each trade or business is itself a trade or business;
The same person or group owns a majority interest in each business to be aggregated; none of the aggregated trades or businesses can be specified service trade or business; and
The trades or businesses meet at least two of three factors which demonstrate that they are in fact part of a larger integrated trade or business.
Understanding the new regulations is key to saving money on your tax returns because of the way the deduction works. The ability to deduct up to 20% of your qualified business income can be a huge benefit for particular taxpayers. Higher-income taxpayer’s qualified may be reduced by the wages/capital limit. Many of the reductions depend on the business’s income. If you have questions about your ability to claim the deduction, contact us at the Center for Financial, Legal & Tax, Inc.