The IRS issued proposed regulations (107892-18) on August 8, 2018 regarding the passthrough deduction of §199A. Excepting the new season of Orange Is the New Black, nothing else has garnered as much anticipation this Summer as the arrival of these regs. Having read all 184 pages, I can tell you there is a lot of meat on the bone.
Six substantive sections comprise the guidance. The first section consists of operational rules and defined terms. The computation of the deduction is discussed with differing levels of taxable income and reference to the threshold amounts and phase-in ranges. The second section discusses W-2 wages and basis issues. Notice 2018-64 was concurrently released and provides three methods for calculating W-2 wages for purposes of the limitations on the§199A deduction. The third section concerns itself with QBI, qualified real estate investment trust dividends, and qualified publicly traded partnership income.
The fourth section tackles the aggregation of separate trades or businesses. The grouping rules under §469 are deemed to not be appropriate for determining a trade or business for §199A purposes. Certainly then, both active and passive owners of a trade or business are entitled to a §199A deduction if otherwise qualified. Aggregation, though, is permitted but not required if certain requirements are met. The regs provide reporting and disclosure requirements for those choosing to aggregate.
Section 5 proves very interesting. Specified Service Trade or Businesses are discussed. A de minimis rule is provided that a trade or business is not a SSTB if less than 10% of its gross receipts are attributable to the performance of services in a specified service activity. It’s 5% of the gross receipts in situations where gross receipts are more than $25M. Specific services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, and brokerage services are also examined for SSTB status.
The news is not great for accountants. As most of you know, a married accountant is unable to take the deduction at all after taxable income of $415,000 ($207,500 for others). The net for the accounting profession as a SSTB remains very fine and very wide. Performance of services in the field of accounting extends to not only accountants but enrolled agents, return preparers, financial auditors, and similar professionals in their capacity as such. The regs seek to capture the common understanding of accounting, to include tax return and bookkeeping services, even though CPA level licensure, education and training may be entirely absent. All such professionals, then, will be viewed as working in a SSTB and therefore subject to the income limitations on the deduction. Incidentally, the field of accounting does not include payment processing and billing analysis.
In an effort to counterbalance that bummer, I submit a bit of better news. Many accountants previously feared the “reputation or skill” clause as a potentially de facto catch-all ensnaring a trade or business in SSTB status. Well, fear no more. The regs limit the meaning of “reputation or skill” to very specific fact patterns (endorsement income; income for the use of image, likeness, etc.; and appearance fees or income). Therefore, the “reputation or skill” clause will not trip up any undeserving operations aside and apart from the seemingly “famous” people.
The final section contains the anti-abuse rules. Taxpayers could have easily circumvented the threshold amounts by dividing assets among several non-grantor trusts with each claiming its own threshold amount. Much to the chagrin of enterprising attorneys, this strategy is outlawed.
My obvious goal here was simply to give you a skeletal overview of the proposed regs. There are tremendous planning opportunities for your clients, and every practitioner should become well versed in the nuances of the §199A deduction. We are continually working here at Surgent to update our materials and presentations with this latest guidance. We refuse to put out a 60 or 90-minute highlight reel which would inevitably leave you with many questions unanswered. Instead, our 4- hour webinar, S19U, covers this new proposed reg comprehensively from soup to nuts. Do yourself a financial favor and register for S19U as our acclaimed presenters, Mike Tucker and Bob Lickwar, speak on this critically important deduction.
Nick Spoltore is VP of Tax & Advisory Content for Surgent CPE. Mr. Spoltore is a graduate of the University of Notre Dame and of Delaware Law School. Before joining Surgent, he practiced tax and business law at the firm of Heaney, Kilcoyne in Pennsylvania and also in Delaware.