The IRS issued proposed regulations regarding the qualified business income deduction under Section 199A. Below is a quick summary of the provision and certain items contained in the proposed regulations that stand out.
Section 199A allows owners of partnerships, S-Corporations, trust, and sole proprietorships to deduct 20% of their qualified business income (QBI) starting in 2018. The deduction is equal to the lesser of 20% of taxpayer’s QBI or 20% of taxable income minus capital gains. Deductions for taxpayers with taxable income above $315,000 for joint returns and $157,500 for other taxpayers (the Threshold Amount) may be subject to the two limitations (Wage & Capital Limitation and Specified Services Limitation).
Limitation Based on Wages & Capital: The deduction attributable to 20% of QBI is limited to the greater of (1) 50% of the taxpayer’s share of W-2 Wages paid with respect to the QBI or (2) the sum of 25% of the taxpayer’s share of W-2 Wages plus 2.5% of the unadjusted basis of qualified property. The Wage & Capital limitation does not apply to taxpayers with taxable income not exceeding the Threshold Amount.
Specified Services Limitation: The deduction attributable to 20% of QBI may be subject to the Specified Services Limitation if the taxpayer’s taxable income exceeds the Threshold Amount and derives income from specified service trade or business, as defined below. In computing the QBI with respect to a specified service trade or business, the taxpayer takes into account only the applicable percentage of qualified items of income, gain, deduction, or loss, and of allocable W-2 Wages and qualified property. The applicable percentage with respect to any taxable year is 100 percent reduced by the percentage equal to the ratio of the taxable income of the taxpayer in excess of the threshold amount, bears to $50,000 ($100,000 in the case of a joint return). A specified service trade or business means any trade or business involving the performance of services in the fields of health, law, accounting, actuarial, sciences, performing arts, consulting, athletics, financial services, brokerage services, or any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees or owners.
Additionally, regulations contain aggregation rules allowing separate trades or businesses to be grouped when applying the Sec. 199A rules. The regulations impose a duty of consistency that requires that once multiple trades or businesses are aggregated into a single aggregated trade or business under Sec. 199A, taxpayers must consistently report the aggregated group in subsequent tax years.