Ability to deduct DPAD for fiscal year pass-throughs may be reversed
The ability for an individual taxpayer to claim the Domestic Production Activities Deduction (DPAD) and the 199A deduction on the same income has been an ongoing issue since the implementation of the TCJA. This unique situation is presented to taxpayers by the TCJA only to the extent the income in question relates to activities occurring in pass-through entities with fiscal tax years beginning in 2017 and ending in 2018. Guidance from various official sources have been drafted on the issue, and RSM has also released multiple tax alerts discussing the practical effects and considerations. Please see our recent tax alerts: JCT and Treasury at odds on DPAD for fiscal year pass-throughs and LB&I directive provides guidance on DPAD claims risk review campaign.
The Treasury and IRS have provided guidance advising individual taxpayers that DPAD would be allowed to be claimed on 2018 tax returns, to the extent the deduction is based on activities of a pass-through entity that occurred in a fiscal year that began in 2017 and ended in 2018. This was then contradicted by the release of the Joint Committee on Taxation's Blue Book (their technical summary of the TCJA), which stated in part that:
"As the enactment of section 199A is also effective for taxable years beginning after Dec. 31, 2017, any item taken into account in determining the qualified production activities income of the taxpayer under former section 199 cannot be taken into account in determining the combined qualified business income amount of the taxpayer under section 199A."
Although the Blue Book is not authority in the same way as the Treasury Regulations and other IRS guidance, any discrepancies with existing guidance should be carefully considered.
On Jan. 2, 2019, the latest development on this issue came from the House Ways and Means Committee Chairman Kevin Brady, with the proposed draft of the Tax Technical and Clerical Corrections Act ("technical corrections bill"). The technical corrections would effectively disallow a dual DPAD and 199A deduction based on the same income. From the technical corrections bill:
"Any item taken into account in determining the combined qualified business income amount of the taxpayer for any taxable year under section 199A of the Internal Revenue Code of 1986 (as added by this section) shall not be taken into account in determining the qualified production activities income of such taxpayer for such taxable year under section 199 of such Code (as in effect before its repeal).''
Generally, the technical corrections bill is meant to ensure correct implementation of the TCJA in line with congressional intent. If adopted by the new congress, the technical corrections bill could create significant issues with taxpayers following Treasury and IRS guidance regarding the DPAD and 199A deduction on the same income. It is important to note however, that the new Congress may not agree with the technical corrections bill's interpretation, and could potentially revise or draft their own technical corrections to the TCJA, or could not pass a technical corrections bill at all in order to focus on other priorities.
There is no certainty in the eventual outcome, but there are options that individuals with pass-through activities as described above should carefully consider. If possible, a taxpayer may choose to extend their return in order to take both deductions on their originally filed return, and then filing a superseding return to reverse their position if the DPAD is disallowed by a technical corrections bill enacted into law. Similarly, a taxpayer may choose not to take the applicable DPAD deduction, and file a superseding return to deduct the DPAD if a technical corrections bill does not become law.
These deductions should be considered with particular caution given the apparent discrepancies between the authorities discussed herein. Above all, taxpayers who are considering this or a related position should consult with their tax advisers to determine their options and the best course of action.