The IRS has released final regulations regarding the new 20 percent deduction against qualified business income (commonly called the pass-through or the section 199A deduction). This deduction, effective for tax years beginning after Dec. 31, 2017, affects most pass-through businesses and their owners, so the release of this guidance has been highly anticipated for months.
The regulations build upon proposed regulations published on Aug. 16, 2018. While these final regulations are not effective for taxable years ending before their publication in the Federal Register, they make clear that taxpayers have the option for taxable years ending in calendar year 2018 to rely on these final regulations in their entirety or on the previously proposed regulations in their entirety. Taxpayers could also choose to rely on a well-reasoned interpretation of the statute, pre-enactment legislative history, and related guidance.
These final regulations modify and clarify a variety of issues, including:
- An expansion of the aggregation rules, allowing partnerships and S corporations to report multiple trades or businesses on a combined basis
- A safe harbor clarifying when rental real estate activities rise to the level of a trade or business
- Confirmation that specified service activities that exceed a threshold will render the entire business a specified service trade or business
- Examples demonstrating situations where a taxpayer may be operating multiple trades or businesses within a single entity
- Favorable modifications to the determination of the asset basis used in computing the deduction
Taxpayers should stay tuned for more in-depth analyses on these and other issues in the coming days and weeks.