Tax Cuts and Job Act – 199A Rules Released for Pass-Through Deductions
Here’s the statement S-Corp released:
“The Treasury’s proposed rules are a good start to making the pass-through deduction workable for Main Street businesses. There are many important details to clarify and we have specific concerns about some of the definitions and reporting requirements, but the overall approach taken by Treasury is positive and should be applauded. Our goal is to make certain the 20-percent deduction is available to real businesses with real employees. We think these rules are a good beginning, and we will use the comment period to clarify our remaining concerns.”
The release was broader than what we expected, and appears to be designed to give most businesses the details they need to file next year, including a refined definition of “trade or business,” clarification on which industries are “specified services” and therefore precluded from the deduction, and a new approach to when business owners may aggregate or group together separate legal entities to calculate the deduction.
S-Corp has championed the aggregation issue since the beginning of the year and the proposed rules are generally consistent with our recommendations. They cut a middle ground between a narrow interpretation severely limiting the ability of owners to aggregate and a broad approach with few limitations, as under Section 469. The resulting approach looks like a good-faith effort to allow owners to aggregate groups of businesses when it is appropriate.
Here are some of the details:
- The rule defines what qualifies as a trade or business, and then requires that any aggregated group only include trades or businesses.
- The same group of owners must own a majority stake of each business in the aggregated group. Owners are allowed to apply family attribution rules to measure their ownership stake, and minority owners may rely on the ownership of the entire group to qualify for aggregation.
- None of the aggregated businesses may be a “specified services” business.
- Each business in the aggregated group must meet at least two of the following three factors:
- Provides products and services that are the same or customarily provided together;
- Shares facilities or centralized business elements (personnel, accounting, purchasing etc.); and
- Operates in coordination with, or reliance upon, other businesses in the aggregated group (supply chain, vertical integration, etc.).
- Owners of the same businesses are not required to coordinate their aggregation approach, so each may choose different groups.
- Aggregated groups must be consistent year to year, with proposed rules on when owners are allowed to adjust a group.
Left out of the rule was guidance on how to address tiered ownership and how to stop owners from gaming the rules by disaggregating their businesses. Moreover, while the proposed rules better defined the population of “specified services” that don’t qualify for the deduction, many business activities remain in limbo, not sure which side of the line they fall. That’s not Treasury’s fault – it’s the concept of a specified services that’s problematic, not the rules that follow. One bit of good news is that Treasury narrowly defined when a business’ “principal asset is the reputation or skill of one or more of its employees.” That language has always been impossible and should be discarded by Congress.
In other good news, the proposed rules clarify that Electing Small Business Trusts get the deduction, just like any other owner of a pass-through business.
Treasury has set a 45-day comment period on the rules and scheduled a public hearing at the IRS on October 16th. S-Corp will be providing detailed comments on the rules and expects to testify on the 16th as well. Getting these rules right is our number one priority for the year. The proposals out of Treasury are a good start – we will be working with them and the Hill over the next two months to make sure the details are just as good.