IRS Issues Final Guidance on the 20% Pass-Through Deduction for Business Owners

We’ve been monitoring tax reform implementation all year and finally have guidance on one of the most talked about changes. The final details on the new 20% pass-through deduction for business owners answers many of your questions. As with most of the changes brought about by the Tax Cuts and Jobs Act, there are winners and losers. There is opportunity for many to benefit, but we should talk through your specific situation with you.

Lobbying groups urged the IRS to make the implementation of these new rules simple for owners of multiple pass-through entities. And though at least one senior official at the Treasury says they have, unfortunately, this section of the rules is arguably one of the most complex.

Proposed regulations released last year gave interim guidance but left more questions than answers. Comparing what was proposed to final regulations released in late January 2019 can be cumbersome, but your HORNE team is ready to walk through this with you.

In the simplest of terms, 20% of “qualified business income,” qualified REIT dividends and publicly-traded partnership income offer a potential deduction at the individual level. That’s where simple ends and complex begins. From there we must answer questions such as “What is qualified business income?” and “Is the business a Section 162 trade or business?”

There are business aggregation rules and rental real estate safe harbor provisions to be considered. The final rules allow you to choose whether to use the prior proposed regulations or the final regulations when preparing this year’s return. These are important considerations for us to walk you through together to ensure you are making the best decision for your personal situation.

Taxable income below certain thresholds may make the calculation somewhat simple for your situation. On the flip side, if you are in a Specified Service Trade or Business, the calculation requires more information and additional thresholds to overcome.
Businesses will be responsible for providing additional information on their entity returns and making some decisions at the business level. The ultimate deduction, however, is calculated at the individual level.

Complexity such as this is one of the reasons we’ve chosen to focus on exceptional client experience. We can’t properly serve owners of pass-through businesses in a “drop-off, pick-up” fashion. It will require face-to-face meetings to discuss your personal situation, understand your business and how you work so that we can help you optimize the pass-through deduction and other areas of your tax return.

Don’t wait! When you are ready, reach out to your HORNE tax advisor and set up a time for us to talk through your personal situation.

There's opportunity for many to benefit under the 20% pass-through deduction, but it’s complex. Your HORNE team is ready to walk through this with you.