199A Qualified Business Income Regulations

September 19, 2018

The Tax Cuts and Jobs Act enacted one of the most significant tax deductions in history for small businesses. New Section 199A creates a deduction for many owners of sole proprietorships, partnerships, trusts and S corporations of up to 20% of their qualified business income (QBI). The deduction is available for tax years beginning in 2018. The statute is extremely complex. The Internal Revenue Service has recently issued several proposed regulations to provide clarification.

The deduction is available without limitation for taxpayers with taxable income less than $315,000 for joint returns and $157,500 for other taxpayers. Deductions for taxpayers above the $157,500/$315,000 taxable income thresholds may be limited. There are other limitations outlined in the Code.

The proposed regulations clarify several items which were unclear within Code Section 199A including, but not limited to, the following:

  • Gains on the sale of certain assets which might otherwise be considered capital gains (and therefore not eligible for the QBI deduction) will be allowed and available to qualify for the deduction
  • Portions of proceeds from the sale of a partnership interest, which appear capital in nature and not eligible for the QBI deduction, would be allowed to qualify for the deduction
  • Some adjustments to income relating to pre-2018 years which are spread out over a period of years (Section 481 change of accounting methods and/or suspended losses) that are deductions in years after 1/1/2018 would not constitute QBI and therefore would not be eligible for the deduction
  • Net operating losses generally are not taken into account in computing QBI, even though deducted in a year after 1/1/2018.

We will continue to provide additional blogs with additional information on these and other matters as newer regulations are issued by the IRS.