It’s tax time again, and because of the Tax Cuts and Jobs Act (TCJA), there are some new rules that you and your accountant need to be aware of to take full advantage of the benefits.
In “10 Things You Need to Know Now about the Final Qualified Business Income Deduction (QBID) Regulations,” Plante Moran (Southfield, MI) noted that one of the most significant aspects of the TCJA was the creation of a new deduction in section 199A, the qualified business income deduction (QBID). “This deduction is claimed by individuals, trusts and estates, and is equal to up to 20% of qualifying domestic business income from S corporations, partnerships and sole proprietorships, plus 20% of certain real estate investment trust dividends and publicly traded partnership income,” said Plante Moran.
Deloitte also issued information on Section 199A, calling it an “elusive, new pass-through tax deduction that demands an early start. The deduction is effective for tax years beginning in 2018 and is available for tax years beginning before December 31, 2025. Deloitte notes in its information that “199A is both a tax benefit and a compliance challenge. Unlike a simple reduction in a tax rate, which is clean and relatively easy to calculate, this deduction is complex, requiring multiple assessments and calculations, new information to be gathered and shared by each pass-through with its owners, and is subject to numerous significant limitations.”
Section 199A—Aggregation of businesses: This deduction is calculated for each individual trade or business and does not automatically allow for attributes from one business to be combined with another. However, the proposed regulations included an aggregation rule, whereby individual taxpayers could aggregate the qualified business income (QBI), W-2 wages and unadjusted basis in assets (UBIA) of two or more separate trades or businesses.
“This modified aggregation rule will be immediately helpful for multi-tiered partnership structures. By allowing separate trades or businesses to be aggregated, the K-1 reporting will be simplified substantially,” said Plante Moran.
Deloitte noted in its information that owners will need to assess whether to aggregate activity of qualifying related trades or businesses. If two or more trades or businesses meet certain qualifications, their respective section 199A activity can be aggregated to enhance the benefit of the deduction, said Deloitte. “The rules provide that either the pass-through entity or its individual owners can elect to aggregate separate trades or businesses. If the pass-through entity aggregates certain trades or businesses, the owners of these entities retain the entity aggregation.” However, the caveat is that once the decision to aggregate is locked in you must consistently report the aggregated trades or businesses in all subsequent taxable years. “This puts pressure on the businesses and its individual owners to exercise foresight when deciding to make the election,” said Deloitte.
Section 162—Qualifying trade or business for the purpose of section 199A: To qualify as a trade or business for the purpose of section 199A, “the taxpayer must be involved in the activity with continuity and regularity, and with a primary purpose of generating income or profit in order to be a trade or business,” said Plante Moran’s Tax Alert.
Deloitte notes in its information that every company must first determine whether it has trades or businesses, and then determine whether each is deemed a qualified trade or business (QTB) or specified service trade or business (SSTB). This is important because the “new deduction applies only to qualified business income earned by a QTB.” And it’s tricky because outside of a few specifics, section 199A defines a QTB by explaining what it’s not, notes Deloitte.
Rental or licensing of tangible or intangible property: This can be determined to be a trade or business if the counterparty is a commonly controlled trade or business. This rule was meant to benefit taxpayers that hold, for example, real estate or intellectual property separately from an operating company, where the rental or licensing would normally not be considered to be in a trade or business.