Detail

Treasury Issues Regulations on New Pass-Through Business Income Deduction

  • May 13, 2019

The Internal Revenue Service (IRS) and the Department of the Treasury on August 8 released guidance on the new pass-through deduction enacted in last year's tax overhaul bill. 

"The pass-through deduction is an important tax cut for small and mid-size businesses, reducing their effective tax rates to their lowest levels since the 1930s," said Treasury Secretary Steven Mnuchin, above. "Pass-through businesses play a critical role in our economy. This 20-percent deduction will lead to more investment in U.S. companies and higher wages for hardworking Americans." 

  • The Tax Cuts and Jobs Act signed by President Trump in December included a new 20 percent pass-through deduction (section 199A) that can lower the top tax rate on qualifying pass-through business income to 29.6 percent. Such income was previously taxed at a top rate of 39.6 percent.   
  • According to Treasury's press release, the guidance is intended to: 
    • "Ensure that all small business income below $315,000 for married couples filing jointly (and $157,000 for single filers) is eligible for the deduction";  
    • "Provide clarity and flexibility for filers over those income thresholds by:  
         • Including 'aggregation rules' for filers with pass-through income from multiple sources;... 
         • Issuing guidance relating to specified service, trade or business (SSTB) income above the thresholds, which may be subject to limitation for the purposes of claiming the deduction; and... 
         • Allowing a de minimis exception to avoid unnecessary compliance costs for businesses earning only a small percentage of SSTB income"; and 
    • "Establish anti-abuse safeguards to prevent improper tax avoidance schemes, such as relabeling employees as independent contractors." 
  • "The pass-through deduction is an important tax cut for small and mid-size businesses, reducing their effective tax rates to their lowest levels since the 1930s," said Treasury Secretary Steven Mnuchin.  "Pass-through businesses play a critical role in our economy.  This 20-percent deduction will lead to more investment in U.S. companies and higher wages for hardworking Americans." 
  • "The proposed pass-through regulations are a critical step forward in the implementation of tax reform provisions affecting real estate investment, jobs, and economic activity," said Jeffrey DeBoer, Real Estate Roundtable President and CEO.  "A regulatory framework for the pass-through deduction is necessary to give taxpayers the certainty they need to move forward with new job-creating real estate projects that strengthen and enhance communities." 
  • The proposed regulations address several issues affecting real estate, such as the ability to aggregate income from multiple real estate partnerships.  Some areas may need further development, such as the rules related to like-kind exchanges. 
  • In January, The Roundtable wrote to Treasury Secretary Mnuchin offering several suggestions designed to maximize the economic impact of the pass-through deduction and avoid unnecessary disruptions to business activity. [Roundtable Letter, Jan. 18].  

The 184-page proposed regulation on the deduction will be formally published in a future edition of the Federal Register. Stakeholders and other interested parties will then have 45 days to submit public comments, followed by a public hearing on the proposed regulation on October 16.