The IRS has recently released guidance on (Code Sec. 199A) the “pass-through deduction” or the “qualified business income deduction.” This section permits business owners deducting up to 20% of their qualified business income (QBI) from proprietorships, partnerships, trusts, and S corps. This new, long-awaited guidance provides general concept definitions and computational rules. This should help clarify deductions of special interest to several taxpayers confused by the said section.
Businesses or Trades
A taxpayer may have more than one trade or business, but a single trade or business generally cannot be conducted through more than one entity. Taxpayers cannot group multiple activities into a single business but they may aggregate trades or business if they meet the following requirements in order to signify that they are part of a bigger, integrated business or trade:
- Each business or trade is itself a trade or business
- A group or person owns the majority interest in each business to be aggregated
- None can be classified as a service business or trade
- The businesses or trades meet at least two of the three factors
Service Businesses
Not included in qualified business income is specified service businesses. A new exception allows some businesses to avoid the service label if they meet one of the following:
- Gross receipts do not exceed $25 million, and less than 10% is from services
- Gross receipts exceed $25 million, and less than 5% is from services
The regulations largely adhire to existing rules for what activities define a service. However, a business receives income because of an employee/owner’s reputation or skill only when the business is engaged in:
- Endorsing products or services
- Licensing the use of an individual’s image, name, trademark, etc.
- Receiving appearance fees.
This regulation also tries to prevent spin-off parts of a service business into separate qualified businesses. If a business that provides 80% or more of its property or services that a business provides to a related service business is qualified as a service business or trade.
Other proposed regulations address rules on determining a business or trade’s W-2 wages, allocations of items that are not attributable to a single trade or business, penalities, special basis rules, and more.
Businesses should reference a Missouri CPA with questions regarding pass-through deductions. Please contact us, your Missouri accountants.
