The IRS is scheduled on October 16 to hold the much anticipated public hearing on proposed regulations for the new Code Sec. 199A passthrough deduction. The IRS released the proposed rules, REG-107892-18, on August 8. The new deduction and proposed regulations have remained a “hot topic” on Capitol Hill among lawmakers and stakeholders.
The new 20-percent deduction of qualified business income for passthrough entities, subject to certain limitations, was enacted under Republicans’ tax reform legislation last December. The Tax Cuts and Jobs Act (TCJA) (P.L. 115-97) created the new Code Sec. 199A passthrough deduction for noncorporate taxpayers, effective for tax years beginning after December 31, 2017. However, the provision was enacted only temporarily through 2025 because of certain Senate budget rules.
The House sent a “Tax Reform 2.0” package to the Senate in September, which would make permanent the TCJA’s passthrough deduction. Although the package of three bills cleared the House with some bipartisan support, the measure to extend the Code Sec. 199A deduction is neither expected to be taken up nor approved in the Senate this year.
It is expected on Capitol Hill that changes will be seen in the Code Sec. 199A regulations once finalized. Indeed, an IRS spokesperson previously told Wolters Kluwer that the initial guidance “would not cover every question that taxpayers have.”
There are many areas where additional guidance would be helpful, Joshua Wu, member, Clark Hill PLC told Wolters Kluwer in a recent interview. Notably, the proposed regulations do not address the differing treatment between a taxpayer operating as a sole proprietor versus an S corporation, Wu said. Additionally, Wu predicted that Treasury may change the definitions of specified service trades or businesses (SSTBs).
The Code Sec. 199A regulations are expected to be finalized before the start of the 2019 tax filing season.
By Jessica Jeane, Senior News Editor