Page 8 - Tax Act First Look: The Complex New World Of The Qualified Business Deduction Rule

items must be effectively connected with the conduct of a trade or business within the United States [IRC section 864(c)]. Therefore, if a domestic part- nership or S corporation has foreign source income, unless the regulations permit certain items to be deemed effec- tively connected with a U.S. trade or business, then such income (or loss) falls outside of the scope of IRC section 199A. It will be interesting to see if the applicable regulations will cross-refer- ence the regulations under IRC section 864 or will adopt separate and new applicable rules and conventions.
factor. If the wage limitation amount is less than 20% of the taxpayer’s QBI with respect to a particular qual- ified trade or business, the taxpayer’s deductible amount is 20% of QBI reduced by the same proportion of the difference between the 20% QBI and the wage limitation amount, as the excess of the taxable income of the taxpayer over the threshold amount bears to $50,000 ($100,000 in the case of a joint return). If the taxpay- er’s taxable income is greater than the aggregate phasein amount, then the wage limitation amount determined
Every partnership, S corporation, and sole proprietorship should immediately assess and project the various tax impacts of the TCJA on their federal and state tax liabilities. Business deductions incurred at the business operational level should be permitted to retain their char- acter when reported at the partner or S shareholder level. While state taxes on businesses will still be deductible, indi- viduals will be very limited in how much, if any, state income taxes they can deduct with respect to wages and other income sources.
Tentative deductible amount for a qualified trade or business. As previ- ously stated above, when computing taxable income under the new law, each qualified trade or business is allowed to deduct up to the lesser of: 1) 20% of the QBI with respect to such trade or business; or 2) the greater of 50% of the W-2 wages with respect to such qualified trade or business, or the sum of 25% of the W-2 wages, plus 2.5% of the unadjusted basis immedi- ately after acquisition of all qualified property.
It is obvious that the IRS will need to issue much guidance on the TCJA in the form of rulings, notices, proposed and temporary regulations.
It is obvious that the IRS will need to issue much guidance on the TCJA in the form of rulings, notices, proposed and tem- porary regulations. Given the speed in which the legislation was put together, there will undoubtedly be a technical corrections bill issued next spring or summer. q
Jerald David August, JD, is a partner of Kostelanetz & Fink, LLP, New York. N.Y. A version of this article also appeared on the Kostelanetz & Fink blog (http://http://www.kflaw.com/). The infor- mation contained in this article is intend- ed solely for informational purposes and the benefit of the readers of this article. It does not constitute the rendering of legal advice and may not be relied upon by the reader in addressing or otherwise taking a position on one or more specific tax issues or related legal matter for his or her own benefit or for the benefit of a client or other person.
A Complex New World
There are modifications that may limit the amount of the IRC section 199A deduction [see IRC section 199A(b)(3)]. As a starting point, the law provides that the wage-offset limitation in IRC section 199A(b)(1)(B) (the “wage limitation amount”) does not apply for any taxpayer whose taxable income for the year does not exceed the “threshold amount.” The threshold amount for this purpose is defined in IRC section 199A(d)(2) as $157,500 ($315,000 in the case of a joint return), further subject to a cost of living adjust- ment. The wage limit phases in for a taxpayer with taxable income of $50,000–$100,000 in excess of the threshold amount (or $207,500– $415,000 for a joint return) as adjusted by a prescribed cost of living adjustment
under either the 50% wage amount or the 25% wage amount plus 2.5% adjusted basis computation in new IRC section 199A(b)(2)(B) is fully operative. Therefore, the wage base limitation may, in many instances, limit the amount allowable as a deduction under IRC section 199A, particularly with respect to high- income individuals or partners if the applicable trade or business is not labor intensive.
Payments of employee compensa- tion presumably must be currently deductible in order to qualify; there- fore, deferred compensation, whether qualified or nonqualified, will not be considered as current W-2 income. Presumably the regulations or other guidance will further provide rules for aggregating qualifying businesses under IRC section 469–type regula- tory principles.
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