Tax Act First Look: The Complex New World Of The Qualified Business Deduction Rule
P. 1

Tax Act First Look:
The Complex New World of
the Qualified Business
Deduction Rule
Implications for Partnerships, S Corporations, and Sole Proprietorships
By Jerald David August
The Tax Cuts and Jobs Act of 2017 will bring significant changes to all areas of federal taxation, including the new qualified business income deduc- tion rule contained in the new IRC section 199A. Owners and advisors of pass-through entities—partner- ships, S corporations, and sole pro- prietorships—must familiarize themselves with the environment and evaluate the impact on their business structures and operations.
President Trump signed the Tax Cuts and Jobs Act (TCJA), H.R. 1, into law on December 22, 2017. The law was passed by Congress two days earlier, on December 20, 2017. In general, the effective date of the TCJA is January 1, 2017. Many of the provisions of the TCJA will sunset on January 1, 2027, although some provisions are permanent. While the con- ference committee resolved the differences between the House and Senate bills— and there were indeed many differences—the Conference Committee selected the final parts of the bill and sent it back or passage.
This article will summarize the TJCA section 11011, which enacted the new IRC section 199A allowing an owner of a pass-through entity to claim a deduction up to 20% of the qualified business income (QBI) of each portion of a qualifying business owned by the taxpayer. This marks the first time in the history of the federal income tax that pass-through business income is taxed at a lower rate than the tax rate that applies to salary, interest, and similar items. With a new maximum marginal income tax rate of 37% for taxpayers other than corporations, this 20% deduction can reduce the federal income tax rate for pass-through entities to as little as 29.4%. In addition to sole proprietors, shareholders in S corporations, and partners in partnerships, the law states that trusts and estates are eligible for the 20% deduction rule. Rules similar to the new IRC section 199A will apply for apportioning between fiduciaries and ben- eficiaries the W-2 wages and unadjusted basis of qualified property under the limi- tation.
As for the entire set of business reforms introduced by the TCJA, time will tell whether this hastily drawn tax blueprint will become popular with business entities and their owners. The proposed changes with respect to unincorporated businesses institute a lower tax rate based on the type of business activity that the owners are engaged in, as well as the level of wages that the business entity pays. As a result, while partners and owners of S corporations will see their taxes reduced, forecasting just how much will very much depend upon individual circumstances.
Becoming familiar with changes to the income tax rate to individuals is an impor-

   1   2   3   4   5