New Tax Savings Opportunities
Wondering about the new Section 199A deduction in 2018?
The deduction became effective on January 1, 2018, but guidance on how it would be calculated has been the topic of much speculation. Congress delegated the job to the Internal Revenue Service (IRS), and it’s finally coming to light. For months, we’ve had no specific guidance to work with but now things are becoming more clear.
Tax Savings as of August 2018
The IRS released proposed regulations on August 8, 2018, that answered pressing questions about business losses and multiple business ventures. The new proposed regulations introduced many new options for business owners, many of which can help save money. However, they also bring new pitfalls of confusion without the help of an expert. The complexity of the 199A proposed regulations calls for careful, strategic planning with your estate planning and financial professionals. Here are the highlights you should know and take with you to your next meeting with your CPA and estate planning attorney:
Aggregation
If you own more than one qualifying non-specified service trade or business (non-SSTB), you can choose to aggregate the qualified business income (QBI) from each business so you can potentially deduct more depending on your specific circumstances. The great news is that you now have a choice — so if not aggregating makes your deduction larger, you can choose to not aggregate.
“Reasonable Method” Allocation
If you have multiple directly-controlled trades or businesses, you now have a new planning opportunity thanks to the “reasonable method” item allocation. If you operate multiple businesses, make sure you understand this rule to maximize your deduction.
SSTB Guidelines
There is an SSTB “taint” extending to trades or businesses over certain gross receipt thresholds. Luckily, the 199A proposed regulations narrow the definition of which businesses count as SSTBs. Non-SSTB businesses would benefit from being extracted from SSTB — particularly if you can bypass the “taint” rule.
End-of-Year Acquisitions
To keep individuals from buying properties for the purpose of gaining a larger deduction, the proposed regulations include a so-called anti-abuse rule excluding “property acquired at the end of the year.” We’re talking about any property that was purchased within 60 days of the end of the tax year and sold soon after.
Former Employees
Not everything can great. The proposed regulations also include a problematic rule for former employees with a new status (such as partners in a partnership or independent contractors). Under this new status, a former employee who becomes a part owner in the business may be denied the 199A deduction even though he/she’s treated as an owner for all other non-199A purposes. This poor outcome may be overcome with proper planning and documentation. This is one area of the 199A which requires careful attention for affected parties.
Multiple Trusts
Be aware: there is a new anti-abuse rule about the treatment of multiple trusts to attempt to get around QBI limits.
Clarification on Losses
Not all years may be profitable for businesses. The new 199A regulations bring more clarity to the rules around how losses in one or more qualified trade or business will be treated.
Review Your Business Structure and Save!
The new proposed regulations help improve the workability of the Tax Cuts and Jobs Act of 2017. However, these rules are complex and easy to mishandle. It’s important to get expert help to apply the rules for your business planning. Tax professionals can assist with these important tax forms. Michaelson & Associates is here to help you make sure your business are structured and you are protected.
It’s time to review your situation and determine whether any changes need to be made to your entity or operations to take advantage of the new proposed regulations. If you own a business, contact us for an entity review. Please call the business attorneys at Michaelson & Associates today for more details, and we’ll discuss the best ways to make the most out of the 199A deduction.
