Who qualifies for a business income deduction? The answer isn’t always clear

By Bari Faye Siegel

When the Tax Cuts and Jobs Act was signed into law in late 2017, a potentially significant provision for businesses came to life: Section 199A. The challenge, say Friedman LLP’s tax professionals, is the new statute creates more questions than answers.

Section 199A is intended to offer considerable benefits to pass-through businesses, namely S corporations, sole proprietorships and partnerships. By allowing these companies to deduct up to 20 percent of their earned income, it would seem all potentially eligible businesses should ask how 199A might impact them.

But, what constitutes an “eligible business” according to Section 199A?

“The IRS and U.S. Treasury have gone part way in simplifying the qualified business income deduction (QBI) and making it more broadly available to taxpayers,” said Mike Greenwald, tax partner and Business Entity Tax Practice Leader at Friedman LLP. “In so doing, they’ve muddied the water for other taxpayers in regard to who is entitled to the deduction.”

Section 199A, he said, is “filled with niche definitions” of potential QBI beneficiaries. So which type of companies are eligible to take a QBI deduction in 2018? The only way to find out if is to talk to an informed tax professional.

Jo Anna Fellon, tax partner with Friedman, said determining QBI eligibility this year is far from clear-cut.

“We haven’t seen tax reform of this magnitude in more than 30 years,” she said. “Business owners are thirsty for details about how Section 199A affects them and their business.”

Unfortunately, added Greenwald, those details haven’t been easy to decipher.

“We have been telling clients all year that we are waiting for guidance about the nuances of many aspects of the new tax reforms, but we haven’t gotten the full guidance we need,” he said. “We can’t wait any longer. We need to act on what we know. Therefore, business owners need to have these important discussions with qualified tax professionals.”

Since Section 199A doesn’t provide specific instructions, it is incumbent on professionals to analyze client situations and make recommendations, Fellon said.

“We want to talk explicitly to business owners and individuals to learn about their business in an effort to determine if a QBI deduction is worth fighting for this year,” she said.

While Section 199A was intended to provide a “simplified approach and lessen the income tax burden on taxpayers, we are not sure it is overly taxpayer friendly,” she continued. “We must evaluate the impact of Section 199A on a case-by-case basis.”

How do the new tax rules apply to your business? Find out by consulting with a knowledgeable tax advisor.