Unit One – Introduction

Learning Objectives

After completing this Unit, you will be able to: › Understand why Congress adopted new §199A of the Internal Revenue Code. › Gain an overview the how the §199A deduction is calculated.

I. Background.

A. The Act. On December 20, 2017, Congress passed Public Law No. 115-97 (the “Act”), titled “An act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018,” but colloquially known as the “Tax Cuts and Jobs Act.” 1. In the legislative history of the Act, Congress noted that the reduction in the corporate tax rate did not mitigate the high rates of tax imposed on businesses conducted by noncorporate taxpayers in passthrough form or through sole proprietorships. 2. In order to lower rates, Congress introduced new §199A of the Internal Revenue Code, which provides an income tax benefit to investors in non-corporate businesses, i.e., sole proprietorships, partnerships, and S corporations 3. The deduction under § 199A is generally available to individual taxpayers, trusts, and estates that have income from what is termed a “qualified businesses”. 4. The deduction under § 199A is not available to C corporations. B. Proposed Regulations. On August 8, 2018, the IRS issued proposed regulations and a Notice providing guidance on §199A. C. Final Regulations, etc. On January 18, 2019, the IRS issued final regulations (the “Regulations”), a Revenue Procedure, and a Notice providing additional guidance. 1. The final regulations generally apply to taxable years ending after February 8, 2019, the date on which they were published in the Federal Register, but taxpayers may rely on either the proposed regulations in their entirety or the final regulations in their entirety for taxable years ending in 2018.

2. The IRS also published answers to frequently asked questions on its website.

II. The Deduction.

A. § 199A provides a deduction equal to the lesser of (i) the taxpayer's “combined qualified business income amount”, and (ii) 20% of the taxpayer's taxable income, calculated without regard to net capital gain and to the §199A deduction. 1. Qualified business income may result from operating a qualified business as a sole proprietorship, but also can result from ownership of an interest in a pass-through entity such as a partnership, S corporation, or limited liability company (referred to as “Relevant Pass Through Entities” or “RPE”) which generates such income. 2. The §199A deduction is only available to owners of service type businesses on a limited basis. B. § 199A contains a labyrinth of additional limitations and operating rules which make the final determination of the deduction a tax professional’s nightmare. In this program will discuss and hope to make sense out of that labyrinth.

Interactive Exercise 1

Before limitations are applied section 199A provides a deduction equal to: A. The sum of (i) the taxpayer's “combined qualified business income amount”, and (ii) 20% of the taxpayer's taxable income, calculated without regard to net capital gain and to the §199A deduction. B. The taxpayer's “combined qualified business income amount”, C. 20% of the taxpayer's taxable income, calculated without regard to net capital gain and to the §199A deduction.

A is Correct – Sec. 199A provides a deduction equal to the lesser of (i) the taxpayer's “combined qualified business income amount”, and (ii) 20% of the taxpayer's taxable income, calculated without regard to net capital gain and to the §199A deduction. B is Incorrect – The Sec. 199A Deduction is equal to the lesser of (i) the taxpayer's “combined qualified business income amount”, and (ii) 20% of the taxpayer's taxable income, calculated without regard to net capital gain and to the §199A deduction. C is Incorrect - The Sec. 199A Deduction is equal to the lesser of (i) the taxpayer's “combined qualified business income amount”, and (ii) 20% of the taxpayer's taxable income, calculated without regard to net capital gain and to the §199A deduction.

Interactive Exercise 2

Which of the following entities does not qualify to take the Sec. 199A deduction: A. C Corporations B. Estates C. Individuals

A is Correct - The § 199A deduction is not allowed to C corporations. B is Incorrect - The § 199A deduction is allowed to estates. C is Incorrect - The § 199A deduction is allowed to individuals.