Implementing the new tax law: New section 199A is a complex provision, and the IRS has announced plans to issue “computational, definitional, and anti-avoidance guidance under new § 199A” to help taxpayers adjust to the new taxation scheme for passthrough entities. Regulatory directives relating to section 199A in the text of the Tax Cuts and Jobs Act include:
IRC § 199A(f)(4) generally instructs the Treasury to prescribe regulations to carry out the purposes of IRC § 199A, including rules on appropriate reporting requirements, allocating items and wages, and applying the IRC § 199A deduction to tiered entities.
New IRC § 199A(b)(5), as added by the Tax Cuts and Jobs Act, instructs the Treasury to issue guidance on how the combined qualified business income amount rules apply when the taxpayer has a short tax year, or acquires or disposes of a major portion of a trade or business or a separate unit of a trade or business.
New IRC § 199A(h) instructs the Treasury to provide guidance for determining the unadjusted basis immediately after qualified property is acquired in involuntary conversions or like-kind exchanges.
New IRC § 199A further provides that payments to a partner for services the partner renders to the passthrough business in a capacity other than that of a partner are excluded from the calculation of qualified business income subject to clarifying regulations.
Rule Timing: CREFC warns members not to expect speedy guidance from the IRS on complex provisions such as new § 199A. While the agency is currently working on the guidance, it will likely be many months – perhaps a year – before final rules are issued.
Technical Corrections Legislation: There have been numerous technical correction issues identified in the first weeks since the law’s enactment. To address these issues legislatively, 60 votes in the Senate likely will be required. Therefore, passage of any such bill in this mid-term election year will be a very difficult process.
CREFC Policy & Strategy
To the extent CREFC members identify the need for technical corrections, regulatory guidance and/or additional clarity with respect to the provisions governing passthrough entity taxation under the new law, CREFC will remain engaged throughout any regulatory and/or technical corrections processes to ensure these provisions are implemented in a clear, workable, beneficial manner.
Additional Background & History
- Under the pre-H.R. 1 tax code, net income earned by a passthrough entity was reported and taxed as ordinary income for the individual owners and shareholders of the passthrough entity.
- The new deduction for qualified business income from a passthrough entity is a reduction in taxable income, not adjusted taxable income.