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Tax Cuts and Jobs Act: Additional Guidance Released

Additional guidance on the new Tax Cuts and Jobs Act (TCJA) is finally starting to surface including proposed regulations on the Qualified Business Income (QBI) deduction under Section 199A. Section 199A permits owners of certain sole proprietorships or pass-through entities to take a 20% deduction on their business’ income subject to certain phase-outs relating to payroll and property. However, trades or businesses that are characterized as a “specified service trade or business” (SSTB) are only permitted the full 20% deduction if their taxable income is under $315,000 for a married filing joint taxpayer ($157,500 for single filers). If your income exceeds these limits, there is a phase-out of the deduction for the next $100,000 of income for a married filing joint taxpayer ($50,000 for single filers). After these limits are surpassed, no QBI deduction is allowed for a SSTB.

Some of the classifications of businesses that were included within the definition of a SSTB gained some clarity including: (1) “financial services” should be narrowly interpreted and include services performed by financial advisors and investment bankers in the areas of wealth management, retirement planning, M&A, raising financial capital, etc.; (2) “any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees or owners” should encompass only a narrow set of business in which income is received directly on the skill or reputation of the employees or owners which based on the examples focuses on the individuals name, likeness, or identity; and (3) “performance of services that consist of dealing in securities” means those regularly purchasing securities from and selling securities to customers in the ordinary course of their business. The QBI deduction is currently set to expire after 2025 and revert back to pre-TCJA law.

The new proposed regulations were issued on August 8^th. To read the proposed regulations in its entirety, visit https://www.irs.gov/pub/irs-drop/reg-107892-18.pdf.

For any questions regarding this information, please reach out to your Richey May tax professional or contact us.