November 2018
Stakeholders are urging the IRS to clarify its guidance on tax
reform’s new passthrough deduction. The IRS held an October 16 public
hearing on proposed rules for the new Code Sec. 199Apassthrough
deduction at its headquarters in Washington D.C. The IRS released the
proposed regulations, REG-107892-18, on August 8.
Over 20 stakeholders and practitioners spoke at the hearing.
Additionally, over 300 comments on the proposed rules have been
submitted to Treasury and the IRS.
Passthrough Deduction
The new 20-percent deduction
of qualified business income for passthrough entities, subject to
certain limitations, was enacted as part of tax reform legislation last
December. The Tax Cuts and Jobs Act ( P.L. 115-97) created the new Code
Sec. 199A passthrough deduction for noncorporate taxpayers, effective
for tax years beginning after December 31, 2017. The deduction is
scheduled to sunset in 2026.
Rental Real Estate
Several speakers at the
hearing asked the IRS for guidance clarifying whether rental real estate
activities are eligible for the deduction. Additionally, Troy Lewis,
testifying on behalf of the American Institute of Certified Professional
Accountants (AICPA), asked the IRS for guidance on specific
circumstances in which rental real estate activities would not produce
qualified trade or business income pursuant to the adopted Code Sec.
162 standard.
"Without further guidance clarifying when the rental of real estate
would fail to rise to the level of a section 162 trade or business,
unnecessary ambiguity exists that will likely create a divergence in
practice," the AICPA said in its written comments. "Taxpayers are thus
left to pursue their own interpretation of the rules under section 199A
and the IRS will likely face greater complexity of administration."
Likewise, the Council for Electronic Revenue Communication
Advancement (CERCA) submitted comments highlighting the uncertainty as
to whether and when a rental property is generally considered a
qualifying trade or business for purposes of the Code Sec.
199A deduction. Notably, CERCA referenced the preamble to the
regulations that indicates taxpayers should look to existing case law to
determine whether rental activities meet the Code Sec. 162 standard.
However, existing case law does not consistently apply a set of factors
that taxpayers could reliably apply as rules, according to CERCA.
Determining that all rental real estate is a trade or business for
purposes of the deduction would significantly simplify the deduction,
Iona Harrison said, testifying on behalf of the National Association of
Realtors. Making such a determination would also simplify IRS
administration, she added.
SSTB
Several speakers and a number of comment
letters requested that the IRS clarify its definition of a specified
service trade or business (SSTB). The SSTB limitation is one of the most
controversial provisions of the deduction. SSTBs are considered
a "trade or business involving the performance of services in the fields
of health, law, accounting, actuarial science, performing arts,
consulting, athletics, financial services, investing and investment
management, trading, dealing in certain assets or any trade or business
where the principal asset is the reputation or skill of one or more of
its employees," according to the IRS.
To that end, Major League Baseball (MLB) has pitched its assertion to
the IRS that professional sports clubs are neither "personal services
corporations" nor provide "services," as defined in Code Sec.
1202(e)(3)(A). The Office of the Commissioner of Baseball, which governs
the 30 MLB clubs, has asserted in written comments that the business of
a professional sports club is not an SSTB under Code Sec. 199A.
Thus, "its owners should be allowed the full 199A
deduction," Commissioner Robert D. Manfred, Jr. wrote in submitted
comments.
Questions Remain
The October 16 public hearing
served more as an opportunity for stakeholders to highlight issues
rather than a forum for the IRS to provide answers. Treasury and the IRS
are expected to consider hearing testimony and written comments when
finalizing the rules. The regulations are expected to be finalized
before the 2019 tax filing season.