With the passage of new, sweeping tax laws at the end of last year, tax preparers and taxpayers have been waiting for clarifications to the new laws by the IRS. “In August, the IRS came out with its initial set of proposed regulations, which should help most business owners with clarity around how the new laws will directly impact them,” said CPA Chris Falco, a founding partner of the accounting firm Falco Sult.
Falco clarifies the following three new tax laws:
Trade or business defined. Although the term trade or business is defined in more than one provision of the Code, the Department of the Treasury and the IRS agree that for purposes of the new law, current section 162(a), provides the most appropriate definition of a trade or business. The proposed regulations extend the definition of trade or business for purposes of the new law beyond existing definitions in one circumstance — the rental or licensing of tangible or intangible property to a related trade or business is treated as a trade or business if the rental or licensing and the other trade or business are commonly controlled.
“This means if you own a business and you rent your building to the business, then both operations are considered trade or business,” explained Falco.
Specified service trade or business. For most owners of passthrough businesses, they will receive a deduction from their total reportable personal income equal to 20% of qualified business income from each qualified business they have. There is a limitation on this deduction for total personal taxable income in excess of $157,500 for singles and $315,000 for married filing joint. The break phases out for high-incomers in specified service business, such as health, law, accounting, actuarial services, performing arts, consulting, athletics, financial, brokerage, investment management and securities trading.
“If you are in these fields, and your taxable income is greater than $415,000 for MFJ or $207,500 for Singles, the deduction is eliminated. The regs did clarify that health clubs, real estate brokers and insurance agents are excluded from the definition of ‘specified service business,’” concluded Falco. “The key to the classification of a business as a non-specified service revolves around the concept of reputation or skill of its employees and owner and if the reason people use your services are due to this fact. Even if you think that your service business is based on reputation or skill of its employees, the IRS has clarified this to mean that it applies to endorsements; license of an individual’s image, likeness, voice and the like; and appearance fees. So, there will be a number of service businesses that may be able to exclude themselves from the service business restrictions.”
W-2 wages further explained. Taxpayers may consider wages reported on forms W-2 issued by other parties provided that the wages reported on the forms W-2 were paid to employees of the taxpayer for employment by the taxpayer.
“Specifically, the proposed regulations provide that a person may take into account any W-2 wages paid by another person and reported by the other person on forms W-2, provided that the W-2 wages were paid to common law employees or officers of the person for employment by the person,” added Falco. “So those companies that ‘lease’ their employees will be able to consider those wages as company wages for calculating any limitations related to the new QBI deduction for passthrough companies.”