Congress created a juicy new tax break for business owners when they rewrote the U.S. Tax Code in December. Three months later, many U.S. Employers still do not know if they qualify for the deduction.
The Internal Revenue Service has said it will provide guidance detailing exactly who is allowed to take the “pass-through” deduction. With billions of dollars at stake, business groups are lobbying for the Service to “open the doors” as widely as possible.
Some high-earning proprietors could be excluded if the IRS writes the rules too narrowly. The agency plans on issuing guidelines by June but we shall see if that happens.
The 20 percent deduction is aimed at pass-through businesses, whose income is reported on their owners’ personal tax returns. Congress tried to bar wealthy owners of service businesses from getting the break. This may exclude many doctors, lawyers, accounting firms and or financial services unless they can find a loophole. The challenge for the IRS will not be easy. The agency must write coherent rules and then be ready to make judgements on every business in the U.S. The IRS may then be challenged by some of these businesses or second-guessed by courts.
This much is clear: if you are a pass-through business owner who earns less than $157,500 (or $315,000 for a married couple), you get full access to the deduction no matter what you do. Above these thresholds, the deduction fades for certain “service” businesses including health, law, consulting, athletics, financial and brokerage services. So, are Veterinarians considered “healthcare”?
Just as puzzling to us is another phrase in the law. Any firm where the “principal asset” is the “reputation or skill of one or more employees” are also excluded. Who does this include? If you advertise that you are the best “baker” in town, does this then exclude bakers? The final version of the law took “engineers and architects” off the list of service providers. Very interesting how the final Regulations will read….stay tuned!