Despite being technically shut down, the Treasury department issued 274 pages of final regulations earlier this month relating to the deduction related to “Qualified Business Income” or QBI. The QBI deduction was created when the Tax Cuts and Jobs Act (TCJA) was passed in December of 2017.
On the surface, the deduction is simple. It’s equal to the QBI included in an individual’s taxable income times 20%. But of course, few things are simple when it comes to tax law. For higher income taxpayers, the definition of QBI and limitations on the allowable deduction make the issue more complex. Certain service businesses such as doctors and attorneys (and alas, accountants) are not considered qualified businesses for these taxpayers. In addition, a limitation based on wages paid and/or property owned by the business left many questions about how these amounts would be determined. There were also questions regarding what constitutes a qualified business in general, and when businesses can or must be combined and when they can or must be separated. For example, the regulations give guidance as to when the activity of renting property can or cannot be considered a qualified business. Many of these issues were addressed in proposed regulations issued back in August of 2018. The final regulations contain several differences from the proposed regulations, and unfortunately still leave some questions unanswered.
There may be some surprises for taxpayers that assumed they would be eligible for the 20% deduction when they get around to filing their 2018 tax returns. There might also be some more pleasant surprises, but one thing is for certain it’s going to be an interesting year for tax preparers.
For more information, please contact Tax Partner, Roger Wilkins.