Treasury Regs Clarify 20% Pass-through Income Reduction – Part 7


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Over the past few weeks, the blogs have focused on discussing the Treasury Regulations issued August 8, 2018 that impact the 20% pass-through income reduction from the Trump Tax Plan.

Even if you read the whole Tax Cuts and Jobs Act cover to cover (1029 pages of it), you still have to pay attention to the changes and clarifications that the IRS, Treasury Department and Tax Courts will give us regarding this sweeping legislation.

Today we continue with Part 7 discussing the specified service trade or business (SSTB) definition changes and clarifications from the new Regulations. Please go back to the previous Parts 1 -6 to catch up with the blog here. Change #26 continues with the definitions of the SSTB. It’s important because your ability to take the 20% pass-through income reduction can be impacted based on whether you have an SSTB or not.

 

Change #26 Reputation or Skill:

The Treasury Department and the IRS believe that the “reputation or skill” clause as used in section 199A was intended to describe a narrow set of trades or businesses, not otherwise covered by the enumerated specified services, in which income is received based directly on the skill and/or reputation of employees or owners.

Additionally, the Treasury Department and the IRS believe that “reputation or skill” must be interpreted in a manner that is both objective and administrable. (That’s their words, not mine)

They have limited the meaning of the “reputation or skill” clause to fact patterns in which the individual or RPE is engaged in the trade or business of: (1) receiving income for endorsing products or services, including an individual’s distributive share of income or distributions from an RPE for which the individual provides endorsement services; (2) licensing or receiving income for the use of an individual’s image, likeness, name, signature, voice, trademark, or any other symbols associated with the individual’s identity, including an individual’s distributive share of income or distributions from an associated entity to which an individual contributes the rights to use the individual’s image; or (3) receiving appearance fees or income (including fees or income to reality performers performing as themselves on television, social media, or other forums, radio, television, and other media hosts, and video game players).

 

Change #27: Real Estate Ownership – Business

The Treasury Department and the IRS are aware that some taxpayers have contemplated a strategy to separate out parts of what otherwise would be an integrated SSTB, such as the administrative functions, in an attempt to qualify those separated parts for the section 199A deduction. Such a strategy is inconsistent with the purpose of section 199A. Therefore, an SSTB that includes any trade or business with 50 percent or more common ownership (directly or indirectly) and that provides 80 percent or more of its property or services to an SSTB is part of the same business. Additionally, if a trade or business has 50 percent or more common ownership with an SSTB, to the extent that the trade or business provides property or services to the commonly-owned SSTB, the portion of the property or services provided to the SSTB will be treated as an SSTB (meaning the income will be treated as income from an SSTB). For example, A, a dentist, owns a dental practice and also owns an office building. A rents half the building to the dental practice and half the building to unrelated persons. The renting of half of the building to the dental practice will be treated as an SSTB.

In the next parts to this review of the proposed Treasury Regulations, we will be looking at specific examples that the Treasury Department provided along with the Regs. There are some interesting things to note beyond the examples themselves. Why did they pick these examples? More to come!



2 Comments

  1. Diane Kennedy says:

    The Schedule E will qualify for the 20% pass-through reduction. However, it could be limited depending on your taxable income.

    If you (as a married couple, filing separately) have taxable income under $315,000, then you get the full 20% pass-through reduction of your rental income. Capital gains income can’t reduced with this.

    If your income is over $315K, then you are subject to wage limitation rules.

  2. Marilyn Greig says:

    My husband and I own and manage 3 duplexes and 2 single family rental properties. We have filed Schedule E for the past 30 years. Do we qualify for the 20% pass-through reduction or do we need to form an LLC to hold our properties?

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