This is Part 3 of the series looking at Treasury Regulations issued 8/8/18 regarding the 20% pass-through reduction in the Trump Tax Plan.
We’re hitting the highlights, primarily focusing on changes and clarifications that the Regs made. Please make sure you review the previous two blogs to go over the first part of the Regs.
One of the questions that the Treasury received regarding the Trump Tax Plan had to do with workers who received their W-2 from a third party, as with professional employee organizations (PEO). If your taxable income is over $315K married filing jointly or $157.5K if single (the taxable income threshold amount), the amount of your reduction will be limited by the greater of 50% of W-2 wages or 25% of W-2 wages plus certain depreciable assets. But what if you had leased employees? Would the amount paid them count?
The answer is “It depends.” If the employees are treated like common law employees and the wages paid on the W-2 were paid to employees of the business for employment of the business, then the wages can be included. However, we’re cautioned that if you treat them like employees for purposes of the pass-through reduction, you must also treat them like employees in other ways, presumably by inclusion with benefit programs.
That’s change #6.
If wages are paid to employees and split among multiple businesses, then the allocation for purposes of Section 199A wage limitations would be the same.
That’s good news for people who have multiple businesses but share a common employee pool. There was a big question about whether the W-2 amount had to follow the company who actually wrote the check.
That’s change #7 (actually a clarification, but to keep this consistent, we’ll call it a “change.”)
The Treasury Dept also states that the IRS has issued a proposed ruling, 2018-64 to describe three methods for calculating W-2 payroll for purposes of Section 199. That’s a lot of conversation about just one aspect of Section 199, the 20% pass-through income reduction.
It’s clear that the IRS is paying attention to the details of trying to implement the W-2 wage calculation for 20% pass-through limitation. Remember this is just one sub-section of one small section of the Trump Tax Plan. If you’ve got the idea that this is more complicated than Congress even realized and it will take a long time to sort it all out, then you have a firm grasp of the situation. It is complicated and there will still be more questions coming up as a result of the Trump Tax Plan. It’s a massive tax change.
If you’re subject to the taxable income limitation, then you have the choice of taking the greater of 50% of W-2 wages or 25% of W-2 wages plus 2.5% of UBIA. (UBIA stands for “unadjusted basis immediately after acquisition”). UBIA is an abbreviation used a lot in the new Regulations.
We’ve been talking about what constitutes “W-2 wages”. Now let’s look at UBIA.
Change (clarification) #8 talks about UBIA. “Basis” is determined to be the normally determined basis of when you buy or inherit a property. “Immediately after acquisition” means the value the property has when you take possession. If the property has partial personal use, that part of the basis is not allowed in the UBIA calculation.
Change #9 adds a new rule by the IRS that was not in the original Act.
The IRS was concerned that someone may try to buy a bunch of assets (UBIA) right before year end in order to up their UBIA, so they came up with another rule. Property is not qualified property if the property is acquired within 60 days of the end of the taxable year and disposed of within 120 days without having been used in a trade or business for at least 45 days prior to disposition. The one exception occurs if you demonstrate that the principal purpose of the acquisition and disposition was a purpose other than increasing the section 199A deduction.
Change #10 talks about like-kind exchange basis that may be used for the UBIA.
The date the exchanged basis in the replacement qualified property is first placed in service by the trade or business is the date on which the relinquished property was first placed in service. If there is excess basis (when you buy a property that is worth more than the original exchange amount), the date for that part of the UBIA will be the date of the purchase of that property.
Thus, unless the exception applies, qualified property acquired in a like-kind exchange or involuntary conversion will have two separate placed in service dates under the proposed regulations.
In just 10 changes, there are already a handful of new strategies that you need to put in place NOW if you want to use the Trump Tax Plan to your advantage this year. If you ignore it, you’ll pay more in tax. It’s almost guaranteed.
There are two ways to join in on the conversation about the Trump Tax Plan, how it will apply to you and specific strategies to consider before year end:
(1) You can join our coaching class at https://www.ustaxaid.com/coaching-program/. For the rest of this month, the cost to join is $67/month. The price will be going up 9/1/18 for anyone new who enrolls. For those of you on the program already, your price will not increase as long as you are enrolled in the program.
(2) Register your copy of “Taxmageddon 2018: How to Brace for the Trump Tax Plan”, following the instructions in Chapter 16 of the book. You can register at www.Taxmageddon2018.com, but will need the password from Chapter 16.
I am posting specific strategies in the “bonus” section of Taxmageddon Insider’s each week right now. Don’t miss out! If you don’t yet have your own copy of Taxmageddon 2018, you can claim yours at www.Taxmageddon2018.com.