by Michael Prestia

The new Tax Cut and Jobs Act TCJA Law permanently lowered the tax rate for corporations to 21%. Tax rates remained higher for individual tax payers. Section 199A of the Internal Revenue Code allows an individual taxpayer (and a trust or estate) a deduction for 20% of the individual’s domestic qualified business income from a partnership, S corporation, or sole proprietorship, and is a qualified trade or business operated directly or through a pass-through entity for tax years beginning after December 31, 2017.

The deduction generally is subject to a limit based either on wages paid or wages paid plus a capital element. Specifically, the limitation is the greater of: (i) 50% of the wages paid with respect to the qualified trade or business; or (ii) the sum of 25% of the W-2 wages with respect to the qualified trade or business plus 2.5% of the unadjusted basis (determined immediately after an acquisition) of all qualified property. Qualified property means tangible property of a character subject to depreciation that: (i) is held by, and available for use in, the qualified trade or business at the close of the tax year; (ii) is used at any point during the tax year in the production of qualified business income; and (iii) for which the depreciable period has not ended before the close of the tax year. For this purpose, the “depreciable period” with respect to qualified property means the period beginning on the date the property is placed in service by the taxpayer and ending on the later of: (i) 10 years after that date; or (ii) the last day of the last full year in the applicable recovery period that would apply to the property under section 168 (without regard to section 168(g)).

S corporations and partnerships are generally not taxpayers and cannot take the deduction themselves. However, all S corporations and partnerships report each shareholder’s or partner’s share of QBI, W-2 wages, UBIA of qualified property, qualified REIT dividends and qualified PTP income on Schedule K-1 so the shareholders or partners may determine their deduction.

The new law appears to provide that qualified business income that is passive income may not benefit from the 20% deduction for purposes of the net investment income tax. As a consequence, liability for the net investment income tax may be unchanged by the provisions intended to benefit businesses conducted

through passthrough entities. The 20% deduction is allowed as a deduction in reducing taxable income and should be taken into account at the partner or shareholder level. Absent amendment, many partnership agreements may not take into account the deduction for purposes of determining partnership tax distributions which may be made starting with the first quarter of 2018.

The Treasury on August 8, 2018 issued 185 pages explaining applying the rules for requiring or restricting the allocation of items and wages and such reporting requirements as Treasury determines are appropriate. The purpose of these proposed regulations is to provide taxpayers with computational, definitional, and anti-avoidance guidance regarding the application of section 199A. The 20% deduction in the new TCJA law expires after eight years and the deduction is temporary unless legislation is enacted extending it, compared to the corporate tax reduction in the law which is permanent. Section 199A should be considered by taxpayers evaluating whether to continue to operate business in pass through form (rather than as a corporation) as a result of the large decrease in corporate tax rates.

Michael G. Prestia, Attorney Gulfport, Mississippi; is a candidate for the LLM in Tax Law at Villanova Law School; Juris Doctor, Mississippi College School of Law, B.S. LSU, and practices in shareholder/partner litigation and the formation and taxation of partnerships. For further information, contact Michael Prestia at 228-868-6609 or