The Treasury Department and IRS on Friday released final regulations on a new deduction for noncorporate businesses created under President Trump's tax law.
The final rules come less than two weeks before the Jan. 28 start of the tax-filing season. A senior Treasury official said that the department sought to finalize the rules before the filing season began.
The 2017 tax-cut law created a 20 percent deduction for income of noncorporate businesses known as “pass-throughs.” These businesses, such as sole proprietorships and partnerships, are taxed through the individual tax code on their owners' returns.
The pass-through deduction is a major part of the tax law. Republicans included it to provide tax relief for noncorporate businesses while they also cut the corporate tax rate.
“The pass-through deduction will drive more investment in U.S. companies and higher wages for American workers,” Treasury Secretary Steven Mnuchin said in a statement. “This provision will reduce pass-through business tax rates to their lowest rate in more than 80 years.”
The regulations provide information about how to calculate the deduction and what types of businesses qualify for it. It also aims to prevent the deduction from being abused.
After Treasury and the IRS proposed the rules over the summer, a number of stakeholders sought clarifications and changes to the guidance. Several changes were made to the rules in response to stakeholders' comments.
One area where stakeholders sought clarity was whether rental real estate activity counts as a trade or business that is eligible for the deduction. The IRS on Friday issued a separate proposed guidance item that provides a safe harbor that taxpayers can follow to ensure that their rental real-estate activity qualifies for the deduction.
Businesses also sought changes to the guidance about what counts as a “specified service, trade or business.” Income from these types of businesses are ineligible for the deduction for high-earning taxpayers.
In the final rules, Treasury and the IRS provided more examples of what is and isn't considered a specified service, trade or business in an effort to provide more clarity.
For example, businesses had questions about what constituted a “health” business whose income doesn't qualify for the deduction for high earners. The final rules give an example of when an outpatient surgical center would qualify for the deduction, but affirm that veterinary practices are health businesses.
The final rules also clarify that originating a loan doesn't count as a specified service business for purposes of the deduction, which should help owners of banks organized as pass-through entities qualify for the deduction. However, Treasury and the IRS did not provide that all activities that banks can perform are eligible for the deduction.
Additionally, the rules provide that professional sports clubs' operations of athletic teams, including selling broadcast rights, are specified service business activities. That means that Major League Baseball teams were unsuccessful in getting the full deduction.
The senior Treasury official said that the release of the final rules on the pass-through deduction was slowed slightly by the partial government shutdown, but that the department came close to its target release date. The IRS had received some funding that it could use over a two-year period to implement the 2017 tax law.