Today arrived the 30 plus summary of the 184 page proposed IRS regulations to help with what was poorly drafted legislation. I am finding that the proposed regs are generally considered favorable to taxpayers.
The proposed rules address many issues that had been of concern to practitioners, such as the definition of a “specified trade or business,” the calculation of qualified business income flowing through to multiple entities, the treatment of wages paid to employees through third parties, and the definition of “reputation or skill.”
Some of the more significant provisions in the proposed regulations include:
(1) allowing taxpayers to aggregate trades or businesses, other than a specified service business, for purposes of applying Code Sec. 199A;
(2) allowing a business that pays wages to a common law employee through a third-party, such as a PEO, to count such wages as being paid by the business in applying the W-2 wage limitation;
(3) for purposes of determining whether a trade or business is a specified service trade or business (SSTB), providing “performance of services in the field of consulting” means the provision of professional advice and counsel to clients to assist the client in achieving goals and solving problems;
(4) reasonable compensation paid to S Corporation Shareholders included in the definition of W-2 wages;
(5) do not yet provide any supplemental guidance on the circumstances under which rental real estate activity rises to the level of a trade or business outside of self-rental activities;
(6) providing a de minimis rule for a specified service trade or business (SSTB) so that it is not considered a SSTB, and is thus eligible for the deduction, if gross receipts are $25 million or less and less than 10 percent of gross receipts of the trade or business is attributable to the performance of services in an SSTB.
(7) perhaps the biggest surprise in the proposed regulations is the IRS’s narrow interpretation of the infamous “reputation or skill” clause. Limiting to fact patterns in which the individual or relevant passthrough entity (RPE) is engaged in the trade or business of (1) receiving income for endorsing products or 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; 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).
Practitioners like us will be reading and learning, eager for more direction so we can accurately advise clients on mid-year tax planning. As favorable as we think Code Sec. 199A will be to taxpayers, clarification is still needed in many areas.
DANIEL R. DEHOEK, CPA, ABV, CFP®