Summer is drawing to a close. I know it sounds ridiculous to say that in the first full week of August, but I know it’s true because next week my son Oliver and daughter Margaret go back to school. (Hearing the words “back to school” always makes me think of the old Staples commercial featuring happy parents dancing through the school supplies aisles to the sounds of Andy Williams’ Christmas classic, “The Most Wonderful Time of the Year.”)
Many schools have summer reading lists. (Last summer, Margaret had to read Kafka’s Metamorphosis, which is how I could tell I was getting value from her tuition.) Now, you may not be headed back to school yourself. But the IRS has just put out some summer reading for you, and if you’re interested in making money with tax planning and beating the pants off your competition, you’ve got to read it.
I’m talking, of course, about the proposed regulations governing the new Section 199A “qualified business income” rules. The new rules are a golden opportunity for the bulk of your clients who own passthrough businesses or rental real estate.
Now, as we’ve been saying since December, you can’t just wait until next April 15 to record your new deductions and call it a day. (I realize all that’s what all the other accountants are going to do. But that’s not good enough for you . . . you guys are the cool kids.) You’ve got to sit down with clients and plan to take maximum advantage of the rules.
Unfortunately, the law itself left lots of questions unanswered:
- Does real estate count as a “qualified trade or business”?
- Can you sidestep the “specified service business” rules by “cracking” out non-service income into a separate entity?
- How broadly will the IRS interpret the “reputation or skill of one or more of its employees or owners” provision?
The new regulations answer most of those questions — some favorably, some not. (As for those specific three, the answers are “possibly,” “not as easily as you hoped,” and “narrowly.”)
Many clients will find the regulations a pleasant surprise. For example, when the law first came out, the National Association of Realtors told their members that their commissions would be limited by the “specified service business” rules. The new regulations make it clear that they’re not.
You’ll find the regulations themselves here: https://www.irs.gov/pub/irs-drop/reg-107892-18.pdf. Do the trees a favor and read them online.
If you’re one of those kids who preferred the Cliff’s Notes, Forbes columnist Tony Nitti does a great job walking through regulations here: https://www.forbes.com/sites/anthonynitti/2018/08/09/irs-provides-guidance-on-20-pass-through-deduction-but-questions-remain/#328f46ae2ff8.
Of course, we’ll be updating Tax Master Network resources shortly, including several modules that address Section 199A, and the “New Tax Law” seminar kit Powerpoint� presentation and script. We’ll let you know as soon as those changes are available.