IRS Expands FAQs to Clarify Rules for Section 199A Qualified Business Income Deduction

Shortly before this year’s tax filing deadline, the IRS made a stealth addition to its list of frequently asked questions (FAQs) pertaining to Section 199A, the 20 percent deduction for pass-through businesses that was enacted as part of the 2017 Tax Cuts and Jobs Act (TCJA). The guidance was added to the IRS Section 199A – Qualified Business Income Deduction FAQ website, expanding the page from 12 to 47 questions, with one inclusion coming as a surprise to many.

Overview

Under the TCJA, Section 199A allows taxpayers to deduct up to 20 percent of qualified business income for tax years 2018 through 2025. The qualified business income (QBI) deduction is available for many owners of sole proprietorships, partnerships and S corporations, as well as some trusts and estates.

Q&As Address Partnerships and S Corporation Interest Holders

The newly added questions address several issues affecting partnerships and S corporation interest holders. For example, FAQ 28 deals with how partnerships and S corporations should manage items subject to limitation or special treatment at the shareholder level. The answer indicates a pass-through entity must provide the equity holder with detailed information to allow appropriate adjustments to QBI. It reads, in part, “If for example, in addition to ordinary income the owner is allocated a section 179 deduction, since the 179 deduction may be limited, the detail would be required in order for the owner properly to determine the current year QBI.” Additionally, FAQ 31 lists the same rules apply to QBI flowing out from a publicly traded partnership.

Another area of interest for taxpayers is the application of loss limitation. FAQ 23 highlights the inclusion of a loss occurred after 2018 “if it is a qualified item deduction or otherwise loss that would otherwise be included in QBI, but not until the year it is allowed in taxable income.” Furthermore, the FAQ clarifies the passive loss limitation also “spills over” into publicly-traded partnership QBI calculations.

Double Deduction for S Corporation Shareholders?

One surprising topic – FAQ 33 – is the treatment of the self-employed health insurance deduction for an S corporation shareholder. The answer states, “Generally, the self-employed health insurance deduction under section 162(l) is considered attributable to a trade or business for purposes of section 199A and will be a deduction in determining QBI.”

In other words, a shareholder who owns more than 2 percent of the corporation may have to reduce QBI at both the entity and shareholder levels. Why is this surprising? The IRS had not previously addressed the topic of self-employed health insurance. There is some debate about whether the IRS should have addressed this controversial topic as a proposal rather than adding it to the FAQs.

It’s important to remember the FAQs are not to be considered an authority. However, unless the IRS provides further guidance, many tax preparers will use them to help interpret the current tax law.

Do you have questions about the recent FAQs or other tax planning issues? Please contact Nicholas J. Marazza, Director, Tax & Business Services.