Business owners -- and their accountants -- can rest a bit easier: the IRS has given them the long-anticipated final word on how they can claim one of the biggest perks in the 2017 Republican tax overhaul.
The regulations detailing the new 20 percent deduction for pass-through business owners are of critical importance to the operators of such entities, who range from mom-and-pop convenience store owners to private equity investors.
The guidance, issued on Friday despite a four-week partial government shutdown that has many Internal Revenue Service employees on furlough, can cut those business owners’ tax bills by as much as one-fifth. The rules would govern what many say is one of the most complex changes in President Donald Trump’s tax law.
The IRS made a series of changes to make it simpler for businesses to determine if they can or can’t get the tax break, a senior Treasury official said on a call with reporters.
Veterinarians, for example, don’t qualify for the deduction, but rental real estate owners who spend at least 250 hours a year involved with the business can get the deduction, according to the IRS guidance.
Lobbyists had wanted Treasury to make the rules easier for taxpayers who own multiple pass-through entities. That didn’t happen, according to Brian Reardon, president of the S Corporation Association.
“Disappointed,” he wrote in an email. “They had a chance to broaden the tax benefit while making it much simpler for businesses to comply with, but they chose not to.” He added that for larger pass-through businesses, “these rules are going to be very complex and require a lot of planning.”
Filing Season Awaits
The rules make it clear that income from originating and selling mortgages is eligible for the deduction, said Alan Keller, first vice president of legislative policy at Independent Community Bankers of America, a trade and lobbying group. “That is favorable,” he said.
Taxpayers had been worried that they wouldn’t see final rules in time for the filing season due to the partial government shutdown, and that confusing parts of the original provision could leave them exposed to penalties plus interest on improperly reported income.
The agency on Friday also released a proposal clarifying that shareholders of mutual funds with real estate investment trust investments can get the deduction. That change will affect about 15 million investors, according a trade group representing REITs. The IRS is still considering whether publicly traded partnership investments held through a mutual fund will qualify for the deduction.