AICPA weighs IRS rules on qualified business income

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The American Institute of CPAs presented testimony Tuesday during a hearing conducted by the Treasury Department and the Internal Revenue Service about the proposed regulations for implementing the qualified business income rules under the Tax Cuts and Jobs Act.

The new rules relate to claiming the 20 percent deduction for pass-through entities under Section 199A of the new tax law, which purposely excludes most accounting firms.

Troy Lewis, who chairs the AICPA’s Task Force on Qualified Business Income, echoed the written comments the AICPA submitted earlier this month ahead of the hearing. In terms of the qualification of rental real estate as a trade or business for purposes of the qualified business income deduction, Lewis pointed out that, while the preamble to the proposed regulations defines a trade or business according to section 162(a) of the tax code, there really is no uniform definition at this time.

“Taxpayers are left to determine trade or business status on a case-by-case basis, sometimes with discrepancies even within the same industry,” he stated. “The courts have also struggled for a long time with drawing definitive lines on what constitutes a trade or business. This lack of clarity on the qualification of rental real estate will undoubtedly lead to inconsistent treatment.”

To promote clarity and certainty in the rules, the AICPA is recommending that a rental real estate activity be considered a trade or business.

Lewis also talked about the anti-abuse rules in the proposed regulations, which are supposed to stop firms from splitting revenue between related businesses, such as a technology practice, to qualify some of their income for the deduction.

“We agree with the need for anti-abuse rules and having to separate out the specified service trade or business (SSTB) income from non-SSTB income,” said Lewis. “However, income from a non-SSTB should not be unfairly recharacterized. The 80 percent or more rule that automatically recharacterizes all of the income limits the effectiveness of the QBI deduction. In the final regulations, we recommend removing the 80 percent threshold cliff rule and allowing the pro-ration rule to cover these transactions,” he said.

When businesses have both SSTB and non-SSTB lines of business, according to Lewis, the rules should permit businesses to distinguish between their net income between qualified and SSTB activities.

“Applying a cliff effect to taxpayers who exceed the threshold would be unfair,” he argued. “It would also discourage natural business growth,” said Lewis. Instead, he noted, “We could easily apply the section 199 Small Business Simplified Overall Method.”

He pointed out that practitioners already use this method and that it would allow taxpayers to “ratably apportion their costs and deductions between the different types of activities.”

In terms of the aggregation rules for when taxpayers can treat multiple businesses as a single business, Lewis pointed to two issues. The first involves siblings. He suggested that businesses use existing attribution rules under sections 267 and 707 of the tax code instead of creating a new family attribution rule.

“Congress intended section 199A to benefit businesses that are not organized as C corporations,” said Lewis. “Many of these businesses are family owned. There is no reason to adopt a new family attribution standard and arbitrarily disadvantage businesses that are owned by siblings.

The second issue revolves around multi-tiered pass-throughs or Relevant Passthrough Entities (RPEs). “We recommend that aggregation be available at the RPE level,” said Lewis. “Allowing for RPEs to aggregate all the lower-tier businesses together would simplify its reporting process and result in a reduction in compliance costs.”

Lewis wrapped up his testimony by emphasizing the importance of the details of how to calculate qualified business income.

“The IRS should confirm that certain deductions do not reduce a taxpayer’s QBI, including the self-employed health insurance deduction, the 50 percent deductible portion of the self-employment tax, and a self-employed taxpayer’s qualified retirement plan contributions,” he said. “These are details CPAs care about and need in order to properly calculate QBI.”

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Tax regulations Tax reform Small business AICPA IRS