IRS estimates 23.7M taxpayers may claim QBI deduction

The Internal Revenue Service is estimating that nearly 23.7 million taxpayers may be eligible to claim a new 20 percent tax deduction for qualified business income provided by the Tax Cuts and Jobs Act, according to a new report, but the service needed to scramble to provide guidance and forms for taxpayers in time for this tax season.

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A woman walks out of the Internal Revenue Service (IRS) headquarters building in Washington, D.C., U.S., on Wednesday, Feb. 17, 2016. Taxpayers have until Monday, April 18 to file their 2015 tax returns and pay any tax owed. Photographer: Andrew Harrer/Bloomberg

The report, from the Treasury Inspector General for Tax Administration, examined the IRS’s implementation of the provision, Section 199A, which was added to the Tax Code by the Tax Cuts and Jobs Act. It provides a deduction of up to 20 percent for an individual’s domestic qualified business income from their taxable income. Lawmakers included the provision as a way to provide pass-through businesses with a tax deduction, and not just corporations. However, the law excludes certain types of businesses, including accounting and law firms, from claiming the full deduction on all their income. Nevertheless, the IRS estimates that almost 23.7 million taxpayers may be eligible to claim the deduction. In addition, the Joint Committee on Taxation estimates a reduction in tax from this provision of $27.7 billion in fiscal year 2018 and $47.1 billion in fiscal year 2019, totaling $414.5 billion over fiscal years 2018 through 2027.

The TIGTA report found that the IRS took a number of steps to implement the QBI deduction, including setting up an implementation team, creating an action plan, and developing a communication strategy. However, because of the late timing of the release of guidance in late January just before tax season began, in the midst of the partial government shutdown, the IRS wasn’t able to develop a tax form for the deduction (see The 199A final regulations: A little more light shining in the darkness).

However, IRS officials told TIGTA that delaying the development of a tax form until tax year 2019 gave the IRS more time to receive comments on the guidance, consider the comments before finalizing the guidance, and get some experience with the first filing season. As an alternative, the IRS has developed a worksheet to help taxpayers calculate the deduction. IRS officials also expect to develop a post-processing compliance plan. Near the conclusion of TIGTA’s fieldwork on the report, the IRS prepared a computer programming request to identify and/or reject tax returns when the QBI deduction exceeds the 20 percent taxable income limitation.

“The QBID is quite complex and subject to various limitations and thresholds,” wrote Lisa Beard-Niemann, acting deputy commissioner of the IRS’s Small Business/Self-Employed Division, in response to the report. “It is expected to impact millions of taxpayers, which will result in billions of dollars in tax deductions.”

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