The U.S. Treasury Department (under whom the Internal Revenue Service (“IRS”) works) just issued proposed regulations to explain and govern complicated application of the exciting 20% deduction available to pass-through tax entities (mainly partnerships, S corporations and sole proprietorships).
One of the main tenets of the proposed regulations is the general rule that the rental or licensing of tangible or intangible property (e.g. real estate or patents) between related taxpayers are usually to be aggregated. This might be a good development if the main business loses money, the rental or licensing activity makes money and the combined results are a profit against which the 20% deduction could be taken. More likely this rule was created to prevent something the smart alecks call “Crack and Pack” wherein taxpayers are “… improperly allocating losses or deductions away from a trade or business that generates income that is eligible for a 199A deduction.”
Section 199A is already known to be one of the most complex sections ever written into the Internal Revenue Code. Feel free to give us a call for guidance.
This post was written by LeRoy Metz.