Section 199A was passed December 22, 2017, as part of the Tax Cuts and Jobs Act (TCJA). In February 2019 the Internal Revenue Service (IRS) released a 247-page document containing its final Regulations describing and finalizing the rules around section 199A. The politicians that proposed this bill promised the public that taxes would become simpler. That was not achieved. Section 199A affects many millions of business owners and investors in certain dividend stocks. The Section’s complexity is already a legend and it took 247 pages to try and explain the rules that were effective for the 2018 tax year. It created a nightmare for individuals and professionals trying to prepare tax returns due in April 2019 by issuing the complex regs in February 2019.
The section provides for a new deduction of up to 20 percent of qualified domestic business income for pass-through entities such as sole-proprietorships, partnerships, S-corporations, trusts, or estates. This was done to counterbalance the reduction of the corporate tax rate to a flat 21%.
While 199A may be a tax benefit it is also a compliance challenge. Unlike a simple reduction in a tax rate, which is clean and relatively easy to calculate, this deduction is complex. It requires multiple assessments and calculations, new information to be gathered and shared by each pass-through with its owners, and is subject to numerous significant limitations. The provision may also cause some business owners to consider changes in the way some businesses are structured so as to be positioned to better benefit from it.
Like most of the individual tax code provisions passed in the TCJA, it expires after 2025 assuming no further action is taken.
Due to the complexity of the new rules, it makes very good sense to do some detailed analysis to see what if anything can be done to take advantage of this new tax deduction.
Another note about simplifying taxes, you may have noticed your individual tax returns looked different in 2018. Most people will have to file more pages with their return than before. While many people may no longer have to file Schedule A for itemized deductions due to the new $10,000 limitation for SALT (State and Local Taxes) deductions, and the elimination of the deduction for miscellaneous deductions, the information that was previously reported on just two full pages is now required to be spread over seven (7) pages, none of which fills more than half a page. The additional time and expense needed, and waste of paper as a result of this new poorly designed reporting layout must be enormous.
Finally, investors with certain dividend-paying investments (REITS for example) can take advantage of the 20% deduction. You will know this by looking at your 1099 tax statement. A line has been added for payments received subject to the section 199A deduction.
