Inquiries Regarding the Tax Cuts and Jobs Act of 2017

From the Tax Help Desk, a few of the most recent inquiries regarding the Tax Cuts and Jobs Act of 2017 (TCJA). WE here at the Tax Help Desk have been fielding inquiries about the new tax act of which most of its provisions became effective in 2018 and play into how we will start to prepare tax returns in the up-coming weeks.

The Tax Cuts and Jobs Act of 2017 (TCJA) implemented a new tax code and deduction in IRC Sec 199A. This new code section has probably generated the most questions of the new legislation. And we hope to share here some of those inquiries and their answers. Or at least the extent of the answers that we have found.

Question #1: Does the rental activity of a taxpayer or a taxpayers’ pass-thru entity qualify for the 20% tax deduction under IRC Sec 199A?

Answer #1: The 20% deduction under IRC Sec 199A is basically defined as 20% of the taxpayers’ “qualified business income” or QBI. A taxpayers’ qualified business income or QBI is broadly defined in the “Act’s” language as the taxpayers’ net amount of items of income, gain, deduction and loss with respect to the taxpayers’ trade or business. Some of the key items that are NOT included in QBI or business income are wages and salaries of an employee, and any type of investment or portfolio income. Also not included in the definition of QBI are a partners’ guaranteed payments, and partners guaranteed payments do not create QBI at the individual 1040 level, like employee wages.

However, the Act did not by name or code section exclude rental income from those listed as ineligible for the 20% tax deduction. But what they did not provide is a clear definition of which rental properties or activities did qualify.

The temporary regulation issued this past August also di not assist much with that definition. Therefore, as practitioners’ we are left with a decision, this tax season, whether or not to use Schedule E based rental activities, or the Form 4835, farm rental, as a trade or business for the 20% deduction under QBI.

We are dealing with a definition, that is vague at best, and reads something like this… trade or business income is an activity that is undertaken regularly and continuously and has a profit motive. The definition of trade or business within IRC Sec 199A uses IRC Sec 162, therefore do not confuse the definition of a trade or business in rental as one with material participation or active participation or having any “hours” of time tied to it, for this definition is a part of IRC Sec 469, which is not specifically mentioned in IRC Sec 199A.

This really, effectively leaves us with a judgement call, at have level does a rental activity rise to the level of a trade or business… officially this is still unknown.

Question #2: What does the very last definition of a “specified service trade or business” (SSTB) entail when they use the broad definition of a business where the owners’ or employees’, skill and reputation, produce the trade or business income?

Answer #2: The original tax act language within IRC Sec 199A left most tax practitioners thinking that pretty much “all” service business, with qualified business income (QBI), over certain income levels, would basically loss the benefit of this 20% deduction.

However, here we were saved by the provision of the proposed regulations. In August of 2018, the proposed regulations put an end to the speculation with this rule and mapped out three (3) very specific “service” businesses. The specific industries or businesses seem to surround the fact that the individual’s skill or reputation rises to the level of their name been known or famous and that their endorsements or promotion, which produces their QBI sells a products or service.

The three specific services or categories deal with income from endorsing products or services. Or where the income is derived from licensing of the individual’s image, likeness, name, signature, voice, or any other symbol associated with the individuals’ identity. And finally, income is received for appearing at an event on the radio, television or any other media format.

Therefore, this so called “catch-all”, in the initial act language, has been narrowly defined to include just three (3) very specific services and the individuals’ rendering those services.

Question #3:Is the deduction for entertainment and business meals really gone? Is the deduction for the business trip eliminated under the new act?

Answer #3: The repeal of the deduction for entertainment, amusement or recreation expenses that are directly related to or associated with an active trade or business is a true statement in the Act’s language. It left us, tax practitioners’, with the feeling that the literal language eliminated the deduction for the business meals that often accompanied that entertainment or recreation.

Well, this fear or concern turns out to be unwarranted. The IRS has issued some guidance, in the form of an IRS Notice, Notice 2018-76. This notice clarifies that the 50% deductible business meal is still a tax deduction. This is despite it being so regularly associated with and incurred in the entertainment setting.

Therefore, the business meal is safe under the new ban on entertainment in the TCJA of 2017. As long as the food and beverage expense is ordinary and necessary under IRC Sec 162. That the expenses or costs are not lavish or extravagant and the taxpayer or employee are present at the meal or event. The food and/or beverage must be provided to and for a current or potential client or customer and must be purchased separate from the entertainment. So in other words the old hot dog, drink and a ticket deal is dead in the business world, for to be deductible the two (2), the food and beverage and the cost of the attendance at the event must be purchased separately.

Despite all of this discussion, remember that the Form 2106 is still eliminated, so the employee version of this tax deduction, if unreimbursed, is lost in the overall elimination of the itemized deductions subject to the 2% AGI floor.

The Form 2106 is still available in 2018, but only for a few very specific individuals and professions. You can find the specific list right on top of the 2018 version of the Form 2106, as well as in the forms’ instructions or the discussion in IRS Publication 17.

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