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Shortly Before Tax Season, IRS Issues More Guidance on TCJA Provisions

Ruth Singleton
Published Date:
Jan 25, 2019


In the run up to tax filing season, which begins on Jan. 28, the IRS has released regulations and other guidance on key provisions of the Tax Cuts and Jobs Act (TCJA). One is IRS Code Section 199A, which provides for a 20 percent deduction for pass-through organizations with qualified business income (QBI), and another is Section 965, which governs taxes on repatriated income.

On Jan. 18, the IRS released the final version of regulations that it issued last summer, to provide more detail about Section 199A. The agency adopted the proposed regulations with modifications in response to comments it received and testimony at a public hearing held on Oct. 16, 2018.

Taxpayers who make more than $157,500, or $315,000, if they file a joint return, are not entitled to the take the deduction if they work in a "specified service trade or business" (SSTB). Section 199A references section 1202(e)(3)(A), to define “specified service trade or business” as any trade or business other than one “involving the performance of services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or any trade or business where the principal asset of such trade or business is the reputation or skill of 1 or more of its employees.”

When proposed, these regulations limited the meaning of "reputation or skill" to cases where the entity is: receiving income for endorsing products or services; licensing or receiving income for the use of an individual's likeness, image, name, signature, voice, trademark or any other symbol associated with their identity; or receiving appearance fees or income, such as going on a reality TV show or engaging with social media.

The final regulations noted: “Many commenters expressed support for the position in the proposed regulations that reputation or skill was intended to describe a narrow set of trades or businesses not otherwise covered by the other listed SSTBs, often writing that a more broad interpretation would be inherently complex and unworkable. Other commenters disagreed with the definition in the proposed regulations, expressing concern that the narrowness of the definition is contrary to the language of the statute and Congressional intent.

"The Treasury Department and the IRS remain concerned that a broad  interpretation of the reputation and skill clause would result in substantial uncertainty for both taxpayers and the IRS. As stated in the preamble to the proposed regulations, it would be inconsistent with the text, structure, and purpose of section199A to potentially exclude income from all service businesses from qualifying for the section 199A deduction for taxpayers with taxable income above the threshold amount. If Congressional intent was to exclude all service businesses, Congress clearly could have drafted such a rule. Accordingly, the final regulations retain the proposed rule limiting the meaning of the reputation or skill clause to fact patterns in which an individual or RPE is engaged in the trade or business of receiving income from endorsements, the licensing of an individual’s likeness or features, and appearance  fees.”

The IRS also released new set of proposed regulations offering guidance on several aspects of the QBI, including qualified real estate investment trust (REIT) dividends received by regulated investment companies;  a revenue procedure providing guidance on determining W-2 wages for QBI deduction purposes; and a notice on a proposed revenue procedure providing a safe harbor for certain real estate enterprises that may be treated as a trade or business for purposes of the QBI deduction

In addition, the IRS issued final regulations for Section 965 of the Tax Code detailing how U.S.-based companies will have to pay repatriation taxes on offshore profits. According to Accounting Today, the IRS retained most of the rules governing how companies should pay taxes on stockpiled overseas profits, but the final version introduced a narrow exception from the 15.5 percent transition tax for some commodities and derivatives contracts.






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