IRS Issues Proposed Regulations on New 20% Pass-Through Deduction

Learn about the IRS proposed regulations for the new 20% pass-through tax deduction.

Under the newly-passed Tax Cuts and Jobs Act (TCJA), qualifying business owners can deduct from their income taxes up to 20% of their net business income starting in 2018. This new 20% deduction for pass-through business owners is extremely complex and the TCJA left many questions unanswered about how it is supposed to work. To clarify some of these questions, the IRS released issued 184 pages of proposed regulations. These regulations don't have the force of law, but can be relied upon as useful guidance until the IRS issues final regulations.

Below are a few highlights from the proposed regulations. For more information, see Who Can Use the 20% Pass-Through Deduction: Learn About the New Treasury Regulations.

  • Employees cannot get the deduction simply by having their employers reclassify them as independent contractors. If a worker is reclassified as an employee, but continues to perform the same work for the hiring firm that he she did when classified as an employee, the IRS will presume that worker doesn't qualify for the pass-through deduction.

  • The proposed regulations help make it clear which business activities are and are not "specified service trade or business," (SSTB). This distinction is crucial because once your income reaches certain thresholds, you get no deduction at all if you are a SSTB. The proposed regulations are a big win for real estate brokers and agents, insurance brokers and agents, and real property managers who were not classified as an SSTB and therefore are not subject to a phase-out and elimination of the deduction at higher income levels.

  • You can combine (aggregate) multiple non-SSTB businesses if the same person or group of people own 50% or more of each business for a majority of the year, and certain other specified requirements are met.

You can access a copy of the IRS proposed regulations on the IRS website. The IRS has also created a FAQ on the pass-through deduction.