On January 18, 2019, the Treasury Department and Internal Revenue Service released final regulations and three related pieces of guidance for the qualified business income (QBI) deduction created by the 2017 Tax Cuts and Jobs Act. The deduction applied to tax years beginning after December 31, 2017, so eligible taxpayers could claim it for the first time on a 2018 Form 1040. [story-s1]
The IRS described the deduction as potentially allowing owners of sole proprietorships, partnerships, S corporations, trusts, and estates to deduct as much as 20 percent of qualified business income. Eligible taxpayers could also deduct up to 20 percent of qualified REIT dividends and publicly traded partnership income. It did not apply to wage income or income earned by a C corporation. [story-s1]
The release bundled several distinct pieces of guidance: final regulations; proposed regulations addressing additional issues; a revenue procedure on determining W-2 wages for deduction purposes; and Notice 2019-07, which included a proposed safe harbor for certain rental real estate enterprises. Under that proposed safe harbor, qualifying owners could treat a rental enterprise as a trade or business for purposes of the deduction, and taxpayers could rely on the safe harbor until a final revenue procedure was issued. [story-s1]
The release also made clear that the deduction was not a blanket 20-percent reduction for every business. For 2018, the IRS cited taxable-income thresholds of $315,000 for joint returns and $157,500 for other filers. Taxpayers above those levels could still qualify, but limitations could apply based on such factors as the business type, W-2 wages paid, and the basis of qualified property. The practical takeaway was less a simple new tax break than a set of eligibility rules that owners needed to understand before preparing their 2018 returns. [story-s1]
Source documents
- Treasury, IRS issue final regulations, other guidance on new qualified business income deduction; Safe harbor enables many rental real estate owners to claim deductionhttps://www.irs.gov/newsroom/treasury-irs-issue-final-regulations-other-guidance-on-new-qualified-business-income-deduction-safe-harbor-enables-many-rental-real-estate-owners-to-claim-deduction