Part of the reason why the passage of the Tax Cuts and Jobs Act was so controversial had less to do with what it changed and was more about the uncertainty that those changes would quickly create. Case in point: the Section 199A deduction.
Under the current version of the law, this section provides a brand-new deduction of up to 20% of "qualified domestic business income" for pass-through entities such as sole proprietorships, partnerships, S corporations, trusts or even estates. But for a bill that was originally sold in part on how simple it was supposed to make everything, it seems to have had literally the exact opposite effect for many people.
The Section 199A deduction was one of the most impactful changes to the tax code in 2017, and 2018 proved to be absolutely no different. Tax professionals and taxpayers alike are scrambling to try to understand how to handle it properly, thus avoiding getting into hot water with Uncle Sam and the IRS.
Recently, we asked a series of tax professionals to go into more detail on their experience and to outline some of the biggest challenges created by this Section 199A deduction in particular. As usual, their responses varied a great deal, but the running theme throughout all of them was resoundingly clear.
The far-reaching implications of the Section 199A deduction
Our experts agree that while the rules governing the Section 199A deduction are themselves relatively straightforward, the types of complexities that they are now facing as a result of it are anything but.
Allen Lenth of Executive Tax Solution said, "To be honest, the answer to this question depends on which clients we are talking about." He elaborated: "My medical doctors do not like the fact that they only get pass-through on monies paid after their payroll wages are determined. My truck drivers and other nonprofessional clients love it."
He said that he "even had one doctor refuse to hire me when he learned that his retiring CPA was having him pass through all of his gross without considering the rules of Section 199A, which state that in his profession, wages do not actually benefit from the 20% pass through deduction."
Andrew Ramsey of Tip Tax Solutions agreed with that sentiment, saying, "We've spent about nine and a half months looking at a statue that had an incredible number of open questions." However, he was slightly more optimistic, saying that "there's a huge potential benefit of a 20% deduction based on certain income that is generated by taxpayers, typically with regards to entities, partnerships and S corporations."
He said that a lot of the major challenges he and his clients are currently facing, however, are administrative in nature. He continued: "What I take from all this in its first year is that taxpayers and, at least initially, a lot of partnerships and S corporations are going to have to put in a lot of effort to make sure they're properly capturing the various components that are needed to calculate this deduction, then properly reporting that information out to their shareholders or partners."
Elizabeth P. Davies, CPA of Taxes Untangled said that her most significant complexity was one that completely blindsided her and involved "the IRS coming out with the real estate clarification in the middle of tax season. Trying to read, absorb and apply the clarifications was challenging in and of itself — and to be honest, I'm not sure I did a good job of it."
She said that even though tax season has come and gone, her work is far from over. "Now I have to go back and review all my real estate clients to make sure we handled everything correctly."
Tapan Patel of Nuttall & Patel, LLP, said that the most difficult thing he had to do this year was "determine whether a certain business was a Special Service Trade or an actual 'business' as clarified by the Internal Revenue Service." That, coupled with rental real estate safe harbor qualifications, made 2018 a decidedly more difficult year than average.
Bradley Smith of Bradley Smith, Inc., perhaps summed everything up best when he said, "The issuance of final regulations in January got everything off to a slow start, and the grain glitch fix was tough to work through with a March 1 deadline looming and no additional guidance from the IRS."
Indeed, it seems that not even the Internal Revenue Service was totally aware of exactly what ripple effect the Section 199A deduction would create or how much additional work that would create for tax pros everywhere moving forward. It's safe to say that this is one development that taxpayers and experts alike will be paying close attention to as 2019 continues.
About Lee Reams II
I am a tax and business news junkie who has spent the last 20 years developing and executing "best in class" word-of-mouth marketing campaigns for tax and accounting professionals. With TaxBuzz and CountingWorks we have taken that same commitment to quality content directly to the consumer. Keeping you up-to-date with the latest tax law changes, business growth tips and planning strategies to help you reach your best financial outcome.
