Article
IRS proposed regulations provide dealers with guidance on the new qualified business deduction
Oct. 2, 2018 · Authored by Dan Cheyney, Amy Stillwell, Kelsey Sjoberg
On Aug. 8, 2018, the IRS released proposed regulations providing additional guidance on the 20% qualified business income (QBI) deduction created by tax reform — commonly known as the Tax Cuts and Jobs Act — under Internal Revenue Code (IRC) Section 199A.
The QBI deduction became effective beginning in 2018. It’s taken against taxable income and applies to most owners of dealership and real-estate-entity structures. There are a number of requirements businesses must fulfill to qualify for the deduction, which are addressed below.
Background
Before the proposed regulations were issued, it was understood the QBI deduction generally couldn’t exceed the greater of an owner’s share of one of the following:
- 50% of the amount of W-2 wages paid by the business
- 25% of the W-2 wages paid by the business plus 2.5% of the cost of qualified property
This left three key issues unanswered, which have since been addressed by the proposed regulations:
- Calculating the QBI deduction
- Applying the new law to multiple business entities
- Handling varying ownership percentages
Below are the main items clarified by the IRS proposed regulations that are important for dealers.
Netting of income from related entities
The proposed regulations create an opportunity for the owners of dealerships with related dealership real-estate entities to aggregate those related businesses when computing the 20% QBI deduction. It also provides dealers with a management company structure or centralized payroll with a similar opportunity. It’s worth noting that while this aggregation is generally allowed, it’s not mandatory.
To qualify, a person or group of people must have common ownership, income from different aggregated entities must be reported on returns within the same tax year, and the aggregated businesses must meet two of the following tests:
- Provide products and services that are the same or customarily offered together
- Share facilities or share significant business elements
- Operate in coordination with, or reliance upon, one or more of the businesses in the aggregated group
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.