At the end of 2017, the Tax Cuts and Jobs Act (TCJA) was signed into law with much fanfare and with an effective date of January 1, 2018. Two income tax provisions in TCJA made big headlines. The tax rate for C corporations was cut to a flat 21% rate. And a new tax code provision dubbed Section 199A made considerable headlines with a provision enabling owners of flow through businesses like sole proprietorships, LLCs taxed as partnerships and S corporations to have a 20% deduction against qualified business income earned in a qualified trade or business. It sounded so good–almost too good to be true.
Here we are, almost nine months later, and seminars and articles leave a feeling there are a lot of questions that need to be answered. TCPA is, after all, nine pages in length. And the Proposed Treasury Regulations just published on August 8 are approximately 80 pages in length. These Proposed Regulations attempt to answer questions and also add a number of anti-abuse rules. As there is a comment period before Final Regulations will be issued, no doubt there will be changes to the Proposed Regulations and the possibility of further statutory clean-up action to be taken. That should give you an idea that things are not totally settled yet on how all of this works.
So the purpose of this blog is not to review the statute and Proposed Treasury Regulations in 600 words, but to suggest to you business owners out there to see your CPA to learn how pertinent all of this is to your situation. The most logical way to go about this would be to have your CPA do to a Section 199A analysis to determine if it may be better tax-wise for you to change the form of business entity you have now to another form of entity or how it is taxed to see what kind of difference it might make to your tax bill. This could even mean changing the business from a LLC taxed as a partnership to a sole proprietorship or from a LLC to an S corporation. And in a few cases, it might even result in someone changing from a LLC to a C corporation.
Before making the leap immediately, business owners should consider several points. At the moment, there are still many issues not totally resolved. Perhaps prudence suggests waiting a bit to see how all of this shakes out. Second, Section 199A is one of those statutes that has a “sunset” provision, meaning that it expires on December 31, 2025 if not extended. So if a business owner makes significant changes to the company’s legal structure and/or applicable taxation scheme utilized, what does that person do then if Section 199A expires? Several experts feel there is no question that it will be extended. But who knows for sure. With the political turmoil going on now, who can guarantee where we will be by the end of December 2025. And while we are in the process of advising clients and prospective clients that a Section 199A analysis needs to be made, how many of those people will actually seek that advice and input and/or chose to implement such advice. That will be interesting to see. While these changed provisions may prove to be a dream come true for business owners, it may be worth waiting a bit to see how the many questions are resolved. Stay tuned.
Michael W. Margrave
Disclaimer: This blog is for information purposes only. Legal advice is provided only through a formal, written attorney/client agreement.