IRS Issues Proposed Regulations on Pass-through Business Deduction

August 16, 2018

The Internal Revenue Service (IRS) on Aug. 8 issued proposed regulations outlining which pass-through businesses will be eligible for the 20-percent deduction enacted as part of the Tax Cuts and Jobs Act (TCJA).

To the benefit of ALTA members, the IRS took a narrow reading of the law and will allow insurance agents and real estate professionals to qualify for the deduction.

The TCJA provided a new deduction for up to 20 percent of qualified business income (QBI). This is income derived by a sole proprietorship, partnership, S corporation or trust. This was meant to create parity with the new lower corporate tax rate. Under the TCJA, the top marginal tax rate on QBI that qualifies for the 20-percent deduction under the law is 29.6 percent.

To prevent potential abuse, the law excluded "specified service businesses" from eligibility for the deduction. These are business that are defined by 26 USC 1202(e)(3)(A), which includes "any trade or business involving the performance of services in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or any trade or business where the principal asset of such trade or business is the reputation or skill of 1 or more of its employees."

Which businesses would constitute a "specialized service trade or business," was a major focus of lobbying by ALTA and other financial services trade groups around implementation of the TCJA.

The proposal specifically defines "financial services" and "brokerage services" to not include insurance and real estate professionals. This should be helpful for title agents that are not conducting the practice of law to qualify for the deduction.

Agents that obtain business income from a source that is excluded (like attorneys) can still qualify for a limited deduction if their taxable income is less than $315,000 (for married taxpayers filing a joint return) or $157,500 (for individuals).

The guidance also covers rules for aggregation and separation of business income to help take advantage of the deduction. ALTA will continue to analyze the proposal and will submit comments to Treasury and the IRS. Comments are due 45 days after publication in the Federal Register.

Contact ALTA at 202-296-3671 or