Here’s a troubling thought. Did lawmakers put you in the out-of-favor tax group that denies you the 20 percent Section 199A deduction because your business makes too much money, and does so thanks to the reputation or skill of one or more of the business’s owners or employees?
Before going on, remember this: tax reform gives you the new 20 percent deduction on your qualified business income, regardless of whether you’re in an in-favor or out-of-favor business, when your 1040 defined taxable income is $157,500 or less (single taxpayer) or $315,000 or less (married filing a joint return).
But when you are in the out-of-favor group, you get a zero Section 199A deduction on your qualified business income when your taxable income is greater than the thresholds above and your business pays no wages or has no qualifying property, or when your taxable income is greater than $207,500 (single) or $415,000 (married filing a joint return).
There are various groups and professions in the out-of-favor group that are easy to identify. But the “reputation or skill” group is not one of those. For example, will the new law treat the following as out-of-favor businesses because the reputation or skill of one or more owners or employees is the principal asset of the business?
- Real estate sales professional paid on a 1099
- Automotive repair shop run by one owner with no employees
- Local property and casualty insurance agent paid on a 1099
- Life insurance agent paid as a statutory employee
- Hairstylist who owns the shop where other stylists rent chairs
We don’t know. Will the IRS come to the rescue?
At a District of Columbia Bar Taxation Community event on January 25, 2018, hosted by Jones Day, Treasury tax legislative counsel Thomas West said that we can expect guidance on the Section 199A deduction, including some guidance focused on small business.