Take a Seat; This is Going To Hurt!
As I wrote in a previous article, many people ask me about the “New Tax Law.” I have
tried to explain the law, but Toni Nitti, a contributor to Forbes Magazine, described the
new tax law better than I, in the following quote. “The Tax Cuts and Jobs Act — signed
into law on December 22, 2017 — gave birth to a brand new provision: Section 199A,
which permits owners of sole proprietorships, S corporations, or partnerships to deduct
up to 20% of the income earned by the business. While the provision has the potential to
bestow a tremendous benefit upon owners of these pass-through businesses, since its
enactment, no one has been able to, well… figure out how the whole thing works. Quite
truthfully, the statutory language of Section 199A created more questions than answers,
with those queries ranging from the seemingly simple — what do we do about a fiscal
year business that crosses over January 1, 2018? — to the much more complex — what
exactly is a "specified service business" for which a deduction is generally prohibited?”
Hang on to your seat. This is going to be a rough ride.
Most Certified Public Accountants, Tax Attorneys, Investment Counselors and others
who are the guardians of the tax law, are just as confused as you are. The original draft
mentioned a 20% reduction in income as a “pass-through” provision to taxpayers. Then
the criteria began to change. Why? There is no definitive reason.
Last week, the IRS issued 184 pages of copious regulations that should provide a clear
understanding and clarity on the new tax laws. But the regulations raise more questions
than answers. My thoughts immediately drift to the possible input from “friends” of
Members of Congress. Just on that thought; members of Congress and the House, hear
this: If you have been in your elected office for more than two terms, GET OUT! When
you stand up, look at your chair. There may be green mold forming in it. You have been
there too long! I feel sure that death is the major reason that some legislators have not
been in office since the initial compilation of tax laws in 1913. Now, let us get back to
the matter at hand. The Tax Cuts and Jobs Act, commonly known as Section 199A of the
IRS Code is continually updating. I suppose you have noticed that the government has
not issued the “bible” of individual tax law for 2018. Publication 17 is the one book
every taxpayer should have in his/her library. However; since the law is in constant flux,
the Publication would have to be a loose-leaf binder, so changed parts of the law could be
inserted at a later date.
Section 199A says, “The Section 199A deduction is available to any taxpayer “other than
a corporation.” This includes: Individual owners of sole proprietorships, rental properties,
S corporations, or partnerships, and An S Corporation, partnership, or trust that owns an
interest in a “qualified” pass-through entity. A taxpayer must be engaged in a “qualified
trade or business” in order to claim the Section 199A deduction. Whoa, hold on, what is a
Qualified Trade or Business?
In General, Section 199A defines a qualified trade or business by exclusion; every trade
or business is a qualified business other than: an employee. Employees are prohibited
from claiming a 20% deduction against his or her wage income. (Well, do you feel the
knife in your back?) Who else is affected? The regulations attempt to leverage off
existing regulations under Section 448 and provide further interpretation of the
disqualified fields. Look at the lists of those who are disqualified in each field: (This list
was presented in the Forbes article mentioned earlier.) I suggest you read Mr. Nitti’s
article at www.forbes.com/sites/anthonynitti/2018/08/09/irs-provides-guidance-on-20-
pass-through-deduction-but-questions-remain/#26e629db2ff8 . He is right on target!
o Disqualified: doctors, pharmacists, nurses, dentists,
veterinarians, physical therapists, psychologists, and other
similar healthcare professionals who provide services
directly to a patient.
o Not disqualified: people who provide services that may
improve the health of the recipient, such as the operator of
a health club or spa, or the research, testing, and sale of
pharmaceuticals or medical devices. (Congressional
Law (Guardians of the tax law.)
o Disqualified: Lawyers, paralegals, legal arbitrators, and
o Not disqualified: Those that provide services not unique to
law, like printing, stenography, or delivery services.
Accounting (Guardians of the tax law!)
o Disqualified: Accountants, enrolled agents, return
preparers, financial auditors, bookkeepers, and similar. You
don't need to be a licensed CPA to fall victim to this rule.
o Not disqualified: No one in this category.
o Disqualified: actuaries and similar professionals.
o Analysts, economists, mathematicians, and statisticians not
engaged in analyzing or assessing the financial costs of risk
or uncertainty of events.
o Disqualified: Actors, singers, musicians, entertainers,
directors, and similar professionals who provide services
that lead to the creation of performing arts.
o Not disqualified: Those who broadcast or disseminate
video or audio to the public, and those who maintain or
operate equipment or facilities used in the performing arts.
o Disqualified: those who provide professional advice and
counsel to clients to assist in achieving goals and solving
problems, including government lobbyists.
o Not disqualified: Salespeople and those who provide
training or educational courses. This category also does not
include any services ancillary to the sale of goods in a
business that is NOT a SSTB (such as a building
contractor) as long as there is no separate fee for the
o Disqualified: athletes, coaches, team managers.
o Not disqualified: Broadcasters or those who maintain or
operate equipment used in an athletic event.
o Disqualified: Those who provide financial services to
clients including managing wealth, developing retirement
or transition plans, M&A advisory, valuation work. In other
words, financial advisors, investment bankers, wealth
planners, and retirement advisors.
o Not disqualified: Banking!
o Disqualified: A broker who arranges transactions between a
buyer and a seller with respect to securities; i.e., a stock
o Not disqualified: Owing to the italics above, a real estate
broker is OK!
o Disqualified: Those who receive fees for providing
investing, asset management, or investment management
o Not disqualified: REAL ESTATE MANAGEMENT!
o Disqualified: those who trade in securities, commodities or
o Not disqualified: A farmer or manufacturer who engages in
hedging transactions as part of their trade or business.
What do you think? Pick yourself up from the floor and call your congress and house
representatives. We are in for a tumultuous ride through the pending tax filing season.
Do not shoot the messenger. Start at the top of the government, and let your voices be heard.