The tax reform legislation Congress passed in December left many details unanswered, especially regarding the small business tax benefit giving some businesses a twenty percent deduction against their income if the businesses satisfy certain employee payroll and property ownership thresholds. On August 8, the Internal Revenue Service issued proposed regulations attempting to address many of the open questions.
One of the biggest questions was whether taxpayers can treat employee payroll and property owned across multiple business entities (like corporation and limited liability companies) as a single combined business for the purpose of satisfying the employee payroll and property ownership tests.
For most types of businesses, the regulations generally would allow aggregation of property and payroll amongst different entities (such as partnerships and S corporations) if the same group of persons own the majority of the business for the majority of the year, the entities satisfy certain integration and interdependence tests, and the taxpayers follow specified filing procedures.
Those rules will not apply to most professional businesses, which are subject to limitations in the use of the small business deduction. These businesses are subject to rules forcing aggregation of income to prevent circumvention of the deduction limitations.
The rules are not fully binding until finalized, but IRS will apply the anti-abuse rules retroactively. Taxpayers can rely on these proposed rules until they are finalized.
We will provide more perspective on these important new rules soon. In the meantime, for more details, you can read the proposed regulations at irs.gov.