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Pass-Through Tax Guidance Delayed Until End of July

Updated on
  • Treasury officials had signaled rules would be issued in June
  • Rules will determine size of tax break for many U.S. firms

U.S. Treasury Department rules outlining which businesses structured as S corporations, partnerships and limited liability companies can claim a 20 percent tax deduction are likely to be delayed until the end of July, according to a senior administration official.

The regulations, which will determine how many so-called pass-through businesses can take advantage of a special break under the 2017 tax law, are some of the most anticipated following the bill’s passage. Hundreds of thousands of U.S. employers still don’t know if they qualify. Treasury officials had previously said they were aiming to issue rules specifying what types of businesses can claim the deduction, as well as mechanisms to prevent gaming, in June.

The pass-through regulations are among those almost certain to be subject to a 10-day review by the White House’s Office of Management and Budget’s regulations office. The official, who asked not to be named because the details are private, said the OMB office hadn’t yet received any formal submission of draft regulations from Treasury.

A Treasury spokeswoman disagreed with OMB, saying that four regulations -- dealing with capital expensing, taxation of overseas profits, penalties for tax preparers and accounting rules for when firms book income -- have already been submitted to OMB.

The official responded by saying OMB had received some information about regulations to determine their significance, but reiterated that nothing had been formally submitted by Treasury.

An April agreement gives the administration more control over regulations implementing the new tax law. For decades, most IRS regulations were exempt from the OMB’s cost and benefit analysis, which applies to most executive agencies. OMB is ready to review the regulations once Treasury sends them over, the official said.

About 90 percent of U.S. businesses are organized as pass-throughs and can range from mom-and-pop convenience stores to private equity funds. The law allows business owners whose income is reported on their personal tax returns to claim up to a 20 percent deduction on their income.

All pass-through owners who earn less than $157,500, or $315,000 for a married couple, can deduct 20 percent of the income they receive via their businesses from their overall taxable income. Above those thresholds, the deduction fades for certain “service” industries specified in the law including health, law, consulting, athletics, financial and brokerage services. Questions remain over what exactly qualifies as a service business.

If taxpayers earn above those amounts and aren’t service professionals, they must meet tests to take the full deduction -- the size of their deduction depends on how much they pay in employee wages or how much they’ve invested in capital like real estate.

Tax professionals have urged the IRS to come out with details as soon as possible. The American Institute of CPAs asked for “immediate guidance” on the pass-through provision in a Feb. 21 letter to the agency “Taxpayers and practitioners need clarity” to comply with their tax obligations and “make informed decisions regarding cash-flow, entity structure, and other tax planning issues,” the AICPA said.

— With assistance by Ben Steverman

(Updates with Treasury and administration official comments starting in fourth paragraph.)