Businesses, trade groups urge IRS to clarify guidance on key part of GOP tax law

Businesses, trade groups urge IRS to clarify guidance on key part of GOP tax law
© Greg Nash

Businesses and trade groups on Tuesday urged the IRS to make clarifications and changes to its proposed rules on a new deduction created by President TrumpDonald John TrumpTrump cites tax cuts over judges as having biggest impact of his presidency Trump cites tax cuts over judges as having biggest impact of his presidency Ocasio-Cortez claps back at Trump after he cites her in tweet rejecting impeachment MORE's tax law, so that more taxpayers can have certainty that they can use the tax break.

The tax-cut law Republicans enacted last year created a new 20-percent deduction for businesses known as "pass-throughs," which are non-corporate businesses taxed through the individual tax code on their owners' returns. In August, the Treasury Department and IRS released proposed rules that provided information about how to calculate the deduction and what businesses qualify for it.

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At a three-and-a-half hour public hearing at the IRS, stakeholders provided government officials feedback on the guidance.

A number of speakers said that the guidance is unclear about whether rental real-estate activity constitutes a trade or businesses that is eligible for the deduction. Some speakers, including representatives from the American Institute of CPAs and the National Association of Realtors, said that rental real-estate activity should generally be treated as a trade or business. Others suggested that the regulators create a safe harbor that allows low- and middle-income taxpayers with rental income to take the deduction if they meet certain conditions.

Iona Harrison, who testified on behalf of the National Association of Realtors, said that deeming all rental real estate a trade or business for purposes of the deduction would "vastly simplify the deduction for millions of owners of rental property" and would "greatly simplify the administration of this part of the law for the IRS."

Banks organized as pass-throughs urged Treasury and the IRS to clarify that these types of banks have full eligibility for the deduction. 

Under the tax law, married couples who make more than $415,000 are ineligible to use the pass-through deduction if they have income from a specified service business, such as businesses involved in health or law. The IRS guidance says that businesses involved in taking deposits and making loans aren't specified businesses ineligible for the deduction. However, community banks are concerned that they will be ineligible for the deduction absent clarifications because some of their business comes from other activities such as loan sales and trust and investment-management services.

"If we are not able to include revenue from these types of core banking services in [the] qualified business income deduction, it would clearly place our bank and our holding company at a disadvantage to those C-corporation banks that are taxed at a 21-percent corporate tax rate," said Steve Lewis, chairman of the board of Jefferson Bank in San Antonio, Texas.

Other speakers at the hearing asked the IRS to ensure that certain types of businesses are eligible for the deduction, or to alter the proposed rules so that their business category qualifies. 

For example, two speakers said that they believe the rules allow staffing businesses to qualify for the deduction, and they wanted the IRS to ensure this is the case. 

Additionally, the American Veterinary Medical Association (AVMA) argued that high-earning owners of veterinary practices should be eligible for the deduction, though the proposed rules stipulate that they are ineligible. Under the tax law, high-earning owners of health firms are ineligible for the deduction, but AVMA Assistant Director of Government Relations Alex Sands said that veterinary practices shouldn't be treated the same way as medical practices for humans for purposes of the deduction because the practices have significant differences.

Treasury and the IRS will take the comments into consideration as they work to finalize the rules on the pass-through deduction.