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Qualified Business Income – Are You Eligible for a 20% Deduction? Part II: Additional Guidance

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Qualified Business Income – Are You Eligible for a 20% Deduction? Part II: Additional Guidance

In August, the I.R.S. issued much-awaited proposed regulations under the new Code §199A covering Qualified Business Income (“Q.B.I”). This provision of recently enacted U.S. tax law allows entrepreneurial individuals to claim a 20% deduction on taxable business profits of a sole proprietorship, partnership, L.L.C. or S-corporation. Galia Antebi, Nina Krauthamer, and Fanny Karaman ask and answer the pertinent questions: Who may benefit? How do the rules addressing R.E.I.T.’s and publicly traded partnerships (“P.T.P.’s”) affect Q.B.I when a net negative result is reported by the R.E.I.T. and the P.T.P.? When is an individual’s income effectively connected to a trade or business and when is the. income a form of disguised salary for which no deduction is allowed? What is a specified trade or business (“S.S.T.B.”)  for which the resulting income cannot benefit from the Q.B.I. deduction? How does the de minimis rule work under which a limited Q.B.I. deduction is allowed S.S.T.B. income does not exceed a specified ceiling? How does the ceiling based on W-2 wages work when calculating the Q.B.I. deduction? 

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Accumulated Earnings Tax Will Hit Taxpayers, Despite Lack of Liquidity or Control

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Accumulated Earnings Tax Will Hit Taxpayers, Despite Lack of Liquidity or Control

Even absent a distribution, shareholders of U.S. corporations may, under certain circumstances, be subject to a second layer of tax: the accumulated earnings tax (“A.E.T.”).  The tax is imposed on the accumulation of earnings beyond the reasonable needs of the business.  Although rarely imposed on well-advised taxpayers, the A.E.T. could become increasingly important if the tax rate disparity between the corporate and individual income taxes increases under proposals put forth by the current administration.  Fanny Karaman and Beate Erwin look at a recent Chief Counsel Advice Memorandum where the absence of liquidity within the corporation was found to be an irrelevant factor in determining that earnings were unreasonably accumulated by the corporate taxpayer.

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