Business Coalition Letter to U.S. Treasury: Request for Rules Allowing for Aggregation of Entities for Purposes of Calculating the Section 199A Deduction

By at 19 March, 2018, 2:53 pm

SBE Council joined a coalition of business organizations and signed a letter requesting the U.S. Treasury Department allow for the aggregation or grouping of business entities for purposes of calculating the new 20 percent deduction (Section 199A) in the “Tax Cuts and Jobs Act,” as the utilization of multiple business entities is a common practice in many operations. The letter reads:

As the Treasury Department and Internal Revenue Service drafts rules necessary to implement HR 1, the undersigned organizations request that you use your regulatory authority to adopt a reasonable method of calculating the new 20 percent pass-through deduction to ensure Main Street businesses are not penalized based on how they are organized for business purposes.

Specifically, we request guidance 1) allowing taxpayers to group activities conducted through S corporations and partnerships, as under Section 469, when they calculate qualified business income under Section 199A and 2) permitting businesses with existing groups under Section 469 to reorganize those groups to reflect the new tax law.

Allowing taxpayers to aggregate or “group” legal business entities together for purposes of calculating the pass-through deduction is vital to making the deduction fair and workable. Main Street businesses often utilize multiple legal entities for non-tax business reasons. For example, family businesses are often organized in a “brother-sister” structure, where their operations are housed in one entity and their real estate in another. Another common practice is for a business to place all its payroll, finances, and insurance in a “common paymaster” entity in order to streamline payroll operations, while housing actual production operations elsewhere.

Section 199A permits owners of pass-through businesses to deduct up to 20 percent of qualified business income. Certain services businesses are precluded from this deduction, however, while even eligible businesses are subject to two alternative limitations, one based on the businesses’ payroll and another on a combination of payroll and capital.

Absent aggregation, the application of these limitations would treat similar businesses differently depending on how they are organized. For example, a manufacturing business housed in a single S corporation may be eligible for the full deduction, while a similar business utilizing the common paymaster model described above may be eligible for none of it, despite having the same robust levels of payroll and investment.

Read the full letter here.

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