Private equity investors get IRS rules on 20% tax break

Bloomberg

Business owners — and their accountants — can rest a bit easier: the IRS has given them the long-anticipated final word on how they can claim one of the biggest perks in the 2017 Republican tax overhaul.
The regulations detailing the new 20 percent deduction for pass-through business owners are of critical importance to the operators of such entities, who range from mom-and-pop
convenience store owners to private equity investors.
The guidance, issued despite a four-week partial government shutdown that has many Internal Revenue Service employees on furlough, can cut those business owners’ tax bills by as much as one-fifth. The rules would govern what many say is one of the most complex changes in President Trump’s tax law.
The IRS made a series of changes to make it simpler for businesses to determine if they can or can’t get the tax break, a senior Treasury official said on a call with reporters.
Veterinarians, for example, don’t qualify for the deduction, but rental real estate owners who spend at least 250 hours a year involved with the business can get the deduction, according to the IRS guidance.

FILING SEASON AWAITS
The rules make it clear that income from originating and selling mortgages is eligible for the deduction, said Alan Keller, first vice president of legislative policy at Independent Community Bankers of America, a trade and lobbying group. “That is favourable,” he said.
Taxpayers had been worried that they wouldn’t see final rules in time for the filing season due to the partial government shutdown, and that confusing parts of the original provision could leave them exposed to penalties plus interest on improperly reported income.
The agency also released a proposal clarifying that shareholders of mutual funds with real estate investment trust investments can get the deduction. That change will affect about 15 million investors, according a trade group representing REITs. The IRS is still considering whether publicly traded partnership investments held through a mutual fund will qualify for the deduction.
The proposed regulations also provide guidance for taxpayers who hold interests in regulated investment companies, charitable remainder trusts and split-interest trusts, the IRS said in a statement.
The agency also put in a test for rental real estate owners to know if they can get the tax break. Property owners can get the tax break if they — or someone they hire, such as a contractor — spend at least 250 hours a year on the business and keep records of their activities.
The pass-through deduction was included in the overhaul to give a tax break to businesses whose owners pay the taxes on their personal tax returns — partnerships, limited liability companies, and S corporations. Trump and Republican leaders have said that middle-class Americans and small businesses would be the biggest beneficiaries under the $1.5
trillion tax cut.
All taxpayers who earn less than $157,500, or $315,000 for a married couple, can deduct 20 percent of the income they receive via pass-through businesses from their overall taxable income. If taxpayers earn above those amounts and aren’t service professionals — such as lawyers or accountants; they must meet certain 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.