Passthrough Deduction and Service Businesses

As discussed in an earlier post, on August 8, 2018, the Treasury Department issued proposed regulations regarding the passthrough deduction under §199A, as added by the new tax law, which was enacted on December 22, 2017.

The passthrough deduction is not available for specified service businesses, if a taxpayer who owns such a specified service business has income above an applicable threshold.

For taxpayers who are subject to this restriction, the proposed regulations take a harsh approach.  Not only are the specified service businesses themselves ineligible for the passthrough deduction, but the proposed regulations also prohibit the passthrough deduction for related activities conducted by separate business entities that are commonly owned by the owner of the specified service business.

For example, a commonly-owned rental real estate entity that rents office space to a specified service business is ineligible for the passthrough deduction on the net rental income that it earns, since the rental income is related to the specified service business.  Similar prohibitions apply to commonly-owned entities that provide management services, employment services, or similar services to the specified service business.