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Pass-through deduction rules affect wage and asset tests

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Tax Hot Topics newsletterThe IRS released highly anticipated proposed regulations (REG-107892-18) on the new deduction for pass-through income that pair flexibility in some areas with strict anti-abuse rules in others. 

The proposed rules provide taxpayers with much-needed flexibility to combine trade or business activities for the wage and asset tests. Wages must be assigned to the common-law employer. But anti-abuse rules can deny deductions to taxpayers with even small amounts of disqualified activities unless they qualify for strict de minimis exceptions. The list of disqualified activities is interpreted fairly narrowly with some exceptions. 

While taxpayers now have some interim guidance for planning their activities for 2018, areas of uncertainty remain. The IRS is expecting to receive extensive comments and has scheduled a regulatory hearing on Oct. 16. Taxpayers may rely on the proposed regulations until final regulations are published in the Federal Register, but the IRS is proposing that final rules be effective for tax years ending after their publication. This means if the regulations are finalized before the end of 2018, individuals would generally be permitted to rely on the final version for their 2018 returns. In addition, several of the anti-abuse rules are proposed to be effective retroactively for tax years ending after Dec. 22, 2017, the date of enactment of the Tax Cuts and Jobs Act (TCJA).

For more information, read our Tax Flash.

Contact
Grace Kim
Principal
Washington National Tax Office 
T +1 202 521 1590 

Jose Carrasco
Senior Manager 
Washington National Tax Office 
T +1 202 521 1552 

Dustin Stamper
Managing Director
Washington National Tax Office 
T +1 202 861 4144 

Bryan Keith
Managing Director
Washington National Tax Office 
T +1 202 861 4116

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