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Opportunities, pitfalls of the new 199A deduction

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Spiral imageThe Tax Cut and Jobs Act included a promise of lower effective tax rates for partnerships, S corporations and sole proprietorships, intended to offer some relief for businesses that wouldn’t benefit from the C corporations rate cut from 35% to 21%.

The lower effective tax rate for any such flow-through entity (FTE) was achieved through a complex deduction of up to 20% of business income enacted as the new IRC Section 199A, also known as the “flow-through deduction,” (FTD). Even though this cut still doesn't match the tax savings granted to C corporations, the promise of the 20% FTD and a myriad of other tax planning factors resulted in most FTE owners maintaining the flow-through status of their businesses for 2018.

On Jan. 18, 2019, the IRS issued final regulations to Section 199A. While the proposed regulations address many areas where guidance was desperately needed, including providing rules around determining the FTD when a taxpayer has multiple qualifying businesses, some unanswered questions remain.

This article by Grant Thornton reviews the FTD in detail, as explained by the final 199A regulations, illustrating how the FTD works (or does not work) for a variety of industries, and discusses planning options for increasing the benefit.

Contact:

John StineJohn Stine
Managing Director
Private Wealth Services
Philadelphia
T +1 215 814 4030

Jared SzychterJared Szychter
Managing Director
Private Wealth Services
Philadelphia
T +1 215 656 3064

Aaron TaylorAaron Taylor
Director
Public Policy/Governmental Affairs
Washington D.C.
T +1 202 521 1505