The American Institute of CPAs is sending an urgent request to the Internal Revenue Service and the Treasury Department, asking for “immediate guidance” on the definition of the term “qualified business income” for pass-through entities under the new tax law.
The Tax Cuts and Jobs Act that Congress passed last December provides a 20 percent deduction on “qualified business income” for pass-through entities, but excludes certain types of businesses, including accounting firms and law firms. The AICPA sent a letter Wednesday to the IRS and the Treasury asking them to provide more clarity on the definition of the term “qualified business income” by defining what activities constitute a qualified trade or business under the new section 199A of the tax code that was added by the tax law. The AICPA is asking for guidance ASAP, pointing out that taxpayers need clarity to comply with their 2018 tax obligations and to make informed decisions about cash-flow, entity structure and other tax planning issues.
“Taxpayers and practitioners need clarity regarding QBI in order to comply with their 2018 tax obligations and to make informed decisions regarding cash-flow, entity structure, and other tax planning issues,” wrote AICPA Tax Executive Committee chair Annette Nellen in the AICPA letter.
She urged the IRS and the Treasury Department to “focus their immediate attention on six questions in need of priority guidance,” along with some responses the AICPA suggested they provide to the questions. The letter recommended immediate guidance on the following issues:
1. Definition of section 199A qualified business income;
2. Aggregation method for calculation of QBI of pass-through businesses;
3. Deductible amount of QBI for a pass-through entity with business in net loss;
4. Qualification of wages paid by an employee leasing company;
5. Application of section 199A to an owner of a fiscal year pass-through entity ending in 2018; and
6. Availability of the deduction for Electing Small Business Trusts
The letter also included a list of several other issues affecting qualified business income that the AICPA believes need further guidance. For example, the AICPA suggests the IRS and the Treasury provide guidance that a trade or business is identified at the activity level, rather than entity level, so a business that performs multiple types of activities would have the ability to segregate its qualified and nonqualified business income from services.
The AICPA also wants guidance on what activities are included in the definition of specified service trade or business under section 199A. That could perhaps enable accounting firms to qualify for the deduction, even though the tax law itself seemed to exclude them.
“Treasury and IRS should provide guidance on what activities are included in the definition of specified service trade or business under section 199A,” said the letter. “For example, the guidance should clarify that the definition of the term ‘accounting services’ includes any services associated with the determination of tax liabilities including preparation, tax planning, cost segregation services, services rendered with respect to tax credits and deductions, and similar consultative services. The guidance should further state that precedents established in section 448,5 along with Private Letter Rulings (PLRs) and similar guidance under section 448, apply to section 1202(e)(3)(A), where appropriate. Additionally, health, law, accounting, actuarial science, and other specified services that are provided by individuals and businesses performing essentially the same activities should have the same tax treatment irrespective of any degree, license, training or credentials of the service provider. Similar service activities should receive similar tax treatment. Such treatment applies a key principle of good tax policy, specifically equity and fairness, which highlights the importance that Treasury and IRS treat and tax similarly situated taxpayers similarly. Further, taxpayers need clarification that activities including valuations, appraisals, billing/accounts management and software solution development and sales are qualified trade or businesses for the QBI deduction.”
