The U.S. Department of the Treasury has finalized rules through which businesses will be able to take advantage of a new 20 percent tax deduction.
The deduction for pass-through businesses was part of the tax-cut legislation that President Donald Trump signed at the end of 2017. However, since the majority of American small businesses (SMBs) are organized as pass-throughs, as well as many financial and real estate companies, there needed to be clarity on which firms are actually eligible for the deduction. With this new regulation, for example, some mutual fund holders can now benefit from the deduction as long as they have holdings in a real estate trust.
The National Federation of Independent Business (NFIB) said the new regulation provides “needed certainty to small business owners,” said Brad Close, senior vice president of public policy and advocacy, according to The New York Times. “The vast majority of small businesses will enjoy the benefits of the full 20 percent deduction.”
In addition, rental property owners — even those who rent full-time on Airbnb — can claim the deduction, as long they keep certain records and perform 250 hours of services on the property each year. However, some of the country’s largest landlords are excluded because their tenants pay all real estate taxes, maintenance and building insurance. “I am very surprised they did what they did,” said Anthony J. Nitti, tax partner at Withum in Aspen, CO. “It creates this strange dichotomy.”
Nicole Kaeding, director of federal projects at the Tax Foundation in Washington, added that the new regulations could even lead to lawsuits.
“It is a generous deduction that encourages individuals to try and take advantage,” she said. “The IRS regulations could be perfect, and still, the beneficial tax treatment will ensure that accountants and attorneys will seek to [innovate] on new business structures and forms to maximize the deduction.”