Winners and Losers on 20% Pass-Through Rules Hard to Call

Accountants determining who benefits from the federal tax law change on 20% pass-through deductions face uncertainty this tax filing season. The beneficiaries are clear, but those not quite fitting the bill are harder to call winners or losers.

Winners are easy to spot, said Scott Berger, principal of entrepreneurial services at Kaufman Rossin: “If you meet the definition, you are a clear winner. There is a 20% deduction from income. If you are a retailer, wholesaler, it’s pretty clear cut that you qualify.”

He pictures business owners in the tourism industry benefiting from the change. Boutiques, restaurants, and retailers are eligible for the 20% exclusion.

The service industry, a large component of the South Florida economy, floats in a grey space, Mr. Berger said: “Do you qualify? Do you meet the definition?”

Answers to those questions are not clear at times even to him and his team. They find themselves in daily, almost hourly, discussions determining whether a client can benefit from the tax change.

Businesses in the service industry are a hot topic given that they are nixed from the grantee list, but there are unique cases. “Service industries are the ones that are carved out of this deduction.
We know the lawyers and doctors don’t qualify, but inside of that there are some areas of specialty, maybe they are not practicing law, per se, or direct medicine or whether they qualify or not,” said Mr. Berger.

Uncertainty also persists for bookkeeping services, payroll services, and real estate investment businesses.

One aspect that has not changed and might benefit clients, this year in particular, is the tendency to file for extensions, Mr. Berger said. “We are encouraging those that maybe eligible for this deduction where it’s not such a clear-cut answer to extend the return, to give us time to see if we can formulate a better understanding and definitive answer for the fact that they do qualify and get some more guidance on these things.”

He expects extended tax filings to keep him busy from now through October.

Professionals in other firms are taking a different approach, urging companies to file by the April deadline, Mr. Berger said. “A lot of professionals are advising these pass-through entities, whether it be S-corporations or partnerships, to file extensions and see what shakes out over the next few months and see if there is more guidance, more discussion amongst the professional community to gain a better understanding of what qualifies and what doesn’t qualify.”

The reaction by the Internal Revenue Service on filed taxes will serve as a guidance, Mr. Berger said. “Year one is sort of a learning phase. Whether the IRS is going to be actively and aggressively challenging this year’s returns down the road on some of these positions has yet to be seen.”