On Wednesday, August 8, the IRS released its proposed guidance on the new 20 percent business income deduction.
The deduction, included as part of the Tax Cuts and Jobs Act passed in Congress last year, was a huge win for Realtors.
With Wednesday’s announcement, that victory becomes even more significant for real estate professionals and small businesses across the country.
Under this deduction, a wide range of real estate professionals, including those who are self-employed and those operating through partnerships, LLCs and S corporations, can take 20 percent off the top of any income received through pass-through businesses, provided annual income doesn’t exceed $157,000 for those filing individually, or $315,000 for married couples.
The calculation will depend on how your business is structured. Other limits could also come into play, but the basic structure is very favorable to you as a small business or independent contractor.
The key development from Wednesday’s announcement is the IRS’ new recognition of eligibility for a wide range of real estate professionals, including, as previously stated, those who are self-employed and who are operating through partnerships, LLCs or S corporations.
Realtors were integral to the favorable interpretation in the proposed guidance. Your association made a forceful case—both in a detailed letter sent to the agency on June 19 and in a face-to-face meeting with IRS officials in early August—that certain limitations on the deduction, based on income, were not intended by Congress to apply to real estate professionals. And that’s the interpretation the IRS has taken in its proposed guidance.
As Bloomberg News reported on August 7, “the National Association of Realtors … met with OMB (Office of Management and Budget) and Treasury Department officials to discuss proposed rules outlining computation of the new write-off for pass-throughs.”
NAR President Elizabeth Mendenhall had this to say about Wednesday's annoucement:
Over the past several months, the National Association of Realtors® has worked with the IRS and Treasury Department to ensure real estate professionals can benefit from the Section 199A 20% deduction for pass-through businesses.
We were pleased with yesterday’s announcement, and believe this new 20% deduction will have a significant, beneficial impact on real estate professionals and America’s small businesses. Specifically, we anticipate the deduction to become available to a wide range of real estate professionals, including those who are self-employed as well as those operating through partnerships, LLCs, and S corporations.
This ruling is a victory for many of our 1.3 million members, those who represent all aspects of residential and commercial real estate. NAR continues to review all relevant information in the recently released proposed regulations on Section 199A, and will communicate with our members as new details emerge.
The new deduction is available for tax years beginning after Dec. 31, 2017. That means you’ll be able to claim it for the first time on your 2018 federal income tax return, beginning next year.
Look for detailed NAR guidance by mid September. It’s a complicated provision, and how it works for you is going to depend on many factors unique to your business structure and your income. As always, consult with your accountant or tax attorney on how this deduction should be applied in your situation.