IRS Issues Proposed Regulations and Notice on Pass-Through Income Taxation

The IRS has released proposed regulations for determining business tax deductions for certain non-corporate enterprises (e.g., sole proprietorships, partnerships, S corporations) which pass through business income to an owner’s individual income tax return.

The Tax Cuts and Jobs Act of 2017 (federal tax reform legislation) altered the taxation not only of corporations, but also of such pass-through-taxed business entities. These businesses generally can deduct 20 percent of their qualified business income. These regulations are intended to aid in determining this tax deduction, which will be available to eligible taxpayers for the first time when filing their 2018 tax returns.

In addition to the proposed regulations, the IRS has also issued Notice 2018-64, which contains a proposed revenue procedure that provides guidance on methods for calculating W-2 wages for such business owners receiving pass-through income, and determining their tax obligations under the tax reform provisions.