The Internal Revenue Service provided some long-awaited answers for business owners hoping to dodge the limits on a juicy new tax break.
The IRS’s proposed regulations make it clear that the agency considers a planning technique known as “crack and pack” to be abusive.
The move had been eyed by professional service providers, such as law and accounting firms, to get around income limits set for so-called pass-through businesses, whose income is reported on their owners’ personal returns.
Under that strategy, business owners split their businesses into different entities or combine multiple businesses into one to take full advantage of the new 20 percent deduction.
The pass-through break under President Donald Trump’s tax law spurred tax professionals to circulate proposals and riff on each other’s ideas, as the industry looked to coalesce around strategies that would save their clients money.
Trump and Republican leaders have said middle-class Americans and small businesses would be the biggest beneficiaries under the $1.5 trillion tax cut. But the strategies under consideration to take advantage of the 20 percent pass-through deduction showed how top earners could ultimately reap the biggest gains.
All taxpayers who earn less than $157,500, or $315,000 for a married couple, can now deduct 20 percent of the income they receive via pass-through businesses from their overall taxable income.
If taxpayers earn above those amounts and aren’t service professionals, they must meet tests to take the full deduction — the size of their deduction depends on how much they pay in employee wages or how much they’ve invested in capital like real estate.
For “service professionals,” the break fully phases out if they earn more than $207,500 if they’re single, or $415,000 if they’re married.