199A Regulations: One of her comments, among many, was that Treasury expects to have finalized the proposed IRC 199A Regulations (that were published in early August) by the end of this calendar year. Treasury understands that many pass-through entities, like S corporations and LLCs, are holding off converting to a C corporation (with its much lower 21% federal income tax rate)  until the final 199A Regulations are adopted. As such, the final IRC 199A Regulations are getting priority treatment by Treasury.

Misc.: Other comments from Ms. de Alth Leonard included:

  • Attorneys and Accountants: The “benefits of IRC 199A were intended to be broadly available to all small business owners, except for attorneys and accountants” (note the omission of physicians and dentists.)
  • SALT Deduction: The $10,000 annual limitation on the itemized income tax deduction for state and local taxes (SALT) is viewed as a ‘revenue raiser’ for the government, used in part to off-set the loss of tax revenues caused by other changes arising from the 2017 Tax Act. Consequently, the IRS has prioritized addressing planning strategies that will try to circumvent the $10,000 annual SALT tax deduction ‘cap.’
  • Opportunity Zone Funds: The creation  of Opportunity Zones under the 2017 Tax Act is intended to encourage investment in distressed communities. Proposed Regulations, issued this month, seek to clarify that almost all capital gains related to investment in Opportunity Zone Funds will qualify for tax deferral. All 50 states have designated Opportunity Zones. A Qualified Opportunity Fund must hold at least 90% of its assets in the Qualified Opportunity Zone. If an investor holds an investment in a Qualified Opportunity Fund for at least 10 years, the investor will be able to exclude (not just defer) the entire recognized gain.
  • Business Meals: Business meal expenses will remain 50% tax deductible as long as the incurred expense is associated with a trade or business. These expenses must still meet the ‘ordinary and necessary’ test of IRC 162(a). The Service will not allow entertainment expenses to be deductible.  Accordingly, the IRS will closely scrutinize business meal expenses to see if the disallowance rule is being circumvented by inflating the deductible business meal expense.
  • Bonus Depreciation: As part of the 2017 Tax Act, IRC 168(k) was added to provide an additional depreciation deduction for trades or businesses. This bonus depreciation was expanded to include used property that was not previously used by a taxpayer or which was acquired from a related party. Accordingly, a lessee can now purchase previously leased property and fully utilize the bonus depreciation. However, ‘qualified improvement property’ is not eligible for the bonus depreciation due to the way that the Tax Act is currently written. Thus, technical correction legislation will be required in order to ‘fix’ that oversight.
  • Technical Corrections: Most speakers at the Institute observed that the 2017 Tax Act contains many mistakes, missing cross references, and vague terminology that requires formal interpretations, hopefully to be provided in the final Regulations. I guess this is to be expected considering that the Bill was written and passed in a completely partisan process in only 47 days, while scheduled to produce a revenue deficit of $1.5 trillion (and it was even ‘scored’ by the Budget Office at the time that the anticipated growth in the economy was insufficient to pay for that estimated loss of tax revenues.) All the speakers emphasized the desperate need for a technical corrections Bill to address many of the 2017 Tax Act’s mistakes and oversights. Yet none of the speakers were optimistic that a technical corrections Bill would ever pass, inferring that no real changes will occur until there is a change in the current administration, even if the nature of Congress changes with the midterm elections.