Tax talk

Final rules for applying the Tax Cuts and Jobs Act's Section 199A deduction have been released

In December 2017, Congress approved and President Trump signed into law the Tax Cuts and Jobs Act, the most sweeping reform of the tax code since 1986. While Congress was drafting and debating the legislation, NRCA educated lawmakers about how federal tax policy affects the roofing industry. One of NRCA's top priorities was reducing tax rates for all types of businesses, including corporations and businesses organized as pass-through entities.

NRCA has long advocated that maintaining a degree of parity in tax rates among varying business structures is crucial to the economy. In preparation for tax reform, NRCA became a steering committee member of the Parity for Main Street Employers, a coalition representing pass-through businesses. Together with the Parity for Main Street Employers, NRCA helped influence the debate within Congress regarding the complexities of tax policy concerning these types of businesses.

The efforts put forth by NRCA and the Parity for Main Street Employers led to an impressive win for the roofing industry. The Tax Cuts and Jobs Act reduces the corporate tax rate from 35 to 21 percent and provides a new 20 percent tax deduction for pass-through businesses under Section 199A that effectively lowers the top individual tax rate from 39.6 to 29.6 percent. Although the decrease in the corporate tax rate is straightforward, the Section 199A deduction for pass-through businesses is extremely complex. Its implementation required regulations determined by the IRS and Department of the Treasury to establish clear methods of calculating the deduction and clarifying what constitutes qualified business income.

Requesting aggregation

In March 2018, the Parity for Main Street Employers submitted comments to the IRS and Department of the Treasury as the agencies began drafting rules regarding implementation of the qualified business income deduction under Section 199A. In these comments, NRCA requested "aggregation" be allowed, which would permit taxpayers to group activities conducted through S corporations and partnerships when calculating qualified business income under Section 199A. NRCA contended aggregation is necessary so the deduction is fair and workable for business owners.

Aggregation also would help ensure pass-through businesses are not penalized based on how they are organized for business purposes because pass-through businesses often use multiple legal entities for nontax business reasons. For example, family businesses often are organized in a "brother-sister" structure, where their operations are housed in one entity and their real estate is in another. Another common practice is for a business to place all its payroll, finances and insurance in a "common paymaster" entity to streamline payroll operations while housing actual production operations elsewhere. Failure to allow aggregation could force many affected businesses to reorganize into C corporations, which would impose significant transactional costs on the businesses.

Forward progress

In August 2018, NRCA was pleased to see proposed regulations released by the Department of the Treasury and IRS providing for aggregation in a broad range of circumstances. In comments submitted through the Parity for Main Street Employers available at, NRCA commended the agencies for permitting aggregation and acknowledging a well-constructed aggregation policy is essential for making the Section 199A deduction practical for pass-through entities.

The proposed rules put forward by the Department of the Treasury and IRS allow taxpayers to group together separate legal entities for purposes of aggregation if they meet each of the following conditions:

  1. The same person or group of persons, directly or indirectly, owns 50 percent or more of each business to be aggregated.
  2. The 50 percent or more ownership exists for a majority of the taxable year in which the items attributable to each trade or business to be aggregated are included in income.
  3. All the tax items attributable to each business to be aggregated are reported on returns with the same tax year.
  4. None of the businesses to be aggregated is a specified service business.
  5. The trades or businesses to be aggregated satisfy at least two of the following factors:
    1. The trades or businesses provide products that are the same or customarily offered together
    2. The trades or businesses share facilities or significant centralized business elements, such as personnel, accounting, legal, manufacturing, purchasing, human resources or information technology resources
    3. The trades or businesses are operated in coordination with, or reliance upon, one or more of the businesses in the aggregated group.

NRCA and the Parity for Main Street Employers cautioned the conditions could be overly restrictive, impractical and preclude many pass-through businesses from using the Section 199A deduction. NRCA also recognized the need to ensure only valid qualified business income receive the Section 199A deduction. NRCA recommended the 50 percent ownership requirement be dropped for business owners seeking to group together multiple businesses. Further, NRCA was concerned the same taxable year reporting requirement would be problematic. Most pass-through businesses operate on a calendar year basis, but there are legitimate business reasons why a trade or business might use something other than a calendar year. Such businesses shouldn't be precluded from joining a taxpayer's group.

NRCA also had concerns regarding the uneven treatment of unprofitable businesses in the proposed regulations, specifically relating to the requirement that loss-generating businesses be grouped together with profitable businesses when calculating a taxpayer's qualified business income. Conversely, the same unprofitable businesses could be precluded from being part of the taxpayer's grouping if they fail to satisfy the five requirements previously listed, reducing the taxpayer's potential deduction by ignoring the wages and capital attributed to the unprofitable businesses. To resolve the problem, NRCA proposed if an unprofitable business is included in a taxpayer's calculation of qualified business income, the taxpayer should be provided an election to include the same business with any group when determining the level of W-2 wages and capital.

Final rules

On Jan. 18, the Department of the Treasury and IRS released the final rules regarding application of the Section 199A deduction. The final rules permit taxpayers to aggregate multiple businesses together when calculating deductions. The final rules clarify for the 50 percent or more common ownership test, the "majority of the taxable year" needs to include the final day of the taxable year, expanding upon the limited family attribution proposed rules that determine whether a taxpayer or taxpayers own 50 percent or more of an entity.

Significantly, the final rules also permit aggregation to be made at the entity level rather than the individual level. As such, aggregation must be reported by the entity, and the owners of the business are then bound to report that election. Further, a taxpayer who fails to aggregate trades or businesses will not be precluded from making such an aggregation election later. A taxpayer normally cannot make an initial aggregation election on an amended return, but because many taxpayers were unaware of the aggregation rules when filing returns for the 2018 taxable year, the IRS will allow initial aggregations to be made on amended returns only for the 2018 taxable year.

It also is important to note the final rules maintain the annual disclosure requirement from the proposed rules. A taxpayer must attach a statement to his or her federal income tax return for that year identifying each business that has been aggregated. The statement needs to include the name and employer identification number of each entity. If a taxpayer fails to attach the statement, the IRS may disaggregate the businesses to determine the Section 199A qualified business income deduction.

NRCA encourages all affected taxpayers to consult with tax professionals or accountants to determine how the final rules may affect their businesses.

Ongoing commitment

NRCA remains committed to fighting for federal tax policies that are advantageous for the roofing industry and will continue working with Congress whenever tax reform is under consideration.

Teri Dorn is NRCA's director of federal affairs.

This column is part of Rules + Regs. Click here to read additional stories from this section.


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