Wayfair II: Congress strikes back

 
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Posted by Evan Piccirillo, CPA

In June of 2018, the Supreme Court rendered their Wayfair Decision, apparently giving states license to much more aggressively legislate sales tax laws for out-of-state vendors. With the longstanding and archaic physical presence standard seemingly abolished, states and their local jurisdictions were granted a method of increasing tax revenues without going through the unpopular process of raising tax rates, but instead increasing their tax base. What a concept!

Obviously, businesses dealing primarily in interstate retail sales were most upset to hear this news. Cost of compliance with respect to registering to do business and perpetually filing various tax returns in many jurisdictions can be burdensome. In addition, states might seek to retroactively impose tax on prior-period sales, opening an unanticipated floodgate of tax, penalties, and interest. Smaller businesses that lack the infrastructure to deal with these compliance matters are particularly vulnerable. Since sales and use taxes are “trust-fund” taxes and business owners can be held liable, the exposure for businesses in these areas could be crippling.

Arguably, the primary concern over the Wayfair decision is the uncertainty left in its wake. Some states have acted quickly to pass laws aiming to scoop up as much cash as possible as quickly as possible. Business aren’t sure if they should scramble to register now and begin filing returns and collecting sales tax or if they should take a wait-and-see approach.

Luckily for businesses, Congress has stepped in to save the day (you don’t hear that very often). A bipartisan bill with a good chance of passing was introduced in the house (you don’t hear that very often either) called the “Online Sales Simplicity and Small Business Relief Act.” What the bill lacks in naming creativity, it makes up for in substance. The bill seeks to clear up problems and provide structure and order left in the pandemonium created by the Court’s decision.

The bill sets a cut-off date for sales prior to June 21, 2018; no sale tax collection on transactions prior (which is the date the decision was rendered). It calls for a phase-in of compliance beginning in January of 2019. It also establishes a small business exemption for sellers with gross annual receipts of less than $10 million per year. Lastly, the bill seeks to compel states to work together to develop a “compact” that defines what gives rise to nexus and decreases the burden of compliance on taxpayers.

Hopefully this shred of sanity in such a chaotic time will survive our legislative process and become law. Either way, businesses that have out-of-state retail sales should take steps to identify potential exposure in applicable jurisdictions, paying special attention to those states that have already passed legislation that ignores the physical presence standard and act accordingly.

WAKE UP WITH REM: Tesla, blockchain to control use of consumer data, and a wombat who just wants to play

 
 

Annnnnd we’re back, with tax withholding, pot-smoking CEOs, IBM Blockchain, and a fat little wombat who just wants to play.

Millions of taxpayers could wind up owing for 2018. Regular “Wake Up” readers may recall previous articles on this topic. The takeaway? Review your current withholding and make any necessary adjustments as soon as possible. [CBS News]

Tesla’s new Chief Accounting Officer David Morton resigns just weeks after joining the company. Things have been weird lately for the electric vehicle maker. Iconoclastic founder and CEO Elon Musk tweeted plans to take Tesla off the public stock market, only to reverse his plan days later. (The SEC is investigating both announcements.) Musk has a documented history of abusing the prescription drug Ambien and appeared on Joe Rogan’s webcast while smoking what appeared to be a joint. So we kind of get why Morton didn’t want to stick around. [New York Times]

“Should I pay my taxes with a credit card?” Depends on your situation and the type of card you use. [ThePointsGuy.com]

IBM to use blockchain to help consumers control the use of their personal data. In an attempt to help stem the current onslaught of data breaches and cyberattacks, the global technology firm has announced that it is providing the IBM Blockchain Platform to “enable consumers to exercise control over the use of their personal data.” IBM was an early adopter of blockchain as a means of creating an infrastructure for processing millions of transactions per second. [Venture Beat]

This week’s videos

Geni Whitehouse talks about "Leading from Within: The Basset Hound versus The Nun" as part of the TEDxNapaValley "Empowering Leadership at Every Level" event. Geni Whitehouse, CPA.CITP, CSPM is the is the author of "How to Make a Boring Subject Interesting : 52 ways even a nerd can be heard".

During a cool morning shower by a brave ranger, this chubby Wombat (26 kilos!!) is in for either an innocent play or a deadly attack! First time we've ever seen a jumping wombat, anyway!

The Wake-Up Call is The REM Cycle’s biweekly compilation of newsworthy articles pertaining to taxation, accounting, and life in general. Got a hot tip? Email us at REMCycle@rem-co.com.

Data protection recap: What have we learned?

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Posted by Amy Frushour Kelly, Communications Manager

It’s been a year since the Equifax data breach, impacting 147 million Americans and widely considered to be the largest consumer data breach in U.S. history. Because Equifax didn’t use strong, consistent encryption methods to protect the data they stored, hackers were able to locate and exploit a known bug in the Equifax framework to steal this information. Data breaches aren’t uncommon; several national corporations, including Home Depot and Target, have been hacked in recent years. There isn’t much we can do as individuals to control how these large companies and institutions protect our financial and personal data, but we can take steps to guard against breaches at home. Specifically, we’re going to look at phishing scams and how to avoid being tricked.

Phishing is a form of cyber attack in which the hacker tries to obtain your information by tricking you into disclosing it yourself. They can do this by contacting you in any of several different ways:

  • Email (both work and personal)
  • Text
  • Social media (Facebook Messenger, Instagram, Twitter, LinkedIn, etc.)
  • Phone

Via email: A phishing email works in one of two ways: convincing you either to disclose your sensitive information or to click on a link or attachment that contains malware. SPOILER ALERT: Your bank/credit card company will never email you to verify your password or account information. Neither will Amazon, eBay, Apple, Microsoft, the IRS, or pretty much any other institution. They will not send you attachments, so don’t click on any.

Via text: Gmail, Hotmail, and Yahoo never ask if you don’t want to do something with your account. If you receive a text asking you about a password reset on your account and you didn’t request to reset the password, ignore the text. Don’t even reply—that will only let the scammers know they reached a working cell phone number so they can try again.

Via social media: There have been reports of Facebook users receiving messages from their contacts that consist of an .SVG image file that looks like a photo. Clicking on the file redirected the users to a fake YouTube page with prompts to add “browser extensions” in order to view the video. When users clicked the prompts, they inadvertently installed malware on their computers that allowed the scammers access to all the users’ Facebook friends. Similar scams have appeared on Instagram, Twitter, and LinkedIn. There are other social media phishing attempts out there, but this is the current big one.

Via phone: If you get a call from Microsoft, the IRS, China, etc.—you’re not getting a legitimate call. Hang up and, if you can, block the number.

Also: Attacks have been reported on Venmo and PayPal digital payment accounts. In the most common attack, the user (you) receives a legitimate-looking text or email that claims there’s been suspicious activity on their account and directs the user to provide updated information to avoid fraudulent charges. Another popular method does essentially the same thing but tells the user “Your payment could not be completed,” and prompts the user to provide the information. Pretty sneaky, right?

Be paranoid. Never login to any website you reach by clicking a link in an email. Even if it looks authentic. Even if it doesn’t look like a link—for instance, a button in the email that says, “Verify information now.” The button is a link and clicking it will not end well for your security.

Lessons to live by

  1. Do not trust the link.
  2. No legitimate request for your username/password will come through an unsolicited email or text.
  3. If you’re not expecting an email and you know the sender: call or text them. If you don’t have their number, use a different email or messaging program to ask them if they really sent it. Do not reply to the email.
  4. If you’re not expecting it and you don’t know the sender: delete it. Better safe than sorry.

Awareness is key. Scammers are shrewd, but you don’t have to be tech-savvy to outwit them.

Reporting phishing attempts

  • You can report phishing incidents on the F.B.I.’s Internet Crime Complaint Center site: https://www.ic3.gov/complaint/default.aspx/
  • Report PayPal scams by forwarding the email to spoof@paypal.com (Venmo does not appear to have a similar feature).

Further reading

WAKE UP WITH REM: First African-American female CPA, medical marijuana tax revenue, and budget surpluses

 Mary T. Washintgon Wylie ( source )

Mary T. Washintgon Wylie (source)

We’re excited to share the news that Mary T. Washington Wylie, America’s first black female CPA, is being publicly honored by the City of Chicago. Also, a heads-up regarding state budget surpluses that don’t get shared with municipalities, tax revenue for medical marijuana, and “blockchain blockchain blockchain.”

Illinois CPA Society honors first African-American female CPA. The City of Chicago and the Illinois CPA Society are honoring Mary T. Washington Wylie (1906 – 2005), the first African-American woman in the U.S. to become a certified public accountant. [Accounting Today]

Cryptocurrency mining at college campuses results in huge electric bills for schools. Bitcoin hijinks are taking place on campus. [CNBC]

“Blockchain blockchain blockchain.” This short talk was given at Crypto 2018 in Santa Barbara, California, which is a conference for mathematicians and computer scientists to discuss new findings in the world of cryptography — the study of how to encrypt and decode data so unwanted parties can't access it. [Business Insider UK]

Show us the money! 39 out of 50 states currently have budget surpluses, often amounting to several billion dollars. All of which is great, but municipal governments aren’t receiving any of the wealth. Local governments are pressured to keep taxes low, but they also need to pay for infrastructure, purchase new police vehicles, and give municipal employees COLA raises. So where’s the funding from the states? [Forbes]

$1.8 million in medical marijuana tax revenue. Montana’s initial 4% tax on marijuana providers’ gross revenues resulted in nearly $2 million in just over a year. [San Francisco Chronicle]

This week's videos

This panel discussion explores the key skills and qualities that professional accountants need to succeed in their career, now and in the future - from first qualifying right through to the boardroom.

Out of coffee? Nooooo!!!

WAKE UP WITH REM: Crypto scammers, lesbian church, and Kenyan basketball

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It’s been an exciting week at the REM Cycle, folks. Raich Ende Malter jumped ahead 13 spots on Inside Public Accounting's IPA 100 and landed smack in the middle of the top ten fastest-growing firms. (Maybe it's because we have such an amazing blog. Just saying.)

We’ve got a great news roundup for you today—a “lesbian-centered” church was recently granted tax-exempt status (which upset all sorts of people), tax choices that might pan out better in the long run, and an interview with a cryptocurrency scammer. Also, videos on why open office plans are a bad idea (and how to fix them) and the transcript of a breakup call.

Will your tax preparer need to be licensed next year? Senator Rob Portman (R–OH) has proposed the Protecting Taxpayers Act (S. 3278), a bill intended to allow the IRS to “regulate paid tax return preparers in a balanced way.” Of course, we strongly recommend that you hire a CPA firm to do your taxes for you, even if it's not us (but we are pretty awesome—see below). [Forbes]

 
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100% bonus depreciation? Yes—no—wait, what? The thing about the Tax Cuts and Jobs Act is that you should “NEVER complete your research after merely looking at the Code.” Here’s why. [Forbes]

A “controversial religious order” is granted tax-exempt status by the IRS. We’re not entirely sure we can print the church’s name, but you’ll see it in the linked article. Controversy or no, the IRS is not mandated to make determinations of a religious organization’s moral worth. [Going Concern]

3 tax breaks that may be better in the long run. In some cases, it’s all about planning ahead. [New York Times]

Accountants upset Ulinzi Warriors… in basketball. Okay, our headline may be misleading, but we just couldn’t help ourselves. We’re excited that an accounting school’s basketball team is on top of the Men’s Kenya Basketball Federation Premier League. Go, KCA-U! [The Daily Nation]

Ethereum giveaway scammer claims to rake in $50-$100K per day. We’re going to guess this guy does not feel obligated to report this income. [Bitcoinstacks.com]

This week's videos

“Proof that open office layouts don’t work.” The basic logic behind the open office is that tearing down physical barriers inspires communication and collective creativity. But does it really?

Phil Hanley presents a dramatic reading of his recent breakup phone call.

The Wake-Up Call is The REM Cycle’s biweekly compilation of newsworthy articles pertaining to taxation, accounting, and life in general. Got a hot tip? Email us at REMCycle@rem-co.com.

Pitfalls of the New IRS Interest Expense Limitation

Posted by Evan Piccirillo, CPA

EDITOR'S NOTE: This article is also featured in the August 7, 2018 edition of the New York Real Estate Journal.

The sweeping revision to the U.S. tax code known as the Tax Cuts and Jobs Act contains many provisions that present pitfalls and planning opportunities.  One such provision limits the tax deduction on interest expense.  This presents certain tax-planning considerations for taxpayers, especially those who do business relating to real estate.

Under the revised code, the federal tax deduction for net business interest expense is limited to 30% of a taxpayer’s “adjusted income” at the entity level, with the excess carrying forward indefinitely.  Adjusted income under this provision is business earnings before interest, and until tax years beginning in 2022, before depreciation and amortization as well.  Net operating losses and the new 20% pass-through deduction are ignored when determining adjusted income.  For example, in 2019 a taxpayer has $40 of taxable income, $30 of interest expense, and $10 of depreciation and amortization.  Adjusted income is $80 ($40 + $30 + $10) and the limit on interest deduction is $24 ($80 * 30%).  In this case, $6 ($30 - $24) carries forward to the subsequent year.

This limitation is a detriment to taxpayers who finance a significant portion of their operations with debt, which is common when operating rental real estate.  Furthermore, rental property debt is often refinanced in order to distribute cash representing the appreciation of the property’s value, usually to fund additional acquisitions.  Since the debt doesn’t go away the excess interest may keep carrying forward, in effect permanently.  Some businesses may have to consider changing their method of financing operations to shift from debt to equity to counter the limitation.

Fortunately, in certain situations taxpayers can avoid limiting their interest deduction.  

The Small Business Exemption

Taxpayers with average gross receipts of less than $25 million over the previous three years ($25M test) are exempt from the interest limitation described above.  Since $25M is a high threshold, many taxpayers will be relieved to hear about this exemption, if not for the following pitfalls:

Pitfall 1 - Aggregation rules

The $25M test for the small business exemption is applied using somewhat complex aggregation rules.  Receipts from entities with common ownership are grouped together for the test.  If the group fails the $25M test, the entities in that group will not be able to avoid the limitation this way.  For example, two rental properties are owned in partnerships by two individuals, split 50/50.  Each property has average gross receipts of $15M, well below $25M.  But the receipts of these properties are combined for the small business test.  In this case, $30M is greater than $25M, so both partnerships fail the test and are subject to the limitation.  This provision is meant to counter the obvious strategy of splitting up existing businesses into smaller companies to avoid the limitation.

Pitfall 2 - Entities with limited investors

Taxpayers who realize taxable losses and have more than 35% of their ownership comprised of limited investors may also fall into the “tax shelter” trap.  Consider a rental property owned by a partnership of five individuals, each with a 20% interest.  Three partners are actively engaged in the business; the other two are limited partners. If the property experiences a tax loss in a given year, it is considered a “tax shelter” in this context, since a ratable amount of the loss is allocated to the two limited partners whose ownership exceeds 35%.  In this case, the small business exemption does not apply, regardless of the results of the $25M test; therefore the interest deduction is subject to limitation.  This “tax shelter” test is applied each year, which means that in profitable years, the limit may not apply, but in loss years it will.  Consider buying out limited investor interest that exceeds 35% to avoid this trap.

Electing Real Property Trade or Business

If a taxpayer does business in the real estate industry and elects to depreciate real property under the Alternative Depreciation System (ADS), that taxpayer will not be subject to the limitation.  ADS provides for a slower recovery period than usual and doesn’t allow the instant cost recovery of bonus depreciation. If you are willing to decrease your annual depreciation deductions, you can get out of this limitation regardless of the other factors.

The ADS election may seem an obvious choice, but benefit and cost must be weighed before making a decision.  The election is irrevocable; long-term consequences must be considered.  Also, an entity that may be subject to the 30% limitation might have enough adjusted income to absorb all interest expense, nullifying the benefit of the election.  In addition, losing the benefit of bonus depreciation can be a significant drawback.

All businesses need to understand the consequences of the new interest deduction limitation, but real estate businesses have an extra option to reduce their tax liability.  Shifting debt to equity, buying out limited investors, and (for real estate businesses) making the ADS election are viable options to counterbalance the new limitation.

WAKE UP WITH REM: Soda tax, tax reform, a reformed form, and marijuana tax

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We can't think of a clever opening paragraph this week. If you can think of one, leave it in the comments below.

Soda taxes again. Several states, including California, Pennsylvania, Oregon, Mississippi, Arizona, and Michigan, are either considering or have already adopted food and/or soda taxes. But what happens when individual municipalities have their own food taxes? [Reason.com]

Tax Reform 2.0. Rep. Kevin Brady (R-Texas), Chairman of the House Ways and Means Committee, released a two-page outline of a plan to reform the nation’s most recent tax reform. The idea is nothing new — for instance, several states have already drafted legislation to mitigate the SALT deduction cap — but it will be interesting to see Brady’s finished plan. [Bloomberg]

ICYMI: Facebook stock drops by more than the worth of the entire global cheese market. John Oliver hopes that this will inspire the return of MySpace. (Strong language warning.) [YouTube]

At last! The new, improved(?) W-4. You know that annoying form you fill out every once in a while? The one where you fill in zeroes and ones, etc., to calculate the number of withholding allowances you can claim? The IRS has revamped it, and you’ll find a few surprises. [Forbes]

New Jersey budgets $20M in medicinal marijuana revenue for FY 2019. But based on tax data from previous years, this would mean handing out more than twice the number of existing cannabis prescriptions. Unless Willie Nelson moves to the Garden State, experts warn that’s not going to happen. [NJ.com]

This week's videos

The Wake-Up Call is The REM Cycle’s biweekly compilation of newsworthy articles pertaining to taxation, accounting, and life in general. Got a hot tip? Email us at REMCycle@rem-co.com.

New sexual harassment guidelines for NYS employers

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Posted by Lucille Southard

The #MeToo movement and innumerable allegations of unwanted and inappropriate sexual advances in the workplace prompted New York legislators to include several provisions in the newly-passed state budget designed to prevent sexual harassment. While not all provisions take effect immediately, we encourage employers to begin preparing now. This post is a primer on what New York State employers will be expected to do to ensure a safe workplace for all workers.

Annual sexual harassment training

By October 9, all New York employers must implement sexual-harassment training programs. A model program created by state agencies is available if employers are unable to design their own sexual-harassment training programs that meet or exceed New York State standards.

Programs must include a definition of sexual harassment and specific examples of what constitutes inappropriate conduct, as well as detailed information on federal and state statutory remedies available to victims of harassment. Employers must also explain employees’ rights of redress and how to bring complaints.

As of now, the new laws are unclear about specific guidelines for the number of hours of training will be required and how the training can be administered (e.g., in person, webinar, etc.).

Employers must keep records of employee training for a minimum of three years, including signed acknowledgement forms from the employees who attended.

Nondisclosure agreements

Employers may no longer include confidentiality provisions in settlement agreements, except when the complainant requests confidentiality.

A related federal provision of the Tax Cuts and Jobs Act (TCJA) eliminates potential deductions for employers’ legal fees and settlement payments incurred by defendants’ sexual harassment cases that are subject to nondisclosure agreements.

Prevention policy

New York State employers must provide a written sexual-harassment policy and distribute it to employees. This policy must include:

  • A statement prohibiting sexual harassment and providing examples of what constitutes sexual harassment
  • Information about federal and state sexual-harassment laws and the remedies that are available to victims—and a statement that there may be additional local laws on the matter
  • A standard complaint form
  • Procedures for a timely and confidential investigation of complaints that ensures due process for all parties
  • An explanation of employees' external rights of redress and the available administrative and judicial forums for bringing complaints
  • A statement that sexual harassment is a form of employee misconduct and that sanctions will be enforced against those who engage in sexual harassment and against supervisors who knowingly allow such behavior to continue
  • A statement that it is unlawful to retaliate against employees who report sexual harassment or who testify or assist in related proceedings

Non-employees

Until now, contractors, vendors, and consultants have not been covered by New York State sexual harassment laws. As of April 11, 2018, Section 296-d of the New York State Human Rights Law prohibits an employer to permit sexual harassment of non-employees in the employer’s workplace. If harassment takes place and the employer knows or should reasonably know, but fails to take immediate corrective action, the employer can be held liable.

In conclusion

Employers should review and adjust existing policies and training to ensure a harassment-free workplace. For practical purposes, compliance will limit employer liability. Of course, the most important purpose of adhering to the new laws is to protect and support all workers with a safe working environment.

If you have any questions, please don’t hesitate to contact me directly.

WAKE UP WITH REM: Trade secrets, co-working, and SALT lawsuits

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Taxes don’t take the summer off! Trade secrets, 529 plans, and co-working spaces are this week’s topics. We’ve also got videos for you: develop professionally by learning how to hack networking like a champ, and join us in our bemusement at a state witness who claims not to know what a photocopier is.

Another lawsuit to preserve the SALT deduction. Tuesday, the states of New York, Connecticut, New Jersey, and Maryland joined to sue the federal government, seeking to void the $10,000 cap on federal deductions for state and local taxes. [Reuters]

Be careful when filing that 10-K. A recent study indicates that companies who disclose the existence of trade secrets in their 10-K reports—not the secrets themselves, but the existence of the trade secrets—increase their risk of a cyber-attack by 30%. [Accounting Today]

 

PROFESSIONAL DEVELOPMENT: What if all the advice we've heard about networking is wrong?

 

Is it time to let your office lease run out? As co-working gradually becomes the norm for startups and smaller companies (and is growing in popularity among established businesses), CPA firms are beginning to ask whether permanent offices are really necessary. [CPA Insider]

How will the new tax law affect education-related tax breaks? Answer: Mostly, it won’t. But in certain cases, 529 plans are now eligible to take advantage of federal income tax-free withdrawals of up to $10,000 per year (yay!) …unless your state imposes state income tax on these distributions (boo!). [MarketWatch]

 

What is a photocopier? “I don’t understand the question.”

 

The Wake-Up Call is The REM Cycle’s biweekly compilation of newsworthy articles pertaining to taxation, accounting, and life in general. Got a hot tip? Email us at REMCycle@rem-co.com.

S Corp considerations for 2018 owners’ compensation resulting from the TCJA

 
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Posted by John Boykas, CPA

Owners of certain flow-through entities may qualify for reduced tax rates on qualified business income earned by the entities via the newly enacted Section 199A, part of the Tax Cuts and Jobs Act (TCJA).  If you operate as an S Corp, you may be able to take better advantage of these reduced tax rates simply by reviewing the compensation structure of payments to owners.  This planning technique must be considered during 2018 and will be relevant as long as Section 199A remains in effect (this provision sunsets in 2026).

Simply put                      

Section 199A allows for a 20% reduction in pass-through income to certain qualified shareholders (see below).  This is an easy way to save money.  Simply put, reducing the salary of owners will increase the net income flowing through to the shareholders, thereby lowering the tax rate; for example, if you are currently paying the top rate of 37%, you may qualify for a reduction of that percentage by 20%, resulting in a tax rate of only 29.6%.  Furthermore, the profits may not be subject to Medicare tax, resulting in an additional 2.9% savings.  As in the past, shareholders should be paid “reasonable compensation,” but this concept is not specifically defined.  Your trusted advisor should be able to determine whether you are in the lowest end of the reasonable compensation range in order to achieve the maximum tax benefit.  Of course, most people do not want to take home less money, but this can be solved by paying the reduction in salary as S Corp distributions, taking care to ensure that appropriate estimates are paid so that underpayment penalties are not incurred.

Example:  A small distributor where the owner historically receives a $400,000 salary that results in $100,000 net corporate income.  Without any planning, the owner will pay tax on the salary at normal rates but will receive a 20% reduction in the $100,000 corporate income, resulting in tax being paid on $480,000 ($400,000 salary plus 80% of $100,000).  With careful planning, we can reduce the salary to a reasonable $200,000, resulting in a net corporate income of $300,000.  The owner now pays tax on $440,000 ($200,000 salary plus 80% of $300,000).  This is a significant tax savings.

Now the details

For 2018, if the owner’s taxable income is less than the threshold amount ($315,000 for married filing jointly and $157,500 for other individuals), there are very few limitations.

However, two major limitations will be phased in once taxable income exceeds the threshold amounts, and will be fully applicable once taxable income is above $415,000 for married filing jointly and $207,500 for other individuals.  Specifically:

  • the deduction will not apply to “specified businesses,” e.g., doctors, lawyers, brokers, accountants, etc. (Architects and engineers are exempt from this limitation because they have better lobbyists); and
  • the 20% reduction will be limited to 50% of W-2 wages (or in the alternative 25% of W-2 wages plus 2.5% of certain property and equipment cost).  So, in certain situations, it may actually be beneficial to increase wages.

The takeaway             

There are many nuances and uncertainties regarding the application of Section 199A. And while the Treasury will eventually be issuing guidance, diligent business owners and their trusted tax professionals need to become familiar with them now.  Speak to your advisor sooner than later to discuss an optimal compensation target for 2018.