The White House is looking to lower the Internal Revenue Service budget by $1.4 billion in fiscal year 2027.

The White House is looking to lower the Internal Revenue Service budget by $1.4 billion in fiscal year 2027.

The budget request, released April 6, 2026, says the overall budget request for the agency will “streamline IRS operations utilizing technology improvements to help focus the IRS on providing high-quality customer service while ensuring the tax laws are fairly administered.”

The request highlighted two areas where it is currently saving money – ending the Direct File program and reducing staffing by 27 percent total – since January 2025.

The decrease accounts for most of the White House’s overall decreased budget request for the Department of the Treasury. The Trump Administration is an $11.5 billion budget for fiscal year 2027, a 12-percent decrease ($1.5 billion) from the budget enacted for fiscal year 2026.

The Office of the Inspector General would see a $4 million decrease to $44 million from the $48 million level in 2026, while the Treasury Inspector General for Tax Administration would see a decrease from $220 million to $206 million.

The IRS has issued final regulations for the "no tax on tips" deduction under Code Sec. 224, which was enacted as part of the the One Big Beautiful Bill Act (OBBBA) (P.L. 119-21). The final regulations adopt proposed regulations that were issued in September 2025 ( NPRM REG-110032-25), with modifications and clarifications in response to comments received.

The IRS has issued final regulations for the "no tax on tips" deduction under Code Sec. 224, which was enacted as part of the the One Big Beautiful Bill Act (OBBBA) (P.L. 119-21). The final regulations adopt proposed regulations that were issued in September 2025 ( NPRM REG-110032-25), with modifications and clarifications in response to comments received.

Background

Under Code Sec. 224, an eligible individual can claim an income tax deduction for qualified tips received in tax years 2025 through 2028. The deduction is limited to $25,000 per tax year, and starts to phase out when modified adjusted gross income is above $150,000 ($300,000 for joint filers). An employer must report qualified tips on an employee‘s Form W-2, or the employee must report the tips on Form 4137. A service recipient must report qualified tips on an information return furnished to a nonemployee payee (Form 1099-NEC, Form 1099-MISC, Form 1099-K).

A "qualified tip" is a cash tip received in an occupation that customarily and regularly received tips on or before December 31, 2024. An amount is not a qualified tip unless (1) the amount received is paid voluntarily without any consequence for nonpayment, is not the subject of negotiation, and is determined by the payor; (2) the trade or business in which the individual receives the amount is not a specified service trade or business under Code Sec. 199A(d)(2); and (3) other requirements established in regulations or other guidance are satisfied.

The proposed regulations provided eight broad categories of occupations that customarily and regularly received tips on or before December 31, 2024. For each occupation, the list provided a numeric Treasury Tipped Occupation Code (TTOC), an occupation title, a description of the types of services performed in the occupation, illustrative examples of specific occupations, and the related Standard Occupation Classification (SOC) system code(s) published by the Office of Management and Budget (OMB).

List of Occupations that Receive Tips

The final regulations made several modifications to the list of the occupations set forth in the proposed regulations. Three new occupations were added:

• "Visual Artists" and "Floral Designers" were added to the Personal Services category; and
• "Gas Pump Attendants" was added to the Transportation and Delivery category.

The final regulations also made changes and clarifications under several of the occupation categories, including:

• Beverage & Food Service – For the "Wait Staff" occupation, "banquet staff" has been added as an illustrative example, and the occupation's description has been modified to include catered events. The "Food Servers, Non-restaurant" occupation has been changed to "Food and Beverage Servers, Non-restaurant," to clarify that winery tasting room servers are covered by this category.
• Entertainment and Events – The preamble to the final regulations states that "table game supervisors" are covered by the "Gambling Dealers" occupation. The IRS also clarified that individuals dressed up as Santa Claus, as well as other characters or celebrities, are covered by the "Entertainers and Performers" occupation.
• Hospitality and Guest Services – "Doorman" has been added to the list of illustrative examples for the "Baggage Porters and Bellhops" occupation.
• Personal Services – To clarify that resident care is included in the "Personal Care and Service Workers" occupation, the description in the list provides that "work is performed in various settings depending on the needs of the care recipient and may include locations such as their home, place of work, out in the community, at a daytime nonresidential facility or a residential facility." The "Pet Caretakers" occupation has been renamed as the "Pet and Show Animal Caretakers" occupation, and "horse groomer" has been added to the list of illustrative examples.
• Personal Appearance and Wellness – The "Eyebrow Threading and Waxing Technicians" occupation has been renamed as the "Eyebrow and Eyelash Technicians" occupation, and additions were made to the description in the list to include eyelash technicians.
• Recreation and Instruction – The "Travel Guides" occupation now includes a parenthetical noting that both indoor and outdoor locations are covered.
• Transportation and Delivery - "App/platform based delivery person" has been added to the illustrative list in both the "Goods Delivery People" occupation and the "Taxi and Rideshare Drivers and Chauffeurs" occupation. Also, the phrase "over established routes or within an established territory" has been removed from the description of the "Goods Delivery People" occupation.

The final regulations clarify that apprentices and assistants qualify under the applicable TTOC occupation category if they perform the same services as those listed in the TTOC occupation description.

Chiropractors, accountants, tax preparers, concert merchandise sellers, and "low bono" legal service providers were not added to the occupations list, despite requests in the comments to add these to the list.

No occupations included on the occupations list in the proposed regulations were removed from the list in the final regulations.

Voluntary Tips

Regarding the requirement that qualified tips must be voluntary, it is clarified that the customer must have the option to reduce the tip amount to zero. Tip selection methods such as Point-of-Sale (POS) systems with a tip slider that goes to zero or an option for the customer to select "other" and input zero are voluntary. Examples in the final regulations have been modified to clarify that these methods are considered voluntary tipping practices.

Further, the final regulations state that situations where nonpayment of a tip is "without consequence" include situations where nonpayment of the tip does not have any impact on the scope or cost of the service. The final regulations also contain a new example where the tip is part of a contract that is entered into before the services are provided. The example concludes that the tip is a qualified tip because it is paid without consequence. If the customer had chosen to not pay the tip, then the scope or cost of the service would not have been affected.

The final regulations include two new examples to help clarify when payments to digital content creators are tips and when they are compensation. It is also clarified that tipping digital content creators through audience engagement mechanisms that result in superficial digital rewards, such as highlighted messages or other digital tokens of appreciation from the tip recipient that are negligible in value, do not disqualify an otherwise qualified tip.

Other Matters

The final regulations state that amounts received as a tip that are not separately reported to an individual on a statement furnished to the individual pursuant to Code Secs. 6041(d)(3), 6041A(e)(3), 6050W(f)(2), or 6051(a)(18), or reported by the taxpayer on Form 4137 (or successor) are not eligible for the tips deduction. (The preamble recognizes, however, that Notice 2025-69 provides transition rules for this for 2025.)

It is also clarified that "cash tips" include amounts paid in foreign currency. Rules are also provided for tips received by digital tipping systems.

Regarding abuse of the tips deduction, the final regulations replace the provision prohibiting ownership in or employment by a payor with a provision stating that an amount is not a qualified tip, and thus not eligible for the deduction if, based on all relevant facts and circumstances, the amount represents a recharacterization of wages or payments for goods or services for purposes of claiming the deduction.

Effective Date

The final regulations are effective on June 12, 2026, the date that is 60 days after publication in the Federal Register.

T.D. 10044

IR 2026-49

The IRS issued updated frequently asked questions (FAQs) addressing educational assistance programs under Code Sec. 127. The FAQs provide general guidance on eligibility, tax treatment of benefits, and recent legislative updates.

The IRS issued updated frequently asked questions (FAQs) addressing educational assistance programs under Code Sec. 127. The FAQs provide general guidance on eligibility, tax treatment of benefits, and recent legislative updates.

General Background

The FAQs explained that a Code Sec. 127 educational assistance program is a written employer plan that provides benefits exclusively to employees. The program must satisfy nondiscrimination requirements that prevent preferential treatment for highly compensated employees, shareholders or owners.

Exclusion Limits and Tax Treatment

The FAQs clarified that employees could exclude up to $5,250 per year in educational assistance benefits for the tax years at issue. The limit applied to combined benefits, including tuition and qualified education loan repayments. Amounts exceeding this limit were taxable and unused amounts could not be carried forward. Expenses covered under Code Sec. 127 could not be used for other credits or deductions.

Eligible and Non-Eligible Benefits

Eligible benefits included tuition, fees, books, supplies, equipment and payments of principal or interest on qualified education loans. These benefits could be provided for undergraduate or graduate courses and did not need to be job-related. However, meals, lodging, transportation and equipment that employees could retain were not eligible. Courses involving hobbies or sports were not eligible unless required for a degree or related to the employer’s business.

Eligibility and Other Provisions

The FAQs emphasized that benefits were limited to employees and included restrictions on owners and shareholders to ensure compliance with nondiscrimination rules. Other provisions, such as working condition fringe benefits, could allow additional exclusions depending on the facts.

FS-2026-10

IR 2026-55

The IRS has issued procedures for nominating population census tracts that would be designated as qualified opportunity zones (QOZs). The tracts would designated as QOZs effective on January 1, 2027. The guidance was directed at Chief Executive Officers (CEO) of States, territories of the United States and the District of Columbia. The procedures fell under Reg. §§1400Z-1 and Code Sec. 1400Z-2, as amended by the One, Big, Beautiful Bill Act (OBBBA) (P.L. 119-21).

The IRS has issued procedures for nominating population census tracts that would be designated as qualified opportunity zones (QOZs). The tracts would designated as QOZs effective on January 1, 2027. The guidance was directed at Chief Executive Officers (CEO) of States, territories of the United States and the District of Columbia. The procedures fell under Reg. §§1400Z-1 and Code Sec. 1400Z-2, as amended by the One, Big, Beautiful Bill Act (OBBBA) (P.L. 119-21).

Background

A QOZ is an economically distressed area in which select new investments could be eligible for preferential tax treatment. The OBBBA makes the QOZ tax incentive permanent. The first round of QOZ designations following the enactment of the OBBBA will take effect on January 1, 2027. New rounds would follow every 10 years. Additionally, the OBBBA added tax benefits specific to investments made into QOZs that are comprised entirely of a rural area.

Identities of LICs

The Treasury and IRS identified 25,332 population census tracts that are low-income communities (LIC) eligible for nomination as a 2027 QOZ. Out of said tracts, 8,334 tracts are comprised entirely of a rural area. Beginning July 1, 2026, and lasting a period of 90 days, subject to a single 30-day extension, State CEOs would begin nominating eligible census tracts to be designated as QOZs.

The number of population census tracts in a State that may be designated as QOZs may not exceed 25 percent of the number of LICs in the State. This limitation is determined based on the 2020-2024 American Community Survey (ACS) 5-Year and the 2020 Decennial Census of Island Areas (DECIA) data sets. The tracts were identified using said data sets.

Further, boundaries established for the 2020 decennial census are controlling. They would not be subject to change during the 2027 QOZ designation period.

Nomination Tool

The Treasury has been developing a nomination tool. This would be accessible online and available for the benefit of State CEOs that nominate census tracts for designation as 2027 QOZs.

The QOZ designation period will begin on January 1, 2027, and end on December 31, 2036. Any request to modify such a nomination after October 28, 2026, would be denied. Finally, nominations of tracts not mentioned in this document would be considered, provided they satisfy Code Sec. 1400Z-1(c)(1).

Effective Date

This revenue procedure is effective on April 6, 2026.

Rev. Proc. 2026-14

IR 2026-45

The IRS has provided a waiver of the addition to tax under Code Sec. 6654 for the underpayment of estimated income tax by qualifying farmers and fishermen.

The IRS has provided a waiver of the addition to tax under Code Sec. 6654 for the underpayment of estimated income tax by qualifying farmers and fishermen. Under Code Sec. 6654(i)(1), a qualifying farmer or fisherman has only one required installment payment (instead of four quarterly payments) due on January 15 of the year following the taxable year if at least two-thirds of the taxpayer’s total gross income was from farming or fishing in either the tax year or the preceding tax year. For a qualifying farmer or fisherman who does not make the required estimated tax installment payment by January 15 of the year following the tax year, Code Sec. 6654(i)(1)(D) provides that the taxpayer is not subject to an addition to tax for failing to pay estimated income tax if the taxpayer files the return for the tax year and pays the full amount of tax reported on the return by March 1 of the year following the tax year.

Difficulty in Electronic Filing of Form 8995

The IRS has noted that some qualifying farmers and fishermen were unable to electronically file Form 8995, Qualified Business Income Deduction Simplified Computation, which was required to be included in their 2025 tax returns. Due to this inability, farmers and fishermen may have had difficulty filing their 2025 tax returns electronically by the March 2, 2026 due date. Accordingly, the IRS has determined to waive certain penalties for qualifying farmers and fishermen due to these unusual circumstances.

Waiver of Underpayment of Estimated Income Tax

The IRS has waived the addition to tax under Code Sec. 6654 for failure to make an estimated tax payment for the 2025 tax year for any qualifying farmer or fisherman who files a 2025 tax return and pays in full any tax due on the return by April 15, 2026. The waiver will apply to any taxpayer who is a qualifying farmer or fisherman for the 2025 tax year and fulfills the conditions stated in the previous sentence. Further, the waiver will apply automatically to any taxpayer who qualifies for the waiver and does not report an addition to tax under Code Sec. 6654 on the 2025 tax return.

In addition, taxpayers who otherwise satisfy the criteria for relief under the IRS’ notice, but have already filed a return and reported an addition to tax, may request an abatement of the addition to tax by filing Form 843, Claim for Refund and Request for Abatement, in accordance with the prescribed instructions.

Notice 2026-24

State and local housing credit agencies that allocate low-income housing tax credits and states and other issuers of tax-exempt private activity bonds have been provided with a listing of the proper population figures.

State and local housing credit agencies that allocate low-income housing tax credits and states and other issuers of tax-exempt private activity bonds have been provided with a listing of the proper population figures to be used when calculating the 2026:

• calendar-year population-based component of the state housing credit ceiling under Code Sec. 42(h)(3)(C)(ii);
• calendar-year private activity bond volume cap under Code Sec. 146; and
• exempt facility bond volume limit under Code Sec. 142(k)(5).

These figures are derived from the estimates of the resident populations of the 50 states, the District of Columbia and Puerto Rico, which were released by the Bureau of the Census on January 27, 2026. The figures for the insular areas of American Samoa, Guam, the Northern Mariana Islands and the U.S. Virgin Islands are the 2025 midyear population figures in the U.S. Census Bureau’s International Database.

Notice 2026-22

Internal Revenue Service CEO Frank Bisignano promoted some of the highlights of the 2026 tax filing season before a congressional committee while deflecting questions about data leaks and other issues.

Internal Revenue Service CEO Frank Bisignano promoted some of the highlights of the 2026 tax filing season before a congressional committee while deflecting questions about data leaks and other issues.

Testifying April 15, 2026, during a Senate Finance Committee hearing, Bisignano used his opening statement to promote the highlights of the tax filing season, including:

• 134 million individual returns filed, with 98 percent filed electronically;
• 80 million refunds issued with 98 percent of funds sent electronically; and
• An average refund of more than $3,400 (up 11 percent from last year), with more than 90 percent received by taxpayers in less than 21 days.

He also stated that 53 million American have taken advantage of new tax breaks found in the One Big Beautiful Bill Act, including the No Tax On Tips (6 million filers), No Tax On Overtime (25 million filers), and No Tax On Car Loan Interest provision (1 million filers), as well as the deduction for seniors (30 million filers).

“When you look at all this, it’s the reason we talk about the historic refunds,” Bisignano testified.

These, along with the increase to the standard deduction and the child tax credit, along with the full expensing for capital investments being made permanent “prevented a tax increase of over $5 trillion on American families and small businesses,” Bisignano testified.

Bisignano defended the decision to end the Direct File program, noting that 2 million Americans have used a free file option, adding that “Direct File was a costly, unnecessary, and less popular duplicate of programs that already are in place.”

He continued: “Despite heavy promotion by the Biden Administration, Direct File was the by far the least used free filing option.”

When faced with questions regarding data breeches, including information given to ICE by Treasury and other data breeches, Bisignano refused to answer, stating that ongoing litigation was preventing him from commenting in the case of the information given to ICE, and that ongoing investigations in other data breeches precluded him from discussing them.

He also refused to express even a general opinion on the lawsuit filed by President Trump on the leaking of his tax information.

When challenged on the tax gap, Bisignano challenged assertions that it more than $1 trillion. Bisignano said the last published number was $650 billion and added that it was “big enough so we don’t have to debate the trillion.” He said the agency was working on a plan to address it but did not offer any specifics as to what the IRS had planned to close the tax gap. He did say the agency has increased the dollar amount of money recovered from compliance activities.

“Collections and enforcement is up 12 percent, and this is year to date,” he testified, adding that more than $2 billion has been collected in the top five audits.

By Gregory Twachtman, Washington News Editor

The Taxpayer Advocacy Panel (TAP) has released its 2025 Annual Report. The report highlighted accomplishments and ongoing efforts to (1) strengthen IRS delivery; (2) improve communications with taxpayers; (3) reduce taxpayer burden; and (4) support continued modernization of tax administration. The TAP project committees submitted 20 project referrals to the IRS, including 188 recommendations for improving IRS operations and enhancing taxpayer experience.

A new, 10 percent middle-income tax cut is conditionally expected to be advanced in 2019, according to the House’s top tax writer. This timeline, although largely already expected on Capitol Hill, departs sharply from President Donald Trump’s original prediction that the measure would surface by November.

A new, 10 percent middle-income tax cut is conditionally expected to be advanced in 2019, according to the House’s top tax writer. This timeline, although largely already expected on Capitol Hill, departs sharply from President Donald Trump’s original prediction that the measure would surface by November.

Middle-Income Tax Cut

President Donald Trump announced on October 22 that a new 10 percent tax cut would soon be unveiled that will focus specifically on middle-income taxpayers. "President Trump is determined to provide further tax relief for middle-class families," House Ways and Means Committee Chairman Kevin Brady, R-Tex., said in an October 23 statement. "We will continue to work with the White House and Treasury over the coming weeks to develop an additional 10 percent tax cut focused specifically on middle-class families and workers, to be advanced as Republicans retain the House and Senate," Brady added.

Comment. Notably, Brady is essentially highlighting in his statement that any such additional tax cut measure would require a Republican majority for congressional approval. As November midterm elections near, there is "talk" on Capitol Hill that Republicans may lose control of the House.

The additional 10 percent tax cut for middle-income taxpayers would aim to build upon the individual tax cuts enacted last December under the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97). To that end, the House passed a "Tax Reform 2.0"package last month, which would make permanent the TCJA’s individual and small business tax credits. The TCJA’s individual tax cut provisions were enacted temporarily through 2025 in accordance with certain Senate budget rules. Although the TCJA did not receive one Democratic vote, the Tax Reform 2.0 package did clear the House with some bipartisan support.

New Congress, New Tax Cut

"We expect to advance this in the new session of Congress if Republicans maintain control of the House and Senate," Brady, said of the tax cut in an October 26 televised interview. However, President Trump said a couple of days before that a " resolution" would be introduced for the tax cut by the week of October 29.

Democratic lawmakers have been criticizing Trump’s announcement as nothing more than politically-driven rhetoric ahead of the November 6 midterm elections. Several top congressional Democrats have voiced intent to repeal, at least in part, the TCJA enacted last December. While Republicans, on the other hand, want to continue building upon the TCJA’s tax cuts.

"What President Trump is looking at is a 10 percent cut focused on middle-class workers and families…he still believes middle-class families are the ones always in the squeeze," Brady said on October 26. "We’ve been working with the White House and the Treasury on some ideas about how best to do it," he added.

Net Neutral

Trump has predicted that the tax cut will be net neutral. A chief complaint of last year’s tax reform among Democrats is the TCJA estimated $1.4 trillion price tag over a 10-year budget window.

"If you speak to Brady and a group of people, we're putting in a tax reduction of 10 percent, which I think will be a net neutral because we're doing other things, which I don't have to explain now," Trump said. A spokesperson for Brady has reportedly said that cost measures for the tax cut will be addressed once the proposal has been scored.

Looking Ahead

At this time, it is considered likely on Capitol Hill that Republicans will retain control of the Senate, but several predictions continue to float that the GOP will lose its House majority. Republicans would likely need to retain control of both chambers for any chance of approving further individual tax cuts or making permanent those enacted under the TCJA.

Although, the House approved its "Tax Reform 2.0" package last month, which includes measures to make permanent the TCJA’s individual tax cuts and enhance various savings accounts and business innovation, the Senate has showed little interest in taking up the package as a whole before the end of the year. However, consideration of the retirement and savings measure in the lame-duck session remains a possibility.

The American Institute of Certified Public Accountants (AICPA) and the American Bar Association (ABA) Section of Taxation are urging the IRS to make extensive changes to proposed "transition tax" rules.

The American Institute of Certified Public Accountants (AICPA) and the American Bar Association (ABA) Section of Taxation are urging the IRS to make extensive changes to proposed "transition tax" rules.

Transition Tax

The Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97), enacted last December, revived and amended Code Sec. 965. The new Code Sec. 965 generally requires U.S. shareholders pay a mandatory one-time repatriation "transition" tax on untaxed foreign earnings of certain foreign corporations.

"The Tax Cuts and Jobs Act treats these foreign earnings as repatriated and places a 15.5 percent tax on cash or cash equivalents, and an 8 percent tax on the remaining earnings. Generally, the transition tax can be paid in installments over an eight-year period when a taxpayer files a timely election under section 965(h),"Treasury Secretary Steven Mnuchin said in a statement.

The IRS held an October 22 public hearing on NPRM REG-104226-18, which provides rules for implementing the transition tax created under last year’s tax reform. IRS officials did not provide any feedback at the hearing.

AICPA Recommendations

In an October 31 comment letter to the IRS, the AICPA offered 15 recommendations to provide taxpayers further clarity and guidance on tax reform’s transition tax requirements. The AICPA’s recommendations include the following:

• Clarify that previously taxed earnings (PTI) under Code Sec. 965(b)(4)(A) are deemed included in Code Sec. 951 for purposes of applying Code Sec. 1248(d).
• Clarify that the portion of a Code Sec. 965 inclusion liability attributable to Code Sec. 956 is eligible for the appropriate reduced rate of tax as a consequence of the deduction provided for in Code Sec. 965(c).
• Provide taxpayers with additional flexibility when making the basis adjustment election under Proposed Reg. §1.965-2(f) by including the ability to make partial basis adjustments, elect adjustments on an entity-by-entity basis, and modify the proposed consistency provision on related persons.
• Provide guidance as to the ordering of distributions of PTI between Code Sec. 965(a) PTI and Code Sec. 965(b) PTI for purposes of applying Code Sec. 959(c) and Code Sec. 986(c).
• Provide relief to taxpayers that make or have made late elections under the proposed regulations and clarify the procedure for obtaining such relief.
• Provide that U.S. shareholders that are members of the same consolidated group are treated as a single U.S. shareholder for all purposes with respect to Code Sec. 965.
• Clarify that the PTI amount created under Code Sec. 965(b)(4)(A) is not taken into account under Code Sec. 864(e)(4)(D) for purposes of allocating and apportioning interest expense.
• Exercise the authority under Code Sec. 965(o) to provide relief from the income inclusion to certain affected taxpayers. Specifically, provide guidance excluding a foreign corporation that is considered a controlled foreign corporation (CFC) solely as a result of the "downward attribution" rules of Code Sec. 318(a)(3) from the definition of an specified foreign corporation (SFC) for any U.S. shareholder not considered a related party (within the meaning of Code Sec. 954(d)(3)) with respect to the domestic corporation to which ownership was attributed.
• Provide a carve-out for certain "triggering events" of an S corporation Code Sec. 965(i), such as where the S corporation and relevant shareholders maintain direct or indirect ownership of the transferred assets (e.g., tax-free transfers).
• Provide guidance on the interaction between a Code Sec. 962 election and a Code Sec. 965(i) election, including clarifying that an eligible taxpayer may make a Code Sec. 962 election for a Code Sec. 965 tax liability for which they intend to defer inclusion under Code Sec. 965(i).

ABA Recommendations

Likewise, the ABA made similar recommendations on the proposed regulations and related guidance in an October 29 letter sent to IRS Commissioner Charles Rettig. The ABA’s 80-page letter grouped its principal recommendations into the three categories:

• the application of Code Sec. 965 to passthrough entities (other than S corporations) and individuals;
• the application of the netting of accumulated post-1986 deferred foreign income with deficits in other related entities; and
• issues in applying the foreign tax credit.

Last year’s Tax Reform created a new 20-percent deduction of qualified business income for passthrough entities, subject to certain limitations. The Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97) created the new Code Sec. 199A passthrough deduction for noncorporate taxpayers, effective for tax years beginning after December 31, 2017. However, the provision was enacted only temporarily through 2025. The controversial deduction has remained a buzzing topic of debate among lawmakers, tax policy experts, and stakeholders. In addition to its impermanence, the new passthrough deduction’s ambiguous statutory language has created many questions for taxpayers and practitioners.

Last year’s Tax Reform created a new 20-percent deduction of qualified business income for passthrough entities, subject to certain limitations. The Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97) created the new Code Sec. 199A passthrough deduction for noncorporate taxpayers, effective for tax years beginning after December 31, 2017. However, the provision was enacted only temporarily through 2025. The controversial deduction has remained a buzzing topic of debate among lawmakers, tax policy experts, and stakeholders. In addition to its impermanence, the new passthrough deduction’s ambiguous statutory language has created many questions for taxpayers and practitioners.

The IRS released the much-anticipated proposed regulations on the new passthrough deduction, REG-107892-18, on August 8. The guidance has generated a mixed reaction on Capitol Hill, and while significant questions may have been answered, it appears that many remain. Indeed, an IRS spokesperson told Wolters Kluwer Tax & Accounting before the regulations were released that the IRS’s goal was to issue complete regulations but that the guidance "would not cover every question that taxpayers have."

Wolters Kluwer recently spoke with Joshua Wu, member, Clark Hill PLC, about the tax implications of the new passthrough deduction and proposed regulations. That exchange included a discussion of the impact that the new law and IRS guidance, both present and future, may have on taxpayers and tax practitioners.

I. Qualified Business Income and Activities

Wolters Kluwer: What is the effect of the proposed regulations requiring that qualified business activities meet the Code Sec. 162 trade or business standard? And for what industries might this be problematic?

Joshua Wu: The positive aspect of incorporating the Section 162 trade or business standard is that there is an established body of case law and administrative guidance with respect to what activities qualify as a trade or business. However, the test under Section 162 is factually-specific and requires an analysis of each situation. Sometimes courts reach different results with respect to activities constituting a trade or business. For example, gamblers have been denied trade or business status in numerous cases. In Groetzinger, 87-1 ustc ¶9191, 480 U.S. 23 (1987), the Court held that whether professional gambling is a trade or business depends on whether the taxpayer can show he pursued gambling full-time, in good faith, regularly and continuously, and possessed a sincere profit motive. Some courts have held that the gambling activity must be full-time, from 60 to 80 hours per week, while others have questioned whether the full-time inquiry is a mandatory prerequisite or permissive factor to determine whether the taxpayer’s gambling activity is a trade or business. See e.g., Tschetschot , 93 TCM 914, Dec. 56,840(M)(2007). Although Section 162 provides a built-in body of law, plenty of questions remain.

Aside from the gambling industry, the real estate industry will continue to face some uncertainty over what constitutes a trade or business under Code Secs. 162 and 199A. The proposed regulations provide a helpful rule, where the rental or licensing of tangible or intangible property to a related trade or business is treated as a trade or business if the rental or licensing and the other trade or business are commonly controlled. But, that rule does not help taxpayers in the rental industry with no ties to another trade or business. The question remains whether a taxpayer renting out a single-family home or a small group of apartments is engaged in a trade or business for purposes of Code Secs. 162 and 199A. Some case law indicates that just receiving rent with nothing more may not constitute a trade or business. On the other hand, numerous cases have found that managing property and collecting rent can constitute a trade or business. Given the potential tax savings at issue, I suspect there will be additional cases in the real estate industry regarding the level of activity required for the leasing of property to be considered a trade or business.

Qualified Business Income

Wolters Kluwer: How does the IRS define qualified business income (QBI)?

Joshua Wu: QBI is the net amount of effectively connected qualified items of income, gain, deduction, and loss from any qualified trade or business. Certain items are excluded from QBI, such as capital gains/losses, certain dividends, and interest income. Proposed Reg. §1.199A-3(b) provides further clarity on QBI. Most importantly, they provide that a passthrough with multiple trades or businesses must allocate items of QBI to such trades or businesses based on a reasonable and consistent method that clearly reflects income and expenses. The passthrough may use a different reasonable method for different items of income, gain, deduction, and loss, but the overall combination of methods must also be reasonable based on all facts and circumstances. Further, the books and records must be consistent with allocations under the method chosen. The proposed regulations provide no specific guidance or examples of what a reasonable allocation looks like. Thus, taxpayers are left to determine what constitutes a reasonable allocation.

Unadjusted Basis Immediately after Acquisition

Wolters Kluwer: What effect does the unadjusted basis immediately after acquisition (UBIA) of qualified property attributable to a trade or business have on determining QBI?

Joshua Wu: For taxpayers above the taxable income threshold amounts, $157,500 (single or married filing separate) or $315,000 (married filing jointly), the Code limits the taxpayer’s 199A deduction based on (i) the amount of W-2 wages paid with respect to the trade or business, and/or (ii) the unadjusted basis immediately after acquisition (UBIA) of qualified property held for use in the trade or business.

Where a business pays little or no wages, and the taxpayer is above the income thresholds, the best way to maximize the deduction is to look to the UBIA of qualified property. Rather than the 50 percent of W-2 wages limitation, Section 199A provides an alternative limit based on 25 percent of W-2 wages and 2.5 percent of UBIA qualified property. The Code and proposed regulations define UBIA qualified property as tangible, depreciable property which is held by and available for use in the qualified trade or business at the close of the tax year, which is used at any point during the tax year in the production of qualified business income, and the depreciable period for which has not ended before the close of the tax year. The proposed regulations helpfully clarify that UBIA is not reduced for taxpayers who take advantage of the expanded bonus depreciation allowance or any Section 179expensing.

De Minimis Exception

Wolters Kluwer: How is the specified service trade or business (SSTB) limitation clarified under the proposed regulations? And how does the de minimis exception apply?

Joshua Wu: The proposed regulations provide helpful guidance on the definition of a SSTB and avoid what some practitioners feared would be an expansive and amorphous area of section 199A. Under the statute, if a trade or business is an SSTB, its items are not taken into account for the 199A computation. Thus, the performance of services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial and brokerage services, investment management, trading, dealing in securities, and any trade or business where the principal asset of such is the reputation or skill of one or more of its employees or owners, do not result in a 199A deduction.

There is a de minimis exception to the general rule for taxpayers with taxable income of less than $157,500 (single or married filing separate) or $315,000 (married filing jointly). Once those thresholds are hit, the 199A deduction phases-out until it is fully eliminated at $207,500 (single) or $415,000 (joint).

The proposed regulations provide guidance for each of the SSTB fields. Importantly, they also limit the "reputation or skill" category. The proposed regulations state that the "reputation or skill" clause was intended to describe a "narrow set of trades or businesses, not otherwise covered by the enumerated specified services." Thus, the proposed regulations limit this definition to cases where the business receives income from endorsing products or services, licensing or receiving income for use of an individual’s image, likeness, name, signature, voice, trademark, etc., or receiving appearance fees. This narrow definition is unlikely to impact most taxpayers.