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March 19, 2018 | by    

MSCI Asks U.S. Treasury To Create Regulations Allowing For “Reasonable Method Of Calculating The New 20 Percent Pass-Through Deduction.”

The Metals Service Center Institute (MSCI) and dozens of other advocacy groups have sent a letter to the U.S. Treasury Department and the U.S. Internal Revenue Service asking for a “reasonable method of calculating the new 20 percent pass-through deduction to ensure Main Street businesses are not penalized based on how they are organized for business purposes.”

As Connecting the Dots has explained, the 20 percent deduction was included in the tax reform bill signed by President Donald Trump last December.

The letter specifically asked that the agencies:

  • Allow taxpayers to group activities conducted through S corporations and partnerships, as under Section 469, when they calculate qualified business income under Section 199A.
  • Permit businesses with existing groups under Section 469 to reorganize those groups to reflect the new tax law.

MSCI believes that allowing taxpayers to aggregate or “group” legal business entities for purposes of calculating the pass-through deduction “is vital to making the deduction fair and workable.”

Under the tax reform bill, Section 199A permits owners of pass-through businesses to deduct up to 20 percent of qualified business income. Certain services businesses cannot take this deduction, however, and eligible businesses are subject to two alternative limitations, one based on the businesses’ payroll and another on a combination of payroll and capital. The letter argued, “Absent aggregation, the application of these limitations would treat similar businesses differently depending on how they are organized.” For example, as the letter illustrates, a manufacturing business housed in a single S corporation could be eligible for the full deduction, while a similar business utilizing the common paymaster model described above might be eligible for none of it, despite having the same robust levels of payroll and investment. The letter explained, “Failure to allow aggregation will force many affected businesses to reorganize, utilizing a different combination of pass-through structures or reorganizing as C corporations.”

The letter, which is available here, was sent on Monday, March 19.