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August 13, 2018

Treasury Department Issues Draft Tax Rules

As readers of Connecting the Dots will remember, the Tax Cuts and Jobs Act, signed into law in December 2017, provided qualified pass-through businesses with a 20 percent deduction, bringing the effective tax rate for those businesses down to 29.6 percent. The law established conditions that would have to be met for a company to qualify for the deduction and last week the U.S. Department of Treasury issued draft regulations that will govern the 20 percent deduction.

The Parity for Main Street Employers coalition, which the Metals Service Center Institute is a member of, worked with the department and the White House to frame the rules.

Importantly, the rules allow pass-through entities to aggregate income from multiple legal entities to qualify for the deduction. In a press statement, the coalition argued, “Applying the deduction broadly helps put Main Street businesses on a more level playing field with public companies traded on Wall Street.”

The S-Corp Association provides more information on the aggregation rules, including explaining that each business in the aggregated group must meet at least two of the following three requirements:

  • Provides products and services that are the same or customarily provided together;
  • Shares facilities or centralized business elements (personnel, accounting, purchasing etc.);
  • Operates in coordination with, or reliance upon, other businesses in the aggregated group (supply chain, vertical integration, etc.).

The Treasury Department’s proposed rule, available here, will be open for public comment after it is published in the Federal Register 

Earlier in the week, the Treasury Department released draft regulations governing the bonus depreciation portion of the Tax Cuts and Jobs Act (TJCA). That draft regulation, available here, will be subject to a 60-day public comment period. The TCJA expanded section bonus depreciation to 100 percent of the basis of qualified property and allowed used property new to the taxpayer to qualify. As tax experts at the law firm O’Melveny and Myers explain, the proposed rule would allow:

  • Taxpayers generally to claim the 100 percent Bonus Depreciation on partnership asset basis step-ups triggered by the acquisition of a partnership interest; and
  • Partnership asset basis step-ups to be triggered by a distribution to a partner in excess of the partner’s outside basis in its partnership interests.

The rule would prohibit remedial allocations (i.e., allocations in respect of deemed basis attributable to the contribution of property at a higher fair market value than the transferor’s tax basis) from being depreciated. Click here for Tax Notes’ full explanation of the proposed rule.