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No Plans to Apply Reasonable Compensation Beyond S Corps

POSTED ON Feb. 13, 2018

There are no plans to apply the reasonable compensation exclusion to qualified business income under the new 20 percent passthrough business deduction to entities other than subchapter S corporations, according to a Treasury official.

Section 199A(c)(4) excludes reasonable compensation, guaranteed payments under section 707(c), and payments under section 707(a) from the definition of qualified business income. “Reasonable compensation,” a term typically associated with subchapter S corporations, does not include a modifier in section 199A(c)(4) that limits it to those entities.

Dana Trier, Treasury deputy assistant secretary for tax policy, said the lack of a modifier to reasonable compensation has raised concerns that the government may broaden reasonable compensation to other entities. “From where I sit . . . that reference to reasonable compensation is not an indication to redo the law of reasonable compensation,” he told the Real Estate and Partnerships and LLCs luncheon at the American Bar Association Section of Taxation meeting in San Diego February 9.

Trier said his view is based on conversations he’s had with congressional staffers that worked on the legislation and is shared with others at Treasury, including Tax Legislative Counsel Thomas West. “From Treasury’s perspective, I don’t intend to spend time developing regulations that go into that question,” he said, adding, “We’ve got bigger fish to fry.”

Despite those assurances, Trier noted that section 199A(c)(4) was “written as it's written,” and Treasury has the power to issue guidance expanding reasonable compensation beyond subchapter S corporations. Treasury will exercise that power “if someone above me makes that decision,” he said.

“Until somebody orders me to look at it differently, I look at that as you’re just applying the [subchapter] S rules to [subchapter] S corporations,” Trier said.

The reasonable compensation issue has received more attention than it deserves, Trier said, adding, “It’s gotten a little out of control.”

Turning to the recent update to the 2017-2018 priority guidance plan, Trier said Treasury is working on an antiavoidance provision for section 199A to deter development of abusive planning. The updated plan includes 18 new projects to implement the Tax Cuts and Jobs Act (P.L. 115-97), including a project under section 199A that will provide “computational, definitional, and antiavoidance guidance.”

Trier said one situation those rules may address is when employees are made into partners to take advantage of the 20 percent deduction. “My own perspective on that is we’re not trying to address all of the world as to who’s really a partner,” he said. “What we’re really trying to do is address situations where you changed your facts from what they would have otherwise been simply to get this deduction.”

Speaking earlier at the Partnerships and LLCs session, Bryan Rimmke, attorney-adviser, Treasury Office of Tax Legislative Counsel, said Treasury has received numerous questions under section 199A asking how the government will define “trade or business” and whether the government will allow groupings.

“I can’t say that our thinking has really developed a long way going down that path,” Rimmke said, but “I’d be surprised if that wasn’t addressed in some fashion in one of the projects” added to the guidance plan.

Beverly Katz of KPMG LLP asked why the guidance plan included a section 199A antiabuse project, but did not include a similar project under the section 163(j) 30 percent limitation to business interest expense deduction.

An antiabuse rule is not completely off the table for section 163(j), Rimmke said, but “a lot of people can imagine situations in which [section] 199A could be used in a way that the government would not appreciate.” He added that discussions on the direction the guidance will take are only just beginning.

Asked about other guidance left off the updated guidance plan, such as a project to implement section 1061, Rimmke said the plan reflects only those projects the government can deliver by June 30. “Just because something did not get on that list does not mean we aren’t working on it or thinking about it,” he said.