Make Section 199A Available to More Small Businesses, Group Says

October 1, 2018

CC:PA:LPD:PR (REG-107892-18)
Room 5203
Internal Revenue Service
P.O. Box 7604
Ben Franklin Station
Washington, DC 20044

Re: Qualified Business Income Deduction Comments (RIN 1545-BO71)

To Whom It May Concern:

The Small Business Council of America (SBCA) appreciates this opportunity to comment on the above referenced proposed regulation published by the Internal Revenue Service (“IRS”) on August 16, 2017, and the impact that the proposed regulations would have on small businesses which overwhelmingly operate as pass through entities.

The SBCA fully appreciates the difficult task facing the IRS in developing regulations to implement Section 199A. In undertaking this endeavor, the SBCA urges the IRS to make every effort to keep the final regulations as simple and easy to navigate as possible. America's small businesses are already heavily burdened by a wide range of complex regulations. In light of Section 199A's intent to try to level the playing field between pass through entities and C-corporations with their new reduced tax rate, the IRS should make sure that the new regulations err on the side of inclusion and allow small businesses to take advantage of the new deduction without wading through unnecessary complexities.

About the SBCA:

The SBCA is a national nonprofit organization that has represented the interests of privately-held and family-owned businesses on federal tax, health care and employee benefit matters since 1979. The SBCA, through its members, represents well over 100,000 enterprises in retail, manufacturing and service industries, virtually all of which provide health insurance and retirement plans.

Areas of Primary Concerns:

• The regulations should not expand the definition of a Specified Service Trade or Business beyond that which was clearly set forth in the Tax Cuts and Jobs Act.

The driving force behind Section 199A of the Tax Cuts and Jobs Act was to limit or minimize (albeit temporarily) the increase in the disparity between C-corporations and pass through entities that will arise from the new corporate tax cut. The idea was to create a deduction for pass through entities, a large number of which are small businesses, which will help bring their rates closer to those of a C-corporation. Thus, inherently, the more pass through entities are able to take advantage of the 199A deduction, the greater overall parity there will be between C-Corporations and pass through entities and the more aligned the result will be with the statutory intent.

Based on the foregoing, the SBCA is very concerned that the proposed regulations seem to be erring towards making the definition of what constitutes a Specified Service Trade or Business as broad as possible. Not only are the proposed regulations adopting traditional definitions of certain trades but they are also enlarging those definitions, for example, expanding accounting services to include bookkeeping services that don't require a license or professional training.

The SBCA urges the IRS to reassess these definitions and adopt narrower definitions that allow more businesses to be eligible for the 199A deduction. An example of where the proposed regulations gets it right is with respect to the definition of what it means for a business to be one where the principle asset is the reputation or skill of one or more of its employees or owners. The proposed regulation does an excellent job of carefully tailoring this definition to meet, and not exceed, Congressional intent as to which businesses should be fully or partially excluded from, the deduction. The SBCA hopes that the IRS will take a similar approach to other definitions in crafting its final rule.

• Businesses and groups of businesses parts of which involve a Specified Service Trade or Business and parts of which do not should be eligible for the 199A deduction for those parts that are not a Specified Service Trade or Business.

Under the proposed regulations, if one part of a business or commonly controlled group of entities is a Specified Service Trade or Business, this part will render the whole ineligible for the 199A deduction. This broad application of the Specified Service Trade or Business exclusion will render less small businesses eligible for the 199A deduction and thereby further exacerbate the disparity between pass through entities and C-corporations.

The SBCA urges the IRS to in promulgating final rules to, where a business is divided between being a Specified Service Trade or Business in one part and a non-Specified Service Trade or Business in another, allow the business to remain eligible for the 199A deduction with respect to that part that is not a Specified Service Trade or Business.

• The presumption set forth in proposed § 1.643(f)-1(b) would improperly shift the focus away from the avoidance of federal income tax to a requirement that there be non-tax purpose for the creation of multiple trusts.

The proposed regulations state that the principal purpose for establishing multiple trusts will be presumed to be “avoidance of tax” “unless there is a significant non-tax (or non-income tax) purpose that could not have been achieved without the creation of these separate trusts.” In setting forth this presumption, the proposed regulations refer broadly to income tax, without making it clear whether this reference is intended to include state income tax.

Based on its lack of specificity, the new regulations shift focus from the avoidance of Federal income tax, as required by Section 643(f), to a requirement that there be a non-tax purpose for creating multiple trusts. This is not consistent with the statute and improperly fails to account for consideration of taxes, other than federal income taxes, such as estate, gift and generation-skipping transfer taxes, that might lead to the creation of multiple trusts.

The SBCA urges the IRS to reconsider, or at very least introduce further clarification, to this currently broad and potentially very problematic presumption.

• Distributions from an electing small business trust (ESBTs) should not be counted twice for the purpose of 199A thresholds.

Under the proposed regulations (§ 1.199A-6(d)(3)(iii)), it appears that trusts and estates would be required to calculate their taxable income for the purposes of the 199A thresholds before making or accounting for any distributions. Then if any distributions are made, they will also be counted as taxable income and against the thresholds of the beneficiary. If this is, in fact, the case, it will result in the income being counted twice and would require nongrantor trusts or estates to include income that is not taxable to it for the purposes of the thresholds. To the extent that this result was intended (and even if it was not, in light of its result), it would be inconsistent with Congressional intent and we submit appears to be outside the scope of IRS's authority to impose such a rule.

Also on proposed § 1.199A-6(d)(3), the SBCA is concerned that the anti-abuse rule set forth in § 1.199A-6(d)(3)(v) is overbroad and lacks clarity about what would be considered abusive or what the consequences would be of behavior classified as such. In the final form of the regulations, the SBCA would hope to see this section tightened and made clearer.

Conclusion:

On behalf of our members, we appreciate this opportunity to comment and look forward to working with the IRS to reach final regulations that are consistent with the intent of Section 199A and manageable for small businesses.

Sincerely,

Paula Calimafde, Chair
301-951-9325
calimafd@paleyrothman.com
Small Business Council of America