NFIB Encouraged by Section 199A Regs

October 1, 2018

The Honorable Steven T. Mnuchin
Secretary of the Treasury
c/o CC:PA:LPD: PR (REG-107892-18)
Internal Revenue Service, Room 5203
Department of the Treasury
P.O. Box 7604, Ben Franklin Station
Washington, DC 20044

Dear Mr. Secretary:

RE: Comments on Internal Revenue Service Notice of Proposed Rulemaking titled “Qualified Business Income Deduction,” REG-107892-18, 83 Fed. Reg. 40884 (August 16, 2018)

NFIB, the nation's leading small business advocacy organization, submits these comments in response to the Internal Revenue Service (IRS) notice of proposed rulemaking, “Qualified Business Income Deduction” (NPRM). NFIB appreciates the opportunity to offer comments on the NPRM and requests the opportunity to testify at the October 16, 2018 hearing on the proposed rulemaking.

The vast majority of small business owners are able to claim the full 20 percent pass-through deduction easily and straightforwardly. As conveyed in the Tax Cuts and Jobs Act (TCJA),¹ owners of all pass-through businesses — regardless of industry — are eligible for the full 20 percent deduction with respect to qualified business income (QBI) if their taxable income is below $157,500 (individual) or $315,000 (joint).² According to recent IRS statistics, it is estimated that there are 23.7 million businesses in the United States³. Of those, over 23 million have net business income of $250,000 or less.⁴

NFIB welcomes this NPRM to assist small businesses that are above the stated thresholds. The TCJA stipulates that for an owner of a specified service trade or business (SSTB) with taxable income above the $157,500/$315,000 thresholds, the deduction is phased out. For owners of non-SSTB pass-throughs with taxable income above the thresholds, the deduction is subject to formulaic limitations.

The small business pass-through deduction is critical to provide tax relief to small businesses across the country. Its significant tax savings will allow small businesses to boost employment and wages.⁵ For planning purposes, NFIB is pleased that the NPRM states that taxpayers may rely on the proposed regulations until the promulgation of final regulations.

Specified Service Trade or Business Definition

Among other items, the NPRM provides rules to identify an SSTB⁶ and de minimis exceptions from such rules. Should a small business pass-through be considered an SSTB, the owner's deduction is limited above the aforementioned thresholds. The deduction is fully phased out for such an owner at a taxable income of $207,500 (individual)/$415,000 (joint). As noted previously, for SSTBs below the thresholds, the small business owners are eligible for the full 20 percent pass-through deduction.

In general, an SSTB is a trade or business “involving the performance” of certain services in the following fields: health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, investing and investment management, trading, dealing in securities, and any trade or business where the principal asset of the business is the reputation or skill or one or more of its owners or employees.⁷

The NPRM focuses on the actual performance of the specified services by the trade or business rather than how that trade or business is compensated. NFIB asks that the final rulemaking consider that many small businesses use independent contractors extensively and rely on the flexibility of independent contractor relationships.

NFIB has submitted separate comments to the Treasury Department and IRS requesting that the SSTB rules adhere to TCJA's text. The TCJA text and legislative history incorporate references to pre-existing statutes (sections 1202 and 448) to provide guidance on identifying SSTB criteria with respect to section 199A. When examining the proposed rules on SSTBs against the section 199A text and legislative history, as well as the existing interpretations and guidance of the referenced statutes, it appears the Treasury Department has exceeded its statutory authority in defining the fields of health and performing arts. These concerns are discussed more fully in NFIB's separate comments.

“Reputation or Skill” Qualification

When considering SSTBs, the scope of the “reputation or skill” qualification as described in statute is ambiguous. NFIB appreciates that the NPRM addresses this issue by narrowly interpreting the phrase “any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees or owners.”⁸ The NPRM applies generally to situations involving endorsements, selling a person's image or other aspects of their identity, or appearance-type fees or compensation. Thus, a trade or business where the reputation of an owner or employee is important (e.g., a well-known artisan or skilled professional) but not the business of monetizing an owner's image itself will not be treated as an SSTB.

NFIB believes the Treasury Department and IRS should rely on this strict interpretation.

De Minimis Exceptions

The NPRM provides two general “de minimis” exceptions from the SSTB rules. Under the first, where a trade or business has gross receipts of $25 million or less, a business is not an SSTB if less than 10 percent of the gross receipts are attributable to specified services.⁹ Under the second, for businesses with gross receipts of more than $25 million, a business is not an SSTB if less than five percent of the gross receipts are attributable to services.¹⁰

NFIB supports such de minimis exceptions and encourages the Treasury Department and IRS to keep and expand both exceptions in the final rule.

Qualified Business Income

The NPRM offers significant detail for calculating QBI. In general, QBI is defined to mean “the net amount of qualified items of income, gain, deduction, and loss with respect to any trade or business of the taxpayer.”¹¹ The NPRM also defines “qualified items of income, gain, deduction, and loss” to mean items of gross income, gain, deduction, and loss to the extent such items are (A) effectively-connected with a U.S. trade or business and (B) included/allowed in determining taxable income for the year.¹² Items such as capital gains and losses, reasonable compensation, certain dividends, and interest income are excluded from calculating QBI. Further, QBI is determined on a per business, not a per taxpayer, basis.

NFIB appreciates the NPRM follows statutory guidance concerning the definition of QBI as outlined in the TCJA.¹³

Aggregation

NFIB is pleased the NPRM allows for the aggregation of businesses. The NPRM delineates several conditions, listed below, to be eligible for aggregation.

Once businesses are aggregated by an individual owner, that individual must consistently report the aggregated businesses in all subsequent years but may add new businesses. If at any point the conditions for aggregation are not met, the group disaggregates.

NFIB is pleased the NPRM sets forth relatively straightforward guidance on determining aggregation of businesses.

Tax Reform Effects on Small Businesses

Since enactment of the Tax Cuts and Jobs Act, small business owners have been remarkably optimistic about the economy. As reflected in a May survey conducted by NFIB,¹⁴ the majority of small businesses are optimistic about the effects of the Tax Cuts and Jobs Act:

• 87 percent believe the new tax law will have a positive effect on the economy

• 75 percent believe it will positively affect their business

• 70 percent anticipate the new tax law will positively affect their personal tax situation

Further, the NFIB Small Business Optimism Index soared to 108.8 in August, a new record in the survey's 45-year history, topping the July 1983 highwater mark of 108.¹⁵ The record-breaking figure is driven by small business owners executing on the plans they have put in place due to dramatic changes in the nation's economic policy.

The August survey showed:

• Job creation plans and unfilled job openings both set new records.

• The percentage of small business owners saying it is a good time to expand tied the May 2018 all-time high.

• Inventory investment plans were the strongest since 2005 and capital spending plans the highest since 2007.

As NFIB continues to pursue pro-growth policies to support small businesses, NFIB is encouraged by the enactment of section 199A and by the promulgation of this NPRM. It is a promising step in the right direction. Accordingly, NFIB reiterates its request to testify at the October 16, 2018 hearing regarding the proposed rulemaking.

Sincerely,

Courtney Titus Brooks
Manager, Government Relations
NFIB
Washington, DC