Careful analysis of the employee retention credit (“ERC”) provided under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) and the 199A limitations set forth under the Tax Cuts and Jobs Act of 2017 (“TCJA”) may lead to unexpected tax consequences this tax season. Just when we thought the discussion surrounding 199A was on the decline, the detailed review of the IRC and regulations could limit the 199A deduction for certain pass-through entity owners, causing their effective federal tax rate to jump from 30% to 37%.
As you may recall, the 199A deduction was incorporated in the TCJA as a compromise for pass-through entities owners after significant public comment following the proposed decline of the corporate tax rate 35% to 21%. After all, why were the large C Corporations being given such favorable treatment when the majority of the businesses in the United States operate as pass-through entities? While the government would not give pass-through entity owners a direct tax rate decrease, they created a fictitious deduction of up to 20% related to pass-through business income provided certain conditions were met. The 199A deduction can potentially allow pass-through entity owners a decrease in their federal effective tax rate from 37% to approximately 30%. In a simple example, if a taxpayer received pass-through entity business income of $100,000, the 199A deduction could be up to $20,000. If the $100,000 was subject to an effective tax rate of 37%, with...
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