How Will the New 20% Pass-Through Tax Break Work?

The new 20% pass-through tax break could be a major benefit to corporations this tax season, but there is also a lot of uncertainty related to qualifications for real estate companies. At the moment, the tax cut allows taxpayers to take a cut from pass-through entities, including sole-proprietorships, partnerships, LLCs and S Corporations, and these could include real estate holdings, according to Phil Jelsma, of CGS3.

“The IRS published proposed regulations for this deduction in August 2018, but the section on rental real estate was unclear,” Jelsma, a partner and chair of the tax practice team at CGS3, tells GlobeSt.com. “The final regulations issued last month help clarify the confusion. “The final regulations still do not come up with simple answers, but generally, the 20% deduction now applies to qualified business income and is limited to the greater of 50% of the businesses W-2 wages or 25% of the W-2 wages and 2.5% of the acquisition cost of depreciable real estate.”

There are some restrictions. For example, service providers, including attorney and accountants, do not qualify. Certain service providers do not generate qualified business income because they are ‘specified service industries,’” says Jelsma.