The Internal Revenue Service and the U.S. Department of the Treasury issued proposed regulations this week for Section 199A of the Tax Cuts and Jobs Act, which passed at the end of last year.
The section 199A deduction, also called the pass-through deduction, allows sole proprietors and owners of pass-through businesses a deduction of up to 20% on business-related income in order to bring the overall rate lower.
Now, new guidance released by the IRS shows that real estate agents and other real estate professionals could benefit from the 20% deduction.
Pass-through businesses are those that do not pay corporate income tax, and therefore would not be subject to the corporate income tax reduction from 35% to 21%. It includes entities such as sole proprietorships, partnerships and S-corporations.
In fact, most businesses in the U.S. are not subject to the corporate tax rate. A study from the Brookings Institute estimates that about 95% of businesses in the U.S. are pass-through businesses.
“Over the past several months, the National Association of Realtors has worked with the IRS and Treasury Department to ensure real estate professionals can benefit from the Section 199A 20% deduction for pass-through businesses,” NAR President Elizabeth Mendenhall said in a statement. “We were pleased with yesterday’s announcement, and believe this new 20% deduction will have a significant, beneficial impact on real estate professionals and America’s small businesses.”
“Specifically, we anticipate the deduction to become available to a wide range of real estate professionals, including those who are self-employed as well as those operating through partnerships, LLCs, and S-corporations,” Mendenhall said. “This ruling is a victory for many of our 1.3 million members, those who represent all aspects of residential and commercial real estate.”
“NAR continues to review all relevant information in the recently released proposed regulations on Section 199A, and will communicate with our members as new details emerge,” she concluded.
In addition to what was issued this week, more guidance is likely still to come.