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Posted on September 5, 2018

pass-through deductions

Small business owners using the 20% tax break for pass-through entities should pay close attention to a new rule change proposed by the Internal Revenue Service (IRS). The change would end these business income deductions and could impact how your company is structured or spins off new divisions. Learn why you might need to contact a tax attorney urgently and stop using the pass-through deduction for your business.

What is the Pass-Through Deduction?

Currently, a 20% business deduction is allowable for business owners who have a taxable income below $157,500 if single or $315,000 if married. Businesses must also adhere to requirements on how much to pay employees, the amount of property owned and whether it fits into certain special categories. The deduction, introduced in December 2017, is part of the Tax Cuts and Jobs Act, which is intended to support growth and fairness for small business owners. However, the IRS has determined that some business owners are restructuring in order to skirt the rules and qualify when they wouldn’t otherwise. The IRS is seeking to end the pass-through deduction.

Why Does the IRS Say Businesses are Skirting the Rules?

Some business owners have found ways to split their businesses into smaller divisions in order to remain below the taxable income threshold for their primary business, allowing them to qualify for the pass-through deduction. A doctor or lawyer, for example, is in a “specified service” category that usually has a high enough personal income to put them over the limit. They might spin off a portion of their business, like their billing office, into its own entity in what is sometimes called a “crack and pack” strategy.

Is “Crack and Pack” Illegal?

No, it’s not illegal; however, the IRS is aware of crack and pack, and wants to crack down on it. Using this kind of strategy is not the original intent of the Tax Cuts and Jobs Act. If you’re currently using “crack and pack” to take advantage of the 20% deduction, you may want to rethink your strategy. Consult a tax attorney right away to discussion your options. Otherwise, the IRS could decide to make an example of your business, which would be a financial and legal headache. It could also be a public relations disaster. From the public’s perspective, it could seem like you’ve done something wrong, even if you were just using a creative tax strategy.

If the IRS Changes the Rules, What Should I Do?

Assuming the IRS proposal goes through – as most IRS proposals do – the change could take effect immediately and impact how your business should be structured. It might become unnecessary to keep a certain division of your company separate and could even look suspicious to the IRS in the future. Rely on your tax attorney to guide you through the process of examining your company structure and evaluating how you can take a proactive approach to this tax issue.

Dutton Legal Group – Indiana’s Tax Resolution Law Firm

The Dutton Legal Group helps the people and businesses of Indiana navigate ever-changing State and Federal tax codes. Our goal as experienced tax attorneys is to assist you in finding an immediate, cost-effective answer to your tax challenges. We provide a variety of tax services from balance resolution and return preparation to wage garnishment relief and audit assistance. Make Dutton Legal Group your next call at 1-800-334-0255 or send an email to request a free consultation. Trustworthy and affordable, for over 15 years.