Tax Break Rules Stall in Shutdown

The longest government shutdown in U.S. history could cause tens of thousands of businesses to make a tough choice about whether to claim one of the biggest perks in the 2018 tax overhaul.

Owners of so-called pass-through entities such as partnerships and limited liability companies have to file their businesses’ returns by March 15, and they still don’t have the final word from the Internal Revenue Service about who, exactly, qualifies for the 20 percent deduction on business income. Those returns form the basis of their personal returns, which are due on April 15.

The rules were nearing publication when the shutdown began, but now face delays as the majority of IRS workers, who were writing the final regulations, and White House Office of Management and Budget employees, who would review the regulations, are furloughed.

If companies take a position that the IRS challenges, they could be hit with penalties tied to the amount of the underpayment plus interest.

The break, which could reduce a business owner’s tax bill by as much as one-fifth, was included in the Republican law as a way to cut rates for companies that didn’t benefit from the overhaul’s slashing of the corporate tax rate. The deduction applies to pass-through businesses and has been regarded as one of the most complicated changes in the tax law.

“It’s mid-January and you have to start making some decisions,” said Don Williamson, executive director of American University’s Kogod Tax Center. “Small taxpayers are in a crunch.”

Tax advisers agree that the more owners are involved in the day-to-day operations, the more likely they can get the tax break. Yet tax professionals don’t know how much activity is enough, meaning their clients could face an IRS challenge if they aren’t careful on their returns.

Pass-through owners make estimated quarterly tax payments throughout the year. Last year, the first two payments were due before the IRS issued any guidance about the deduction, leaving it up to taxpayers to make their best guess about how much they owe. When taxpayers file their returns this year, they’ll effectively settle up with the IRS, by either paying any additional amount they owe or receiving a refund.

Accountants hope any issues will be addressed in final regulations, but when those may be available is unclear. The partial government shutdown is in its fifth week.

Many businesses may end up filing for an extension, so they don’t have to rely on guidance that may become outdated. In that case, pass-through entities would have until Sept. 16 and pass-through owners would have until Oct. 15.

Taxpayers that don’t take the prudent approach could end up paying their accountants to prepare their returns twice.

Source: Bloomberg