Top Dem tax writer calls for guidance on new business tax deduction

The top Democrat on the House Ways and Means Committee is urging the Treasury Department and IRS to issue guidance “as soon as possible” on a new deduction for business income created by the GOP tax law.

In a letter sent to the agencies Tuesday, Rep. Richard Neal (D-Mass.) said guidance is needed promptly on the “pass-through deduction” because taxpayers are confused about how to determine their estimated tax payments and because an absence of guidance could lead businesses to abuse the deduction to avoid taxes.

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“Republicans rushed the tax bill through Congress with little opportunity for public comment or close scrutiny,” Neal wrote. “As a result, taxpayers are left struggling to understand its implications, and opportunities to exploit its ambiguities abound.” 

The new tax law, which President Trump signed in December, created a new 20 percent deduction for certain income of pass-through businesses — companies that aren’t traditional corporations and instead are taxed through the individual code.

The law includes a number of unclear rules about what income is and isn’t eligible for the pass-through deduction. As a result, many business groups and tax professionals have made it a top priority to get clarifying IRS guidance on the deduction.

The IRS has included guidance on the deduction on its priority plan, but it’s unclear how long it will take the agency to issue regulations on the topic.

Neal said that taxpayers are struggling to figure out their estimated tax payments, which business owners have to make on a quarterly basis.

“Without computational and definitional guidance to assist taxpayers in determining whether, and to what extent, they may qualify for the pass-through deduction, it is difficult for them to properly calculate their quarterly estimated tax payments,” he wrote. “Given the possibility that individuals may have considerably different tax liabilities under the new law, the inability to determine the appropriate estimated tax payment could result in liability for additions to tax and underpayment penalties.”

Neal also urged Treasury and the IRS to issue guidance to prevent the pass-through deduction from being abused. He expressed concerns that businesses’ use of tax-planning strategies to maximize their benefit under the deduction could lead to disputes between taxpayers and the IRS and could cause the tax law to increase the debt by even more than is predicted by Joint Committee on Taxation.

“As taxpayers and practitioners navigate the outer limits of the pass-through deduction, we’re concerned by signs of aggressive tax-minimization strategies,” Neal wrote.