IRS cracking down on tax break has just made the news. Here is what you need to know. After the Tax Reform passed by Congress, most tax professionals became aware of a tax break for pass through businesses. The IRS proposed a new rule, giving a 20 percent qualified business income dedcution. This is a break for so called pass through entities, including sole proprietorships and S-corporations. In the proposed rule, the IRS also killed many of these tactics.
“There’s probably a minimal amount of people who’ve changed an entity structure or spun it off, but now the IRS is trying to crack down on it,” said Jeff Levin, CPA and director of Financial Planning at Blue Point Wealth Alliance. “Because of the newness of the rule, we weren’t recommending anyone do this until there was more guidance from the IRS,” he said. IRS cracking down on tax break that used to work is something that needs to be determined by the IRS before you venture into unchartered waters.
Crack and Pack. Prior to the August 8th proposal, accountants figured out that businesses that won’t qualify for the 20 percent break because they’re in a “specified service” and they exceed the taxable income threshold coul split themselves into two companies. For example, a law firm, which would not qualify for the 20 percent deduction, would spin off its bill collection department or its administrative staff into a separate entity. This new entity would not have been considered a “specified service” and would have been able to nab the tax break. In the new regulation, the IRS eliminated this strategy, known as “crack and pack”.
Previously, tax professionals pondered whether enterprising employees could leave their jobs, start their own business, and be rehired by their old company as independent contractors. The IRS put the kibosh on that. “If you worked for the employer and became and independent contractor for the same person, performing the same work, you’re presumed to retain your status as an employee,” said Michael D’Addio, a Principal at Marcum.