Adapted from an article to be published in the January, 2018 issue of the CPA Journal which is the official journal of the NY State Society of CPAs
By the time this article is published, we will know whether the new tax law was enacted by Congress and signed into law by President Trump. While the conference committee resolved the differences between the bills, and there indeed were many differences, at this point the conference agreement has selected the provisions going forward for the final vote of Congress. This article will focus on the new reforms to the tax rates applied to owners of unincorporated businesses with respect to qualified business income.
This summary is based on the conference committee report released on December 15 with respect to the versions of the Tax Cuts and Jobs Act passed by the House of Representatives on November 16, 2017 and then by the Senate on December 2, 2017. The mangers of the House and Senate tax-writing committees included a Joint Explanatory Statement of the Committee of Conference on December 16, 2017 along with a version of the tax bill.
Time will tell whether this hastily drawn tax blueprint which ushers in a set of radical changes to our domestic and international tax law, i.e., the Tax Cuts and Jobs Act, will gain public support. It is one thing to suggest that corporate income tax rates were too high compared with foreign countries and that a territorial type system was advisable to place in the Code for large corporations engaged in international business operations. There was bipartisan agreement that to maintain our competitive role in the global marketplace, lower corporate tax rates were needed. There was not bipartisan support for many of the domestic law tax changes, however, including the treatment of pass through entities. Even the Republicans in the House had a different version than the Republicans in the Senate with respect to pass throughs.
The proposed changes with respect to unincorporated business under the House Bill prescribed a 25% rate of tax based on the type of business activity that the owners are engaged in as well as the level of wages that the business entity pays. The Senate version granted a 23% deduction from the pass through of qualified business income in computing each owner’s federal income tax. The deduction approach used by the Senate scored more favorably under the budget reconciliation process, i.e., it reduced the deficit impact of the tax bill over the House version.
Introductory material on the income tax rate changes to individuals is important in order to understand the changes to the pass-through regimes, such as partnerships and S corporations, as well as for determining the tax rates on capital gains. It is also helpful to address the changes made to the individual alternative minimum tax.
Reduction and Simplification of Individual Income Tax Rates. H.R. §1001, S. 1 §11001.
Under current law, individuals are subject to federal income tax at graduated rates starting at 10% on taxable income not over $9,235, and climbing to a maximum marginal rate of 39.6% for taxable income over $418,400. There are seven tax brackets in all whereby the rate of tax increases as taxable income levels climb over increasing taxable income thresholds. For married couples filing joint returns, the marginal tax rate of 39.6% applies to joint taxable income over $470,700. Estates and trusts, as treated under current law, quickly hit the maximum marginal rate of 39.6% on taxable income over $12,500.
With respect to capital gains, an individual, estate or trust, the amount of adjusted net capital gain which otherwise would be taxed at the 10% or 15% rate are not taxed at all. Adjusted net capital otherwise taxed at rates over 15% but below 39.6% (over $37,950 in taxable income but less than $418,400 in taxable income for single individuals for example) are taxed at a 15% rate. For taxable income levels subject to the maximum individual income tax rate of 39.6%, adjusted long term capital gain is taxed at a 20% rate. Adjusted net capital gain is increased by the amount of “qualified dividend income”, as defined under section 1(h)(11)(B), which includes dividends received from domestic corporations and qualified foreign corporations. A qualified foreign corporation is one that is eligible for benefits under an income tax treaty with the U.S. which includes an exchange of information provision. For income realized in the form of depreciation subject to recapture under Section 1250, the maximum rate of tax is 25%, while capital gains from the sale of a collectible is taxed at a maximum rate of 28%.
Individuals are currently subject to a 3.8% Medicare Tax under section 1411 on the lesser of their net investment income, including capital gains and dividends, or modified adjusted gross income over a threshold amount of $250,000 for married couples filing a joint return (or surviving spouse) and $125,000 for a married individual filing a separate return, and $200,000 for any other individual.
The House Bill compresses the seven tax rate brackets under current law to four and sets the lowest marginal rate at 12% for taxable income up to $45,000. The present maximum effective rate would remain at 39.6% but the applicable threshold would not be attained until taxable income was over $500,000 for a single individual and over $1,000,000 for married couples filing jointly. The House Bill generally retained the present-law maximum rates on net capital gain and qualified dividends but adjusted for different break points (threshold levels) between rates.
The Senate Bill temporarily replaces the individual income tax rate structure with a new rate structure but retains the seven tax bracket system. The 10% rate applies to taxable income below $19,050, with increased marginal rates at higher levels of taxable income. The maximum rate of tax is 38.5% (in lieu of the House’ Bill’s 39.6% rate) and applies to individuals having taxable income in excess of $500,000 or over $1,000,000 in the case of married couples filing joint returns.  The Senate Bill adopts the House Bill on retaining present-law maximum rates on net capital gain and qualified dividends.
Conference Committee Agreement.
The Conference Committee adopted the seven bracket approach of the Senate Bill and adopted rates ranging from 10% on taxable income not over $9,525 for individuals ($19,050 for married couples filing jointly) and set a maximum rate of 37% for taxable income over $500,000 for individuals ($600,000 for married couples filing jointly).  The conference agreement retains the present-law maximum rates on net capital gains and qualified dividends. The tax bill’s reduction in overall individual rates expires for taxable years starting in 2025.
The individual income tax brackets are subject to adjusted for inflation based on annual changes in the level of the Consumer Price Index for All Urban Consumers. The indexing adjusted rule is permanent and will later apply to present law rates for taxable years beginning after 2025.
Individual Alternative Minimum Tax. H.R. 1, §2001. S.1., §12001. Code Sections 53, 55-59.
Present Law: Individual Alternative Minimum Tax.
The alternative minimum tax (“AMT”) is imposed on an individual, estate, or trust in an amount by which the tentative minimum tax exceeds the regular income tax for the taxable year. Under present law, the tentative minimum tax is the sum of: (i) 26% of taxable income as does not exceed $187,800 ($93,900 for a married individual filing separately); and (ii) 28% of the remaining excess. The breakpoints are indexed for inflation. The maximum tax rates on net capital gains and dividends used in computing the regular tax are used in computing the tentative tax.
The alternative minimum taxable income (“AMTI”) is taxable income adjusted for statutorily prescribed tax preferences and adjustments. Several familiar adjustments include that miscellaneous itemized deductions are not allowed, itemized deductions for state, local and foreign real property, personal property, sales and income taxes are also not allowed, deductions for interest on home equity loans are not allowed and the taxpayer’s net operating loss generally cannot reduce the taxpayer’s AMTI by more than 90% of the AMTI.
The exemption amount for taxable years beginning in 2017 are $84,500 for married individuals filing a joint return and surviving spouses and $54,300 for unmarried individuals. The exemption amount for a trust or estate is $24,100. For taxable years beginning in 2017 the exemption amounts are phased out by an amount equal 25% of the amount by which the individual’s AMTI exceeds $160,900 for married individuals filing a joint return and surviving spouses an $80,450 for married individuals filing separate returns or an estate are trust, as indexed for inflation.
Where an individual is subject to the AMT in a particular year, the amount of tax exceeding the regular tax liability of the taxpayer is allowed as a credit (“AMT credit”) for any subsequent taxable year to the extent the taxpayer’s regular tax liability exceeds his tentative minimum tax liability for such year.
H.R. 1 repeals the individual (as well as the corporate) alternative minimum tax. It allows existing AMT credits to offset the taxpayer’s regular tax liability for any taxable year. In computing AMTI for taxable years beginning before January 1, 2018, the net operating loss carryback from taxable years beginning after December 31, 2017, is determined without regard to any AMT adjustments or preferences.
Senate Bill (Amendment).
The Senate amendment retains the individual AMT and temporarily increases both the exemption amount and the exemption amount phase-out thresholds and agrees with the repeal of the corporate AMT. The AMT exemption amount for 2018 increases to $109,400 for married taxpayers filing a joint return and $70,300 for all other taxpayers. The phaseout thresholds for the lower 26% rate are increased to $208,400 for married taxpayers filing a joint return and $156,300 for all other taxpayers. The threshold amounts are indexed for inflation. The Senate Bill also retained the corporate AMT but at a rate of 20%.
Conference Committee Agreement.
The individual AMT is retained by adopting the Senate Bill, and the conference agreement temporarily increases the exemption amount and the exemption phaseout amounts. However, the phaseout thresholds are significantly increased to $1,000,000 for married individuals filing a joint return and $500,000 for all other taxpayers (other than estates and trusts). The threshold amounts are indexed for inflation. This means that fewer individuals will be subject to the individual AMT.
The corporate AMT is repealed as was passed by the House.
The provisions are effective for taxable years beginning after December 31, 2017.
Taxation of Business Income of Individuals, Trusts and Estates
Deduction for Qualified Business Income. H.R. 1, §1004; S. 1, §11011. New Code Section 199A
Present Law: Flow Through Taxation of Partnerships and S Corporations.
Partnerships are not subject to federal income tax. Instead, individual items of taxable income or loss, as well as so-called “bottom line” income or loss under Section 702(a)(8), is pass through to its partners on based on a daily pro-rate portion of each such partner’s or member’s (as to a limited liability company or “LLC”), share of such partnership items. Losses are deductible to the extent of a partner’s basis in his partnership interest with an excess loss carried forward indefinitely in accordance with Section 704(d). Other limitations apply with respect to the current deductibility of losses. A partner’s tax basis, as adjusted, in his partnership interest generally equals the sum of: (i) the partner’s capital contributions to the partnership based on cost or “book” principles; (ii) the partner’s distributive share of partnership income; plus (iii) the partner’s share of partnership liabilities determined in accordance with Section 752; less: (i) the partner’s distributive share of losses and certain other nondeductible expenses; (ii) reduction in share of such partner’s liabilities which are treated as constructive distributions; and (iii) any actual distributions to the partner.
The law permits partners to allocate items of income, gain, loss, deduction, and credit among the partners, i.e., special allocations, provided such allocations have substantial economic effect.  An allocation has substantial economic effect to the extent that the partner receiving the allocation receives a corresponding economic benefit or cost, as the case may be, so that it impacts such partner’s capital account which then is used in determining the manner in which the assets of the partners are to be distributed in liquidation. 
Where a partner sells his partnership interest to a third party, generally the transaction is treated by the transferor as capital gain under Section 741. Ordinary income is realized, however, to the extent the amount realized is attributable to the selling partner’s distributive share of unrealized receivables and items subject to recapture. 
The federal income taxation of S corporations and their shareholders resembles the taxation of partnerships and its partners. It was designed for such purpose when it was enacted into law by Congress in 1958. Over the years the S corporation has been the subject of various ownership limitation reforms which have greatly expanded its use as a preferred business entity for privately owned companies. In order to make an S corporation, an S corporation may not have more than 100 shareholders and issue only a single class of stock. Only individuals (other than non-resident aliens), certain tax-exempt organizations and certain trusts and estates are permitted shareholders. As a pass through entity, an S corporation’s items of income, deduction, loss and credit generally pass through to its shareholders on a daily proportionate basis based on stock ownership, including shares of non-voting stock.  As with partners in a partnership, each S corporation’s shareholder reports taxable income or loss on his individual return based on the tax items reflected on Form K-1. Losses may be deducted to the extent of a shareholder’s stock basis, which is not adjusted for entity level obligations as is required under Section 752 for partnerships. Any excess losses may be forward.  A shareholder’s stock basis is increased for capital contributions and the pass through of items of income reflected on Form K-1. Stock basis is further adjusted for distributions and losses.
S corporations which have converted from C corporation status, are subject to a corporate level tax on their recognized built-in gains under Section 1374, subject to applicable rules and limitations, for the five succeeding years after the effective date of the conversion and an annual corporate level tax on excess passive investment income under Section 1375 which requires that the S corporation have undistributed C year accumulated earnings and profits as well as “excess passive investment income”. 
A shareholder selling shares of S corporation stock to a third party generally will report any resulting gain or loss as capital gain or loss, based on the amount realized less the shareholder’s adjusted basis as adjusted through the date of closing. There is no “look thru” recharacterization rule under Subchapter S like Section 751 for partnerships. 
Where a business is operated as a sole proprietorship, including a single member LLC, the items of income, loss, deduction or credit are reported by the owner on a Schedule C to Form 1040.  The sale of the owner’s interest in the business is treated as the sale of each individual asset based on a fair market value allocation. 
Tax Cut and Jobs Act Tax Relief for Owners in Pass Throughs
Both the House and Senate bills prescribe lower tax rates for partnership income, but adopt different models, i.e., wholesale tax rate cuts (House), versus a more limited deduction in computing taxable income (Senate). The House Bill provides a maximum 25% rate for qualifying pass through business income. The Senate Bill adopts a rule permitting a deduction for 23% percent of qualifying business income to arrive at a lower, variable individual rate (new section 199A). It can easily be seen that the tax deduction approach will generate far less tax savings to “passive” investors in qualified businesses conducted by a partnership, S corporation or sole proprietor, than the House version.
The House Bill provides that “qualified business income” of an individual from a partnership, S corporation or sole proprietorship is subject to a maximum Federal income tax rate of 25%. Qualified business income is defined, in general, as 100% of any net business income from any passive business activity plus the capital percentage of net business income from an active business activity, reduced by carryover business losses and certain net business losses from the current year (emphasis in italics added).  A business activity involves the conduct of any trade or business and an “activity” has the same meaning as presently set forth under the passive activity loss rules and regulations. Net business income or loss includes amounts received as wages, director’s fees or guaranteed payments. Thus, for example where an S shareholder is paid wages from an S corporation involved in a single business activity , such wages are added back in determining the overall net business income or loss. The “capital percentage” is generally 30% of net business income but a taxpayer may elect to prove that the capital percentage should be greater. The statute sets the “capital percentage” for specified service activities as discussed below.
Net business income or loss does not include investment-related income, deduction or loss such as items taken into account in determining net long-term capital gain or net long-term capital loss, dividends, interest income and similar investment income or loss.
Net business income requires netting items of income, gain, deduction or loss with respect to the business activity. As an example, where a business activity has $100x of ordinary income from inventory sales, and expends $25x which is required to be capitalized and amortized over 5 years, the net business income is $100x less $5x (the allowable amortization deduction) or $95x. Therefore, if a taxpayer was a 50% partner in the active business activity but passive with respect to Section 469 rules and principles, his income tax would be limited to 25% of his 50% share of $95x or $47.5x. Under current law, and assuming maximum rates, the tax would be substantially higher, i.e. 39.6% (plus 3.8% Medicare Tax) on passive investment income of $47.5x.
The capital percentage is generally 30% except as the result of a taxpayer’s election to prove an increased percentage for capital-intensive business activities (other than a specified service activity). The election, which must be made with a timely filed return, including extensions, is irrevocable and applies for the taxpayer year made and the succeeding four taxable years. .
In the case of an active business activity that is also a specified service activity, generally the capital percentage is 0% and the percentage of any business loss from the specified service activity taken into account as qualified business income is also 0%. A specified service activity includes the performance of services related to law, health, accounting, engineering, architecture, accounting, actuarial science , performing arts, consulting, athletics, financial services, brokerage services, or any trade or business where the principal asset of such business is the skill or reputation of one or more employees or investing, trading, or dealing in securities, partnership interests or commodities. An election may be made by a capital-intensive active business activity which is a specified service activity provided the applicable percentage, as defined, is at least 10%. There is, in general, no federal income tax rate reduction under the House Bill for high-income service providers such as anesthesiologists, surgeons, successfully trial lawyers, accountants, consultants, etc. When you add into the mix that many of these same taxpayers derive their service income from high tax states, the limited deductibility of state and local tax will further disadvantage such individuals when compared with capital investors in active businesses.
A special reduced rate of 11%, 10% or 9% applies for an individual’s qualified active business income below an indexed threshold which threshold is $75,000 for a joint return or surviving spouse.  The reduced rate is phased in. Under this rule a qualified active business income includes any trade or business activity, including service businesses. Obviously, the Republican controlled Congress wanted to throw out a palliative for the new lawyer, doctor or accountant starting in his or her practice. Still, the House Bill was “too rich” so to speak and had a more adverse impact on the deficit than the Senate’s version of tax relief for pass throughs.
In general. The Senate Bill allows an individual taxpayer, for taxable years beginning after December 31, 2017 and before January 1, 2026, to deduct 23% of his qualified business income from a partnership, S corporation or sole proprietorship, as well as 23% of the aggregate qualified REIT dividends, cooperative dividends and qualified publicly traded partnership income in computing his or her taxable income.  A limitation based on W-2 wages paid is phased in above a threshold amount of taxable income. A disallowance of the deduction with respect to qualified service trades or businesses is also phased-in above the threshold amount of taxable income. Where the taxpayer’s taxable income is below the threshold amount, the deductible amount for each qualified trade or business is equal to 23% of the ABI for each respective trade or business. It is obvious that the deduction model promoted by the Senate and at a 23% deduction would yield a greater tax rate on qualified business income then the House Bill.
Where the net amount of qualified business income from all qualified trades or business of a taxpayer is a loss, it is carried forward as a loss from a qualified trade or business in the next year. However any deduction allowed in a subsequent year is reduced (but not below zero) by 23% of any carryover qualified business loss.
As an example, taxpayer has QBI of $20x from qualified business A and QBI of ($50x) from qualified business B in 2018. Taxpayer has no QBI in 2018 and the ($30x) QBI (loss) of ($30x) is carried over into 2019. In 2019, taxpayer has QBI of $20x from qualified business A and $50x of QBI from qualified business B. In determining the carryover loss deduction for 2019, the conference committee report states that the taxpayer can only reduce the QBI of $70x by only 23% of the ($30x) carryover qualified business loss. Does this mean the entire ($30x) carryover is eliminated since it is only a 23% usable NOL carryover? Perhaps that is what is meant. 
Effectively Connected with A US Trade or Business Requirement. Under the Senate Bill, qualified business items must be effectively connected with the conduct of a trade or business within the U.S.  If an investor is foreign the income eligible for the deduction has to be ECI. Qualified business income does not include investment related items of income, deduction or loss such as items attributable to long term capital gain or loss, dividend or interest income, etc. Qualified business income does not include any amount paid by an S corporation that is treated as reasonable compensation of the taxpayer. It similarly does not include any guaranteed payment for services under Section 707(c). A qualified trade or business does not include a specified service business which is defined in the same manner as the House Bill. Investment income or related expenses are not entered into the computation of qualified business income or loss. Although not entirely clear at this time, presumably each business activity is to be analyzed as a QBI activity and a grouping election will be permitted as is the case under Section 469.
Tentative Deductible Amount For a Qualified Trade or Business. Under the Senate Bill, for each qualified trade or business, the taxpayer is allowed to deduct up to the lesser of: (i) 23% of the qualified business income with respect to such trade or business; or (ii) 50% of the W-2 wages with respect to such business (the “wage limit”). If the taxpayer’s taxable income is below the threshold amount, the deductible amount for each qualified trade or business is equal to 23% of the amount of qualified business income as to each respective trade or business ) reduced by any net capital gain).
The exclusion from qualified business income of specific service income phases in for a taxpayer with taxable income in excess of a threshold amount. That amount is $250,000 for an individual and $500,000 for a joint return. The threshold amount is indexed for inflation. The exclusion from the definition of a qualified business for specified service trades or business is fully phased in for a taxable income in excess of the threshold amount plus $50,000 ($100,000 for a joint return). This presumably means that a junior partner in a law firm, for example, making $175,000 per year and who is not married, would qualify for the 23% deduction. However, once the same lawyer is making $300,000 or more per year, then the deduction is eliminated completely.
Special Rules for Partnership and S Corporations. The qualified business deduction rule applies at the partner or shareholder level with each taking into account his allocable share of QBI and W-2 wages of the partnership.
Example 1. H and W file a joint return reporting $520,000 of taxable income without regard to new Section 199. H is a partner in QBI A which is not a specified service business. W is a sole proprietor in a QBI B which is a specified services business. They also receive $10,000 in qualified REIT dividends during 2018. H’s share of QBI A is $300,000 such that 23% (deduction) is $69,000. H’s allocable share of wages paid by QBI A is $100,000 such that 50% of his share is $50,000. H’s and W’s taxable income is greater than the threshold amount of $500,000 (joint return) which therefore requires application of the wage limit for QBI A as phased in. Accordingly the $69,000 deduction for QBI A is reduced by 20% of $69,000 (23% of $300,000) - $50,000 (share of W-2 wages) or $3,800. H’s deductible amount for QBI A is $65,200. 
As to W, her QBI B is $325,000 and her share of W-2 wages from QBI B is $150,000. H and W’s taxable income for 2018 is again over the threshold amount. The exclusion of QBI and W-2 wages from the specified service business are phased in. W has an applicable percentage of 80%. Therefore W takes 80% of $325,000 or $260,000 in determining QBI B. In determining includible W-2 wages, W takes 80% of $150,000 or $120,000. Next, W determines the deductible amount for QBI B by taking the lesser of 23% of $260,000 ($59,800) or 50% of includible W-2 wages of $120,000 ($60,000). Therefore W’s deductible amount for qualified business B is $59,800.
H and W’s combined QBI of $127,000 consists of the deductible amount of QBI A of $65,200, the deductible amount for QBI B of $59,800 and 23% of the $10,000 REI dividends ($2,300). H’s and W’s deduction is limited to 23% of their taxable income for 2018 of $520,000 or $119,600 which is their Section 199 deduction.
Conference Committee Agreement.
Under the conference agreement, the Senate version of the qualified business income rule was adopted but reducing the deduction allowable to 20% instead of 23%. The conference agreement reduces the threshold amount above which both the limitation on specified services businesses and the wage limit are phased in. The threshold amount is set at $157,500 and $315,000 for a joint return subject to the indexing rule.  The conference agreement modifies the wage limit for taxable income over the threshold amount to the greater of: (i) 50% of W-2 wages paid by the qualified trade or business; or (ii) 25% of W-2 wages plus 2.5% of the unadjusted basis, of all qualified property.
On the definition of specified service trade or business, engineering and architectural services are excluded and is further modified to take into account the reputation or skill of owners. As modified, a specified service trade or business involves services rendered in health, law, consulting, athletics, financial services, brokerage services or any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees or owners, or which involves the performance of services that consist of investing and investment management trading, or dealing in securities, partnership interests, or commodities.
The deduction for qualified business income is equal to the sum of: (i) the lesser of (a) the combined qualified business income amount or (b) an amount equal to 20% of the excess of the taxpayer’s taxable income in excess of any net capital gain; plus (ii) the lesser of 20% of taxable income (reduced by net capital gain). The 20% deduction is not allowed in computing adjusted gross income but as a deduction reducing taxable income. It does not affect the limitations based on adjusted gross income so that the deduction is available for individuals regardless of whether claim itemized deductions.
The conference agreement modifies the wage limit for taxpayers having taxable income above the threshold amount to provide a limit based either on wages paid or on wages paid plus a capital element. Under the conference agreement, the limitation is the greater of: (i) 50% of the W-2 wages paid by the QBI, or (ii) 25% of the W-2 wages with respect to the QBI plus 2.5% of the unadjusted basis, immediately after the acquisition, of all “qualified property”, as defined.
The conference agreement states that trusts and estates are eligible for the 20% deduction rule. Rules similar to new Section 199 will apply for apportioning between fiduciaries and beneficiaries W-2 wages and the unadjusted basis of qualified property under the limitation based on W-2 wages and capital.
Assuming the legislation is passed and enacted into law, every partnership, S corporation and sole proprietorship should be prepared to project the tax impacts of the new legislation on their federal and state taxable income to their owners. While state taxes on businesses are still deductible, individuals are very limited in deducting their state income tax liability. Business deductions incurred at the business operational level should be permitted to retain their character when reported at the partner or S shareholder level.
 A special holding period requirement is set forth with respect to qualified dividend income.. Moreover dividends received from a passive foreign investment company, per §1297, in either the year of the distribution, or the preceding taxable year, are not qualified dividends. A dividend is treated as investment income for purposes of §163(d)(investment interest deduction limitation) only where the taxpayer elects to treat the dividend as not eligible for the reduced rates.
 The Senate Bill’s rate structure does not apply to taxable years beginning after 2025 in which event the current rates spring forward for taxable years beginning on or after January 1, 2026.
 The maximum marginal rates of income tax for estates continues to be imposed at modest levels (or more) of taxable income.
 The Conference Committee Bill therefore imposes a marriage penalty on married couples filing jointly. For married individuals filing separate, the 37% threshold is attained at taxable income over $300,000. No tax relief is provided for estates and trusts other than a reduction in the maximum rate to 37%.
 See §1(f). The inflation indexed thresholds for individual income tax purposes apply to: (i) regular income tax brackets; (ii) standard deduction; (iii) additional standard deduction for the aged and blind; (iv) the personal exemption amount; (v) thresholds for the overall limitation on itemized deductions and the personal exemption phase-out; (vi) the phase-in and phase-out thresholds of the earned income credit; (vii) IRA contribution limits and deductible amounts; and (viii) the saver’s credit.
 Under current law a publicly traded partnership, in general, is taxed as a corporation. See §7704(a). A publicly traded partnership is one whose ownership interests are traded on an established securities market or interests are readily tradeable on a secondary type market. §7704(b). Corporate treatment is still avoided by a publicly trade partnership if it predominately holding and managing “passive” assets whereby 90% or more of its gross income constitutes “qualifying income” for this purpose. See §7704(c)(2).
 See, e.g., §§465 (at-risk rules), 469 (passive-activity loss rules), §163(d) (investment interest limitation).
 See §704(b)(2) and corresponding regulations.
 There are, of course, other rules in the regulations for testing allocations. Certain rules require items of gain or loss to be allocated to certain partners. See §§704(c), 743(b).
 See §751(a).
 Otherwise, an S corporation must only issue a single class of stock. See §1361(b)(1)(D).
 See §1366(d). The at-risk rules, passive activity loss rules and investment interest limitations also apply to shareholders in a S corporation.
 See §1375(b)(1).
 Treas. Reg. §1.1366-1(b)(1).
 Such income or loss may alternatively be shown on Schedule E (rental real estate and royalties) or Schedule F (farming income or loss). A single-member LLC is disregarded for federal income tax purposes unless its owner files an election on Form 8832 to be treated as a C corporation. Treas. Reg. §301.7701-3(b)(1)(ii).
 Williams v. McGowan, 152 F.2d 570 (2d Cir. 1945).
 In determining qualified business income a separate computation must be made of the net business incoe or loss from each of an individual’s passive business activities and active business activities.
 Net business income does not include: (i) capital gains or losses; (ii) dividends or payments in lieu of dividends; (iii) interest; and (iv) similar items.
 This reduced rate is not available for trusts or estates.
 There is a phase out of the special 11%, 10% or 9% interest rate over an indexed applicable threshold amount, which is $150,000% in the case of married individuals filing jointly.
 The Senate version is apparently designed based on the manufacturing deduction under §199. The 50% wage limit is also contained in §199.
 In this regard, perhaps net operating losses from specified service activities may be fully realized against subsequent maximum rate income.
 See §864(c).
 ($520,000-$500,000)/$100,000 =20%.
 1-($520,000-$500,000)/$100,000 = 1-$20,000/$100,000 = 1-.2=80%.
 The conference report states that the reduce threshold amount is intended to deter high-income taxpayers from engaging in efforts to convert wages or other compensation for personal services to income eligible for the 20% deduction provision. The Senate version had the threshold at $250,000 for individuals and $500,000 for married filing jointly.
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