One of the most talked about components of the Tax Cuts and Jobs Act passed by Congress last year is a 20-percent deduction for operating profits earned by certain sole proprietors and pass-through entities (LLCs, partnerships, S corporations and REITs). This new provision of the tax code, which sets these limitations out in Code Section 199A, is very complex and has numerous limitations. As a result, many professional types of businesses (referred to in this article as “specified services trade or business” or SSTB) will not be able to get the benefit of the 20-percent deduction. Also, for business owners with total income over a certain threshold— $157,500 for a single filer or $315,000 for a married couple filing jointly—the deduction is limited or not allowed at all depending on certain factors, including the type of business and whether the business pays enough in payroll or has adequate depreciable property. Code Section 199A, as enacted by Congress, left many unanswered questions for the Treasury Department to resolve through regulations. The initial round of proposed regulations was published on Aug. 8, 2018. As discussed below, there are both favorable and unfavorable provisions for taxpayers, but the current draft of the proposed regulations don’t answer all of the issues raised by the statute.

First, the good news.