Tuesday, August 14, 2018
Following up on my previous post, NY Times: Who Gets a New 20% Tax Break? The Treasury Dept. Speaks: David Kamin (NYU), “Reputation or Skill” in the New Pass-Through Regulations: Reading “Skill” (and “Principal Asset”) Out of the Law:
The proposed regulations governing the 20-percent pass-through deduction under Section 199A are rightly garnering attention, and there is already significant commentary focused on the fact that Treasury chose to interpret the “reputation and skill” catch-all narrowly. As I explained in my earlier post, I think that’s a mistake because of the wide-open door that leaves for many high-income service providers. Here, I discuss exactly how narrow the definition is — which seems to be extremely narrow, at least based on the examples given — and how the regulatory definition seems to conflict with the text and potentially purpose of the restriction.
Specifically, and despite the language in the law, the regulation seems largely focused on excluding returns that are explicitly and exclusively based on “reputation” from the deduction, and it allows a deduction for returns to “skill” associated with labor services, despite the plain language of the statute. The regulation then has no way of dealing with the mixing of the two in most circumstances, other than to grant the full deduction. So, if the star chef simply lends her name to a business in exchange for a share of profits, she doesn’t get the deduction according to the regulation but, if she also provides services to the business too in exchange for that profit share, she apparently does on all her income from the restaurants. And that helps illustrate the extremely narrow reach of the catch-all and how people can plan around it in its current iteration.