WASHINGTON — The Treasury Department and the Internal Revenue Service issued a proposal this week to allow pass-through businesses like Subchapter S corporations to deduct 20% of their business income as part of the new tax law President Trump signed last year.

The proposal, released Tuesday, provides long-awaited clarification for Subchapter S banks, which had questioned whether the new tax law would still provide them with the advantage of a lighter tax bill. S Corps, along with sole proprietorships and partnerships, are known as “pass-through” businesses, which is a classification that allows profits to flow directly to shareholders before federal income taxes are applied.

“Pass-through businesses play a critical role in our economy,” Treasury Secretary Steven Mnuchin said in a statement. “This 20-percent deduction will lead to more investment in U.S. companies and higher wages for hardworking Americans.”

Steven Mnuchin
The proposed deduction will "lead to more investment in U.S. companies and higher wages," said Treasury Secretary Steven Mnuchin. Bloomberg News

As part of its plan, the Treasury Department also proposed that married couples filing jointly receive the deduction for business incomes under $315,000 and that single filers receive the deduction under an income of $157,000.

The rule would also offer guidance related to specified service, trade or business income above the thresholds and would include “aggregation rules” for filers with pass-through income from multiple sources, according to the department's notice of proposed rulemaking. It also proposed establishing anti-abuse safeguards to thwart tax-avoidance schemes.

“We were pleased with yesterday’s announcement, and believe this new 20% deduction will have a significant, beneficial impact on real estate professionals and America’s small businesses,” Elizabeth Mendenhall, the president of the National Association of Realtors, said in a press release. “Specifically, we anticipate the deduction to become available to a wide range of real estate professionals, including those who are self-employed as well as those operating through partnerships, LLCs, and S corporations.”

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