The Treasury Department and IRS issued formal guidance today clarifying that being a client of a PEO does not affect the eligibility of pass-through entities for the 20 percent tax deduction in Section 199A of the tax code.
The tax reform bill passed at the end of 2017 created Section 199A—allowing taxpayers to deduct the "combined qualified business income amount" from a pass-through entity in an amount up to 20 percent of the taxpayer’s taxable income.
As noted in a press release issued by the National Association of Professional Employer Organizations (NAPEO), some accountants had erroneously advised clients that are pass-through entities that a PEO relationship might jeopardize their eligibility for this tax deduction. Today’s announcement provides the needed clarification for current and prospective PEO clients.
Relevant language of the proposed rule can be found here.
IRS news release found here.