Business Tax Briefs: Major League Baseball Wants Tax Law Perk

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By Lydia O’Neal

The MLB commissioner and a writers guild want sports team owners and TV writers to be eligible for the tax law’s 20 percent deduction for pass-through businesses; Tesla Inc. and its CEO, Elon Musk, won’t be able to write off their separate $20 million settlements with the Securities and Exchange Commission; a tax policy lobbying group wants the IRS to allow certain businesses with employees who switch to contractor status to still get the pass-through deduction; and more.

TV Writers and Baseball Teams

The commissioner of Major League Baseball and a writers guild want the Internal Revenue Service to leave owners of sports teams and entertainment content writers, respectively, out of the definition of “specified service” businesses ineligible for the 2017 tax overhaul’s new pass-through deduction above certain income levels.

The 20 percent deduction for pass-through businesses, for which income is taxed at the owner level under new tax code Section 199A, came with a cutoff for “specified service” businesses making more than $207,500 for single filers and $415,000 for married filers. Among those “specified service” trades were those in the fields of performing arts and athletics.

MLB Commissioner Robert Manfred Jr., in a letter released Oct. 2 under the Freedom of Information Act, asked that the agency replace an example it used in proposed rules (REG-107892-18) released Aug. 8 that appears to render sports team owners ineligible for the write-off “with an example that accurately reflects the multi-faceted operations of professional sports franchises.”

Those proposed regulations defined “athletics” as involving “the performances of services by individuals who participate in athletic competition such as athletes, coaches, and team managers,” but not “the provision of services that do not require skills unique to athletic competition, such as the maintenance and operation of equipment or facilities for use in athletic events.”

Similarly, the proposed rules apply a similar standard to the performing arts “specified service” category. The Writers Guild of America West, which represents writers “for a variety of platforms, including broadcast television, basic cable networks,” and “pay TV,” made the case in a letter released Oct. 2 under FOIA for the IRS to exclude the group’s members from that definition. The “specified service” limit shouldn’t apply to those in the field of performing arts if they don’t perform in front of an audience, it said.

No Deductions of Penalties

Tesla and its founder and CEO Elon Musk won’t be allowed to deduct the $20 million settlements they separately agreed to pay the SEC, according to their consent agreements with the financial regulator.

Musk and his company agreed to the penalties for the SEC’s fraud charge stemming from his misleading tweet, the SEC announced Sept. 29. The CEO, forced to give up his Tesla board chairmanship and appoint new directors, “shall not claim, assert, or apply for a tax deduction or tax credit with regard to any federal, state, or local tax for any penalty amounts” he pays “pursuant to the Final Judgment,” his consent agreement says.

The company’s consent agreement uses almost identical language. The agreements each describe the $20 million settlement payments as a “civil penalty.”

The 2017 tax law (Pub. L. No. 115-97) amended tax code Section 162(f) to draw a line as to what portion of a settlement with a government or similar entity is eligible for deduction. Only amounts stated in the agreement to be payments toward restitution, remediation, or coming into compliance with the law can be deducted.

Under new Section 6050X, the government or other entity must disclose this information to the Internal Revenue Service. The agency issued guidance in March (Notice 2018-23) delaying the reporting date for this new requirement, as it hadn’t yet made the corresponding form available.

Contractors or Employees?

A tax policy lobbying group wants the IRS to allow certain businesses with employees who switch to contractor status to still get the tax overhaul’s 20 percent pass-through deduction, according to a letter released Oct. 2 under FOIA.

The Federal Policy Group requested that the IRS add an example to its regulations for new Section 199A ensuring that a financial adviser who gives up employee status to become a partner in a joint venture with the employer shouldn’t limit the company’s access to the write-off.

In that case, the “presumption rule” in the agency’s proposed rules for Section 199A would be inapplicable, wrote Kenneth Kies, the group’s managing director, in the Oct. 1 letter to Treasury Secretary Steven Mnuchin and IRS Commissioner Charles Rettig.

The Federal Policy Group lobbies on tax issues for dozens of organizations and corporations. In the second quarter, the group counted General Electric Co., Microsoft Corp., Pfizer Inc., and Anheuser-Busch Companies Inc., among the clients for which it lobbied on tax issues.

S Corporations Seek Clarification

The IRS allowed pass-through businesses—such as S corporations and partnerships, in which income is taxed at the owner level—to aggregate their business entities to increase their chances of getting a new 20 percent deduction under the 2017 tax overhaul, as requested. But a group representing S corporations is far from satisfied.

In an Oct. 1 letter, the group highlighted the tax-treatment disparity between pass-throughs and C corporations, which are taxed separately from their owners at a 21 percent rate, citing research from Ernst & Young LLP.

Above incomes of $157,500 for single filers and $315,000 for married filers, a limit on the new deduction under new tax code Section 199A based on W-2 wages and capital kicks in. Businesses organized as multiple entities may place all of their payroll operations in one entity and all or most of their capital in another, and this separation could winnow their deduction down to zero, or close—even if, as a whole, their business would otherwise qualify.

The IRS sought to remedy this with an “aggregation rule” in the Aug. 8 proposed regulations, but it could use a few fixes, said Brian Reardon, president of the S Corporation Association.

For example, the proposed rules would require at least 50 percent ownership of each entity for it to be included in the aggregated group of businesses. Reardon said the association “disagrees that 50 percent ownership is a necessary or helpful condition for aggregation under Section 199A” and “requests that Treasury delete the 50 percent ownership test.”

Compliance ‘Confusion’ for Charter

Charter Communications Inc. wants the IRS to modify its proposed requirements for pass-through businesses structured as multiple entities for purposes of the new 20 percent deduction to “alleviate” problems the company would otherwise face come filing time.

The telecommunications company is 90 percent owned by a publicly-traded C corporation, with the remaining 10 percent owned through a partnership “to which Charter will need to report Section 199A information,” Charter vice president of finance and corporate treasurer Jessica Fischer wrote in a letter released Oct. 2 under FOIA.

“The business is conducted through numerous lower-tier entities, most of which are disregarded for tax purposes, containing phone, cable, internet, mobile phone, and related ad sales operating units,” Fischer wrote. Plenty of those separate entities, she continued, “were created solely to meet state regulatory requirements.”

The aggregation rules in the IRS’ Section 199A proposed regulations, Fischer wrote, “would create significant confusion for our investors because they would receive so many separate reports and result in substantial additional compliance burdens and reporting costs.”

The agency should state in final regulations that disregarded entities aren’t regarded as entities for the purpose of computing the pass-through deduction, she wrote.

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