As we continue to monitor the impact of the Tax Cuts and Jobs Act, we wanted to bring you up to speed on an important, new tax break for authors. As you may recall, the new tax code, effective this calendar year, provides that owners of certain pass-through entities may take a 20% deduction on their qualified business income—whether earned through a pass-through entity such as an S corporation, partnership, sole proprietorship, or as an unincorporated self-employed individual. The question has been: can authors take advantage of this deduction, and if so, to what extent?
The short answer is that authors who earn less than certain income thresholds can take advantage of the deduction; and there is no need to create a special entity to do so. As an unincorporated self-employed individual, you are automatically treated as a pass-through entity all by yourself. Authors filing singly with a taxable income (i.e., minus deductions) of $157,500 or less, and those who are married and are filing jointly with a combined taxable income below $315,000, are eligible to take the new 20% pass-through deduction on their writing income.
What is still unclear at this point is: what happens if you’re one of the lucky ones who makes more than $157,500, if filing singly, or $315,000, if you’re filing jointly? The IRS’s new proposed regulations, issued on August 8, 2018, seem to indicate that authors at a higher income level could also benefit from this deduction, but these are not final rules yet and should not be relied upon until final rules are issued.
Among other things, the proposed regulations explain what types of businesses cannot take advantage of the deduction. The law disallows the deduction for earners over the thresholds if engaged in a “trade or business where the principal asset of such trade or business is the reputation or skill of one or more employees.” The regulations state that certain performers fall within this exclusion (and cannot apply the deduction), but does not specifically mention authors. Some commenters have interpreted the regulations to mean that authors are not included in this specified “trade or business” category and so are covered by the deduction even at the higher incomes.
It is still possible that the IRS may issue a final rule that expressly excludes authors at the higher income levels (over $157,500/$315,000) and so we are advising those authors to wait until the 4th quarter to take the deduction. The IRS has sought comments on the regulations and a public hearing is scheduled for October 16, 2018. We assume final regulations will be adopted before the close of 2018. We will monitor the situation and keep you posted.
Of course, you should consult with your own accountant to determine what is the best approach for your individual circumstances.