‘Pass-through’ tax breaks still need defining

IRS hasn’t yet provided guidance on who qualifies

NEW YORK — Congressional Republicans created a juicy new tax break for business owners when they rewrote the U.S. tax code late last year. Three months later, hundreds of thousands of U.S. employers still don’t know if they qualify.

The Internal Revenue Service has said it will provide guidance detailing exactly who’s allowed to take the so-called passthrough deduction. With billions of dollars at stake, business groups are lobbying for the agency to open the doors to the deduction as widely as possible.

Some high-earning proprietors — such as construction contractors, massage therapists, executive headhunters and restaurateurs — could be excluded if the IRS writes the rules too narrowly. The agency plans on issuing guidelines by June. But that deadline has been questioned by a former top Treasury official given the vagueness of the legislation and complexity of the task.

The 20 percent deduction is aimed at pass-through businesses, whose income is reported on their owners’ personal tax returns. Congress tried to bar wealthy owners of service businesses from getting the break — leaving out many doctors, lawyers and hedge-fund managers unless they can find a loophole. and faces a possible restructuring by Congress, is monumental. The agency must write coherent rules, and then be ready to make judgments on every business in the U.S. And the IRS can be challenged by taxpayers and second-guessed by courts, a process that could take years to play out.

A spokesman for the IRS didn’t respond to a request for comment.

A lax interpretation of the pass-through rules would please businesses, but also could blow a hole in the U.S. Treasury. The nonpartisan Joint Committee on Taxation estimates that the pass-through deduction, which expires at the end of 2025, would cost about $415 billion over the coming decade. The tax break could be even more expensive if IRS regulations can’t keep gamesmanship to a minimum.