Key Takeaways
- In the OBBBA, Congress enacted a new deduction for tipped income that has generated a lot of interest and attention.
- Treasury has begun to outline how it will work, but many questions remain.
- The benefit could be available not only to service workers but entertainers and those in online entertainment economies.
- Former IRS commissioner defends Direct File program.
- Shutdown risks rising as Dems push for ACA tax credit extension.
Substantively, the new $25,000 deduction for tips is probably not the most important part of the One Big Beautiful Bill Act. But that hasn't stopped it from being one of the most high-profile provisions in the legislation.
It became a major campaign issue in 2024, and upon taking office it was a key priority for President Trump. It generated debate during passage of the bill--with Democrats claiming it doesn't go far enough. And, since enactment, its implementation has received a lot of attention, as the U.S. Treasury Department has begun to mull the many difficult nuances contained in the simple-sounding proposal.
The provision would allow some workers a deduction, available to itemizers and non-itemizers, for up to $25,000 in tipped income. The law applies to tips “received by an individual in an occupation which customarily and regularly received tips" as of 2024, and that are "paid voluntarily without any consequence in the event of nonpayment, is not the subject of negotiation, and is determined by the payor."
It's up to Treasury to define which professions are "customarily and regularly" tipped, and the law mandates that the department issue a list by Oct. 2. On August 27, Treasury issued a preliminary draft, which it confirmed in proposed regulations the department issued today, which also delve into how Treasury evaluated these jobs..
With 68 occupations, many found Treasury's list to be unexpectedly broad—including not only obvious choices like bartender and barber, but also more nebulous categories such as "entertainer" and "digital content creator." The latter category opens up the benefit to a plethora of roles in the online economy, where influencers and podcasters often rely on financial support from fans.
Not every Internet personality will be eligible for the benefit, however. The law also blocks the deduction to those who are involved in a "specified service trade or business." That is a category borrowed from Sec. 199A, where it is used to restrict the 20% deduction available to pass-through entities like partnerships or sole proprietorships. The deduction was meant to put flow through businesses on equal footing with corporations, tax-wise, and the SSTB rules exclude service-based businesses from the benefit.
It's not entirely clear why Congress chose to pull in that definition to implement the new deduction for tips. There was a lot of concern that the new tips deduction could be abused, and the SSTB rules provided one more safeguard, on top of the list of professions and a phase-out for those with more than $150,000 in annual income.
But the SSTB categories could contradict some professions identified by Treasury. For instance, the department’s list includes entertainers, defined as those who "entertain audiences with artistic expression."
The legal definition of a SSTB, however, includes "services performed in the field of performing arts," meaning the "performance of services by individuals who participate in the creation of performing arts, such as actors, singers, musicians, entertainers, directors, and similar professionals performing services in their capacity as such."
Treasury’s new guidance makes it clear that it views the SSTB rules as an additional restriction which applies on top of the list of eligible professions—so some in those roles may find that they cannot deduct tips if they operate in a specified service trade or business. The department asks for comments about how to navigate these restrictions, including whether its existing guidance on SSTBs should apply.
There's also the question of how to define a "voluntary" payment. Leaving a bit extra on the bill is considered all but mandatory while dining out—and, in some cases, tips are automatically included for large parties or excessive bills.
While lawmakers have pushed Treasury to ensure that such "auto-gratuities" are included in the definition, today’s guidance states that it will only qualify if the customer “is expressly provided an option to disregard or modify it without consequence.”
How smoothly all of this goes could inform Congress when it decides whether to renew the tax benefit, which is currently set to expire in 2028.
Recent Tax Pieces:
Direct File Derailed by Dissension, Not Performance, Werfel Says – Benjamin Valdez, Tax Notes ($):
While Republicans criticized the tool as an overreach of IRS authority, “Democrats told me and the IRS to ‘go go go. . . . You’re not scaling this product quick enough,’” Werfel said.
House GOP Races to Cool Dissent as Trump Tariff Anxiety Surfaces – Alicia Diaz, Bloomberg News ($):
While Congress holds legal authority over the duties, Trump has managed to unilaterally issue tariffs across dozens of trading partners through emergency actions, assisted by House Republican leaders who’ve moved to make it harder for opponents to force a vote challenging them.
Shutdown Risks Rise as Democrats Issue Ambitious Counteroffer – Erik Wasson, Bloomberg News:
Without renewal of the Obamacare subsidies, many Americans will get notices of a surge in their health insurance premiums when open enrollment begins Nov. 1 for coverage next year. Democrats’ proposed stopgap would run through Oct. 31, just before that opening deadline, while the GOP proposal would fund the government through Nov. 21.
Stopgap Bill Would Freeze Last of IRS Long-Term Enforcement Funds – Cady Stanton, Tax Notes ($):
Between those cuts and the $1.4 billion rescinded as part of the Fiscal Responsibility Act of 2023, a total of $41.8 billion of the amount allocated for enforcement has been clawed back.
IMF eying top Treasury official for No. 2 post – Victoria Guida and Megan Messerly, Politico:
Katz’s appointment would place an ally of President Donald Trump near the top of the international institution, at a time when Bessent has been calling for reforms.
Katz has been an active participant in the Treasury Department’s international policy agenda, including serving as a top lieutenant to Bessent on negotiations with China on trade matters and with Ukraine on critical minerals.
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