The IRS has issued proposed regulations explaining the new tax law’s “qualified business income” (QBI) deduction for pass-through entities (PTE). How the new tax law is implemented affects business cash flow, operations, and long-term strategy that will impact all business valuations. The proposed regs include rules designed to prevent the provision from becoming a tax loophole for wealthy Americans.

While the Tax Cuts and Jobs Act (TCJA) provided permanent tax relief to corporations, which saw their tax rate slashed from 35% to 21% and an end to U.S. taxes on much of their foreign profits, PTE owners got only temporary relief under the law’s individual tax provisions, which are due to expire after 2025. Proposed legislation is kicking around Washington, DC, to make individual tax cuts permanent, but such a measure is not expected to become law anytime soon.

IRC Code Section 199a allows a 20% write-off of QBI for sole proprietors, owners of S corporations, and members of partnerships/LLCs. Section 199a is complex—it’s 22 pages long with about 20 defined terms, dozens of cross-references within the new section and to other sections, and complicated computations. The proposed regs are 184 pages long and are intended to ensure that business owners receive the full deduction on business income up to a $315,000 threshold for married couples and $157,500 for single filers. The deduction is limited for higher income.

The regulations provide the deduction to a wide range of businesses by limiting a tax code provision that could otherwise deny the benefit to any businesses based principally on the skill or reputation of owners or employees. The rules say the limitation applies narrowly to income from product endorsements, royalties, and licensing fees. The new rules should also provide welcome flexibility for owners of multiple businesses and settle lingering uncertainties about the kinds of firms that qualify for the deduction. Specific industries including healthcare, law, accounting, and consulting do not qualify. But others, such as the real estate industry, architects, and engineers, receive the benefit.

The new regs include anti-abuse safeguards to prevent schemes that wealthy taxpayers may try, such as improperly declaring themselves as contractors or splitting off a restricted firm’s nonrestricted income into a separate entity.