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Allocating SSTB

Lord Happy
Level 4

Happy day,

Thank you in advance for any commentary you might provide. This might also be in the wrong forum, and I apologize in advance if that is the case.  This is about SSTB vs. non-SSTB activity within the same entity. 

Client provides consulting services and also runs workshops.  The consulting business certifies that a manufacturing process meetings government guidelines, and provides specific advice and solutions to any process or condition that would not meet the requirements for certification. Revenue for this activity is 1.15 million.

Client runs workshops and people pay to attend.  An unknown portion of the consulting services comes from attendees who then hire the client to consult.  Revenue for this activity is 275k.

The owner is the primary, but not the only, consultant, and is one of the teachers.  The client maintains one set of books and tracks the income for each income for each separately.  As the workshops are out of town, it is possible to identify expenses directly related to the workshops, although this has not been done.  Now that courses are offered online, this is a de minimus expense, but it could be tracked, even if it is just an expense for a commercial Zoom license and merchant account fees as consulting fees are not paid by credit card.

Based on Section 1.199A-5(c)(1)(iii)(B), I am torn as to whether or not the income can be segregated.  Are P&L by class and mixed use staff sufficient to justify a split?  The services are sold to an audience that may or may not use both services. 

Do you think that all of the income is SSTB, or do you believe that it can be allocated?  And if so, where in Proseries would such an allocation occur?

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5 Replies 5
BobKamman
Level 14

Yes, definitely wrong place.  This forum is for TurboTax users wanting free advice. 

Just kidding  . . .

My first reaction to any question like this is, are you sure it's consulting?  If the guy comes and fixes the machine, that's not consulting.  Does it make a difference if he tells the customer to call someone else to fix the machine?

But in many cases, the only box you can fit this into is the one labeled "consulting."

Seems to me that the seminars qualify for non-SSTB treatment.  I don't know the mechanics of splitting that out on a single 1120-S, but I would keep trying.  

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Lord Happy
Level 4

Happy day Bob,

Wait, isn't this Reddit?  I always get the best advice from Redditors.

A more clear representation of the facts:  You want to manufacture goop.  To sell it, you have to comply with FDA requirements.  Using a credit card, you paid $300 to attend a workshop about the requirements and what an inspection would entail.  You were so impressed that you hired the company that put on the workshop to come and do a pre-inspection report.  You forked out $50k via check and the report highlighted that you have too many bug parts in your goop, and ways to reduce bug parts so that you can pass the inspection. 

Two transactions, two different activities, probably provided directly owner, to one customer.

 

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BobKamman
Level 14

The IRS audit techniques manual would describe what you have as a hybrid:

Hybrid Company - A consulting firm that provides other services or goods. An example is: a computer consulting firm that provides computer consulting services, as well as, the sale and installation of the computer hardware and/or software that they have recommended.

https://www.irs.gov/pub/irs-utl/business_consultants.pdf 

Of course, this was written in the pre-SSTB days. But wasn’t the definition of “consulting” an issue in the earlier Section 199A QBID days?

If I’m your client, I’m going to tell you I don’t want to know why you can’t break out the non-SSTB income, I want to know how you are going to do it.

Lord Happy
Level 4

Happy day Bob,

I recall that the IRS doesn't do K1 matching very well, if at all.  So what I have done the past two years is I split the K1 into two pieces for entry onto his 1040.  Using the ratio of workshop to consulting, I split the K1 and the 199A info.  After I wrote my question, I posited the idea that since the costs are so low, it would be better for him to start a 2nd entity.  Even with the related party ownership rules, I think it can be cracked and packed. 

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BobKamman
Level 14

IRS K-1 matching is like a Russian dancing bear -- the surprise is not that it's done well, but that it's done at all.  I think they are getting better at matching income items.  As far as getting down to the details like SSTB computations -- you think Congress really wants them to use resources for that?

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