On Aug. 8, 2018, the IRS released proposed regulations around the centerpiece provision of the Tax Cuts and Jobs Act. The new Sec. 199A measure affords owners of sole proprietorships, partnerships, trusts and S corporations a lucrative 20 percent deduction on their qualified business income (QBI) beginning in tax year 2018.
In general, the deduction is available to qualifying business owners with taxable income below $315,000 for joint filers and below $157,500 for other filers. Overall, the deduction is limited to the lesser of: 20% of QBI (plus 20% of qualified real estate investment trust dividends and qualified publicly traded partnership income); or 20% of taxable income minus net capital gain.
Specified Service Trades or Businesses
The Sec. 199A deduction does not apply to specified service trades or businesses (SSTB), which taxable income is above $415,000 for joint filers and $207,500 for other filers, and is partially allowed when taxable income is between $315,000-415,000 for joint filers and between $157,500-207,500 for other filers (tax year 2018 amounts). Individuals with taxable income below these threshold levels are not subject to the limitations.
The regulations elaborate on and provide examples on which professions are included and excluded in the definition of a specified service trade or business. The chart below includes excerpts from IRS Publication 535, Business Expenses, and will help tax professionals advise their clients on this aspect of the Sec. 199A deduction.
De Minimis Exception
If you have a blend of income from an SSTB and a non-SSTB, and your gross receipts from the SSTB component are under a certain threshold percentage, a de minimis rule applies and will allow the SSTB to be fully eligible for the QBI deduction.
- If gross receipts from a trade or business are $25 million or less, AND less than 10% of the gross receipts are from an SSTB, the activity is not treated as an SSTB.
- If gross receipts from a trade or business are more than $25 million AND less than 5% of the gross receipts are from an SSTB, the activity is not treated as an SSTB.
If your trade or business provides services or property to an SSTB, and there is 50% or more common ownership of the trades or businesses, that portion of the services or property provided to the SSTB is treated as a separate SSTB.
|Included fields||Excluded fields|
|Health||Physicians, pharmacists, nurses, dentists, veterinarians, physical therapists, psychologists and other similar healthcare professionals performing services who provide medical services directly to a patient||Services not directly related to a medical services field, such as the operation of health clubs or spas, payment processing, or the research, testing, manufacture and sale of pharmaceuticals or medical devices|
|Law||Lawyers, paralegals, legal arbitrators, mediators and similar professionals||Services that do not require skills unique to the field of law, such as services by printers, delivery services or stenography services|
|Accounting||Accountants, enrolled agents, return preparers, financial auditors and similar professionals|
|Actuarial science||Actuaries and similar professionals|
|Performing arts||Actors, directors singers, musicians, entertainers and similar professionals||Services that do not require skills unique to the creation of performing arts, such as the maintenance and operation of equipment or facilities for use in the performing arts, or the provision of services by persons who broadcast video or audio of performing arts to the public|
|Consulting||Consulting, including providing advice and counsel with the intention of influencing decisions made by a government or governmental agency, and all attempts to influence legislators and other government officials on behalf of a client by lobbyists and other similar professionals||The performance of services, other than advice of counsel, such as sales, training of educational courses. It also excludes embedded or ancillary services that are otherwise not SSTBs, if there is no separate payment for the consulting services.|
|Athletics||Athletes, coaches and managers in sports, such as baseball, basketball, football, soccer, hockey, martial arts, boxing, bowling, tennis, golf, snowboarding, track and field, billiards, racing and other athletic peformance||Services that do not require skills unique to athletic competition, such as the maintenance and operation of equipment or facilities for use in athletic events or the provision of services by persons who broadcast video or audio of athletic events to the public|
|Financial services||Managing wealth, advising clients with respect to finances, developing retirement plans, developing wealth transition plans, the provision of advisory and other similar services regarding valuations, mergers, acquisitions, dispositions, restructuring (including in title 11 or similar cases), and raising financial capital by underwriting, or acting as a client’s agent in the issuance of securities and similar services. This includes services provided by financial advisors, investment bankers, wealth planners, retirement advisors and other similar professoinals.||Taking deposits or making loans, but does not include arrange lending transactions between a lender and borrower|
|Brokerage services||Services in which a person arranges transactions between a buyer and a seller with respect to securities for a commission or fee, including services provided by stock brokers and other similar professionals||Services provided by real estate agents and brokers, or insurance agents and brokers|
|Investing & investment management||Investment and investment management, in which a fee is received for providing investing, asset management or investment management services, including providing advice with respect to buying and selling investments|
|Trading||Trading, including the trade or business of trading in securities (as defined in Sec. 475(c)(2)), commodities (as defined in Sec. 475(e)(2)) or partnership interests|
|Dealing in securities||Dealing in securities, including dealing in securities (as defined in Sec. 475(c)(2)), commodities (as defined in Sec. 475(e)(2)) or partnership interests|
|“Catch-all” category||Any trade or business where the principal asset is the reputation or skill of one or more of its owners or employees, as demonstrated by:
Planning Tip: If taxable income is above the threshold, consider trying to reduce taxable income so you can qualify for the QBI deduction, including the following:
- Bunch income (defer income/accelerate expenses).
- Contribute to a retirement plan.
- Make a charitable contribution.
- Choose married filing separate instead of married filing jointly.
- Intuit® ProConnect™ Tax Reform Resource Center
- IRS Qualified Business Income Deduction FAQs
- IRS Publication 535 (Chapter 12 – excerpts above)
- Final Regulations
Editor’s note: This article was originally published Jan. 17, 2019, and republished with changes on July 22, 2019.