Sec. 199A of the Internal Revenue Code affords owners of sole proprietorships, partnerships and S corporations (and some trusts and estates) a lucrative 20 percent deduction on their qualified business income (QBI) beginning in tax year 2018. On Jan. 18, 2019, the U.S. Department of the Treasury issued final regulations on this centerpiece provision of the Tax Cuts and Jobs Act.
Specified Service Trades or Businesses
The Sec. 199A deduction does not apply to specified service trades or businesses (SSTB), when taxable income is above $426,600 for joint filers and $213,300 for other filers, and is partially allowed when taxable income is between $326,600-426,600 for joint filers and between $163,300-213,300 for other filers (tax year 2020 amounts). Individuals with taxable income below these threshold levels are not subject to the limitations.
The regulations elaborate 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 instructions for Form 8995-A, Qualified Business Income Deduction, and will help tax professionals advise their clients on this aspect of the Sec. 199A deduction.
|Included fields||Excluded fields|
|Health||Physicians, pharmacists, nurses, dentists, veterinarians, physical therapists, psychologists and other similar healthcare professionals.||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, directors 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||Persons providing clients with professional advice and counsel to assist in achieving goals and solving problems, and persons providing advice and counsel regarding advocacy with the intention of influencing decisions made by a government or governmental agency, and lobbyists attempting to influence legislators and other government officials on behalf of a client, and other similar professionals.||Performance of services, other than advice of counsel, such as sales, or the provision of training of educational courses. It also excludes consulting services embedded in, or ancillary to, the activities of a trade or business that isn’t an SSTB, if there is no separate payment for the consulting services.|
|Athletics||Athletes, coaches and team managers in sports, such as baseball, basketball, football, soccer, hockey, martial arts, boxing, bowling, tennis, golf, snowboarding, track and field, billiards, racing and other forms of athletic competition.||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||Persons managing clients’ wealth, advising clients on finances, developing retirement plans, developing wealth transition plans, providing advisory and other similar services regarding valuations, mergers, acquisitions, dispositions, restructurings (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 professionals.
|Taking deposits or making loans, but does not include arranging lending transactions between a lender and borrower.|
|Brokerage services||Persons who arrange transactions between a buyer and a seller of securities for a commission or fee, such as stock brokers and other similar professionals.||Services provided by real estate agents and brokers, or insurance agents and brokers.|
|Investing & investment management||Persons providing, for a fee, investing, asset management or investment management services, including providing advice on buying and selling investments.||Service of directly managing real property.|
|Trading||Persons who trade 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 (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:
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.
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:
- Bunching income (defer income/accelerate expenses).
- Contributing to a retirement plan.
- Contributing to a health savings account.
- Making a charitable contribution.
- Choosing married filing separate instead of married filing jointly.
Editor’s note: This article was originally published Jan. 17, 2019, and republished with updates on July 22, 2019, and March 3, 2020.