On Aug. 8, 2018, the IRS released proposed regulations around the centerpiece provision of the Tax Cuts and Jobs Act. The new Section 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 Section 199A deduction does not apply to specified service trades or businesses (SSTB), which exclude engineers and architects, when 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. Individuals with taxable income below these threshold levels are not subject to the limitations.
The proposed regulations elaborate on and provide examples on which professions are included and excluded in the definition of a specified service trade or business. The following chart includes excerpts from the regulations 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 performing services who provide medical services directly to a patient||Services not directly related to a medical services field. For example, the operation of health clubs or health spas that provide physical exercise or conditioning to their customers, payment processing, or the research, testing, and manufacture and/or sales of pharmaceuticals or medical devices|
|Law||Lawyers, paralegals, legal arbitrators and mediators||Services that do not require skills unique to the field of law, for example, services by printers, delivery services, or stenography services|
|Accounting||Accountants, enrolled agents, return preparers and financial auditors|
|Performing arts||Actors, singers, musicians, entertainers and directors||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; and services by persons who broadcast or otherwise disseminate 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||Sales or economically similar services or the provision of training and educational courses; the performance of consulting services embedded in, or ancillary to, the sale of goods or performance of services on behalf of a trade or business that is otherwise not an SSTB (such as typical services provided by a building contractor) if there is no separate payment for the consulting services|
|Athletics||Individuals who participate in athletic competition such as athletes, coaches, and team managers in sports such as baseball, basketball, football, soccer, hockey, martial arts, boxing, bowling, tennis, golf, skiing, snowboarding, track and field, billiards, and racing||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; the provision of services by persons who broadcast or otherwise disseminate 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, restructurings, and raising financial capital by underwriting, or acting as a client’s agent in the issuance of securities and similar services|
|Brokerage services||Brokerage services, including 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||Real estate agents and brokers, or insurance agents and brokers|
|Investing & investment management||A trade or business involving the receipt of fees 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 section 475(c)(2)), commodities (as defined in section 475(e)(2)), or partnership interests|
|Dealing in securities||Dealing in securities, including dealing in securities (as defined in section 475(c)(2)), commodities (as defined in section 475(e)(2)), or partnership interests|
|“Catch-all” category||Any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its owners or employees. Consists of any of the following:
- IR-2018-162: IRS issues proposed regulations
- Section 199A Proposed Regulations
- IRS Deduction for Qualified Business Income FAQs
- Intuit® Tax Reform Resource Center