Defining Specified Service Business Eligibility for QBI Deductions
We continue to explore the new changes that are outlined in the new TaxCuts and Jobs Act, IRC Section 199A. The long-anticipated announcement from the IRS that was released on Aug. 8th indicated proposed regulations for the new provision allowing many small business owners of “pass-through business entities”— including sole proprietorships, partnerships, trusts and S corporations – to deduct 20 percent of their qualified business income (QBI).
Today, we’ll look at bit closer at what the new regulations state, as there are some caveats to this that are extremely important to understand. A recent article that appeared in The Kitces Report gives a good overview of the changes, and we have simplified them below as highlights for small business owners to consider:
The primary purpose IRC Section 199A deduction for QBI was to provide a tax benefit for businesses that hire and employ people, injecting money into the market to help grow the U.S. economy. But, this was not necessarily to give a deduction to those who simply earned a substantial income from their sole labor/work.
The determination for the QBI deduction remains the same and is of minimal importance to low and moderate income earners (up to$315,000 for married couples filing joint returns, and up to $157,500 for all other filers). However, it is critical to high earners above those thresholds and those that may see their QBI deductions related to specified service trade or businesses partially or fully phased out as their income exceeds those thresholds.
Therefore, certain Specified Service Trade or Business (SSTBs) are not eligible for QBI deduction if they have higher income. An SSTB is any trade or business involving the performance of services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or any trade or business where the principal asset of such trade or business is the reputation or skill of 1 or more of its employees.
It’s still a bit unclear on what categorizes SSTB, but if we examine it a bit closer, the newly proposed regulations stipulate:
The performance of services in the field of health means the provision of medical services by individuals such as physicians, pharmacists, nurses, dentists, veterinarians, physical therapists, psychologists and other similar healthcare professionals performing services in their capacity as such who provide medical services directly to a patient (service recipient).
This includes accountants, but also “enrolled agents, return preparers, financial auditors, and similar professionals,” while the latter also includes “paralegals, legal arbitrators, mediators, and similar professionals” in addition to lawyers, themselves.
The proposed regulations limits the definition of financial services to services typically performed by financial advisors and investment bankers. These services include but is not limited to: the provision of financial services to clients including managing wealth; advising clients with respect to finances; developing retirement plans; developing wealth transition plans; and the provision of advisory and other similar services regarding valuations, mergers, acquisitions, dispositions, restructurings (including in title 11 or similar cases). This includes services provided by financial advisors, investment bankers, wealth planners, and retirement advisors and other similar professionals, but does not include taking deposits or making loans.
This applies only to celebrities. According to the proposed regulations, a business is only considered an SSTB by virtue of the “reputation or skill” provision if, and only if, it generates fees, compensation, or other income via endorsements of products or services; use of an individual’s image, likeness, name, signature, voice, trademark, or any other symbol associated with the individual’s identity; or appearances on radio, television, or other media.
This is one of the most difficult categories to define. The new regulations indicate that the performance of services in the field of consulting means the provision of advice and counsel. The performance of services in the field of consulting does not include the performance of services other than advice and counsel, such as sales or brokerage services, or economically similar services.
Also according to the Kitces Report, an additional key takeaway is that many businesses engage in more than one specific activity or business line at a time, creating a potential challenge to determine whether or not the business, in its entirety, is an SSTB. New rules will now force businesses with modest specified service income to treat the entire entity as an SSTB, limit the ability of specified service businesses to remove their non-SSTB income into a separate entity, and combine multiple commonly owned SSTB and non-SSTB business for tax purposes.
As we approach the final months of 2018, it’s more important than ever to start thinking through this to begin strategizing your complete financial picture. We know taxes can be overwhelming, and while M.J. Smith does not offer tax advice, we can help answer questions and look at your overall wealth management portfolios to ensure you maximize your investments. Please contact us today fora free consultation.
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