IRS sets guardrails around pass-through business income deductions

Effective for a short time only–roughly, 2018 to 2026–taxpayers other than corporate entities may be entitled to a deduction equal to 20% of the “qualified” business income earned in a “qualified” trade or business. Enacted as part of the Tax Cuts and Jobs Act of 2017, the law around the new Section 199A deduction was vague on who benefits from these potentially sizable deductions.

This summer, the IRS proposed some guardrails around what constitutes qualified under Section 199A. These regulations provide clarity on the definition of a specified service trade or business (SSTB) and a de minimis exception for businesses that sell products and perform services to avoid being treated as an SSTB.

The definition of an SSTB for purposes of section 199A is (1) 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 one or more of its employees or owners, and (2) any trade or business that involves the performance of services that consist of investing and investment management, trading, or dealing in securities (as defined in section 475(c)(2)), partnership interests, or commodities (as defined in section 475(e)(2)).

Further guidance is provided on the meaning and scope of the various trades or businesses described in the preceding paragraph. Tony Nitti writing for Forbes parsed a list from the regs, with excerpts here, separating disqualified entities from those that should dig deeper into the details of the law with their tax advisor.

• Health
  • Disqualified: doctors, pharmacists, nurses, dentists, veterinarians, physical therapists, psychologists, and other similar healthcare professionals who provide services directly to a patient
  • Not disqualified: people who provide services that may improve the health of the recipient, such as the operator of a health club or spa, or the research, testing, and sale of pharmaceuticals or medical devices


• Law
  • Disqualified: Lawyers, paralegals, legal arbitrators, and mediators
  • Not disqualified: those that provide services not unique to law, like printing, stenography, or delivery services


• Accounting
  • Disqualified: Accountants, enrolled agents, return preparers, financial auditors, bookkeepers, and similar


• Performing Arts
  • Disqualified: Actors, singers, musicians, entertainers, directors, and similar professionals who provide services that lead to the creation of performing arts
  • Not disqualified: Those who broadcast or disseminate video or audio to the public, and those who maintain or operate equipment or facilities used in the performing arts


• Consulting
  • Disqualified: those who provide professional advice and counsel to clients to assist in achieving goals and solving problems, including government lobbyists
  • Not disqualified: salespeople and those who provide training or educational courses


• Athletics
  • Disqualified: athletes, coaches, team managers
  • Not disqualified: broadcasters or those who maintain or operate equipment used in an athletic event


• Financial Services
  • Disqualified: financial service providers including managing wealth, developing retirement or transition plans, M&A advisory, valuation work (financial advisors, investment bankers, wealth planners, and retirement advisors)
  • Not disqualified: banking


• Brokerage Services
  • Disqualified: brokers who arrange transactions between a buyer and a seller with respect to securities; i.e., a stock broker
  • Not disqualified: real estate broker


• Investment Management
  • Disqualified: those who receive fees for providing investing, asset management, or investment management services
  • Not disqualified: real estate management


• Trading
  • Disqualified: those who trade in securities, commodities or partnership interests
  • Not disqualified: a farmer or manufacturer who engages in hedging transactions as part of their trade or business
  
  

The takeaway

Coming in at 184-pages, the proposed regs do provide some much needed clarity but lots of gray space remains. And year-end will be here in no time. Schedule a trade or business consult with your TaxOps advisor well in advance of year-end to determine whether you can claim this valuable business income deduction.