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 regulationson this centerpiece provision of the Tax Cuts and Jobs Act.
What is a specified service trade or business?
An specified service trade or business (SSTB) is a trade or business involving the performance of services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, investing and investment management, trading, dealing in certain assets or any trade or business where the principal asset is the reputation or skill of one or more of its employees or owners. The Sec. 199A deduction does not apply to SSTBs when taxable income is above $440,100 for joint filers and $220,050 for other filers, and is partially allowed when taxable income is between $340,100-440,100 for joint filers and between $170,050-220,050 for other filers (tax year 2022 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 forForm 8995-A, Qualified Business Income Deduction,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.
Ancillary rule
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.
Resources
Editor’s note: This article was originally published Jan. 17, 2019, and republished with updates on July 22, 2019, March 3, 2020, and March 29, 2023.
