Article written by:
Jennifer Zimmerman, CPA
The new Qualified Business Income Deduction under Code Section 199A is one of the most talked-about changes signed into law as part of the Tax Cuts and Jobs Act. This is a new provision of the Code that, on the surface, will allow owners of pass-through entities (partnerships, s-corporations, sole proprietorships, etc.) a 20% deduction against the income from their business. C corporations and their shareholders do not qualify for this deduction, nor do employees.
The deduction is subject to various limitations and includes several new terms and definitions in determining the amount of the deduction available to a given taxpayer. One of these new terms is a “specified service trade or business,” which is generally precluded from being able to claim the deduction. This term is partially defined by reference to certain qualifications for small business stock under Code Section 1202 and includes the following:
- Any trade or business involving the performance of services in the fields of health, law, accounting, actuarial sciences, consulting, athletics, financial services and brokerage services.
- 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.
- Any business involving performance of services that consist of investing and investment management trading, or dealing in securities, partnership interests or commodities.
The definition of a specified service trade or business specifically excludes engineering and architecture services. Presumably, this is due to the fact that these industries will also be losing the Domestic Production Activities Deduction. The pass-through activity must also be engaged in the conduct of a trade or business within the United States.
While a specified service trade or business generally is unable to claim the deduction, taxpayers may still be able to benefit from the deduction based on taxable income thresholds. The disallowance of the deduction for specified service trades or businesses does not apply for taxpayers with taxable income below $157,500 (or $315,000 for joint filers). Further, the benefit of the deduction is phased out over the next $50,000 (or $100,000 for joint filers). Thus, for 2018, the limit fully applies to single filing taxpayers with taxable income over $207,500 (or $415,000 for joint filers).
The Code Section 199A deduction presents taxpayers with all kinds of new opportunities and pitfalls. Owners should be preparing now in order to understand the impact on their businesses. Your GBQ advisor is ready to help you navigate this new provision and maximize the benefits.