If you are a business owner and keeping tabs on the new tax laws, you’ve likely heard a lot about a QBI (Qualified Business Income) tax deduction and how SSTBs (Specified Service Trade or Businesses) might miss out on this new 20% deduction. Yes, there is a chance you won’t receive a full 20% deduction if you’re a married business owner, making over $315,000 (the beginning threshold for the QBI tax deduction phase-out), and in healthcare (one of the SSTB classifications), whereas a business owner of a landscaping company will likely fully benefit from this deduction with proper planning. Before your mind starts racing about the inequalities of the new tax law, we should all be able to agree on at least one thing - the tax rates are lower this year (woohoo!), so it’s not recommended to make less money because you want to qualify for this 20% deduction. Seriously, this 20% deduction wasn’t around in the past and you weren’t worried about making too much money so why worry about making too much money now when your rates are actually lower. If you qualify for the deduction it will be gravy on top. Also, there has been a lot published about this new rule and we are here to help you determine if you will benefit from this deduction but in the meantime keep the dough flowing! If you’re unsure how this new deduction will impact your business and/or whether or not you’ll be included in the dreaded SSTB category, please feel free to contact me or one of our professionals.
- Health – meaning the provision of medical services by physicians, pharmacists, nurses, dentists, veterinarians, physical therapists, psychologists, and other similar health care professionals who provide medical services directly to a patient. There are some aspects of health that would not be included in this definition which would be the operation of health clubs or spas that provide physical exercise or conditioning to their customers, payment processing, or research, testing, and manufacturing and/or sales of pharmaceuticals of medical devices.
- Law – meaning the provision of services by lawyers, paralegals, legal arbitrators, mediators, and similar professionals in their capacity as such.
- Accounting – meaning the provision of services by accountants, enrolled agents, return preparers, financial auditors, bookkeepers and similar professionals in their capacity as such. The term accounting does not include payment processing and billing analysis.
- Actuarial Science – meaning the provision of services by actuaries and similar professionals in their capacity as such.
- Performing Arts – meaning the performance of services by individuals who participate in the creation of performing arts, such as actors, singers, musicians, entertainers, directors, and similar professionals performing services in their capacity as such.
- Consulting – the performance of service in the field of consulting which means the provision of professional advice and counsel to clients to assist the client in achieving goals and solving problems. Keep in mind that if there is a product and services component to the revenue generated and the service is not significant, sales for service are less than 10% of gross receipts (5% if the gross receipts are greater than $25 million), in comparison to total revenue, than you would not be considered a SSTB.
- Athletics – including performance of services by individuals who participate in athletic competition such as athletics, coaches, and team managers.
- Financial Services – the proposed regs limits the definition of financial services to services typically performed by financial advisors and investment bankers. The field of financial services includes the provision of financial services to clients including 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 the client’s agent in the issuance of securities, and similar services.
- Brokerage Services – buying and selling securities for a commission
- Reputation or Skill is dependent on 1 or more of its employees/owners - this SSTB category is going to be facts and circumstance driven and likely be the focus of many IRS litigations. Stay tuned for future guidance on this one.
Also, if you are looking for a more in depth dive on the Qualified Business Income Deduction there was a great article published in the Journal of Accountancy, see here.