Qualified Business Income

Deduction May Impact Some Advisory Businesses and Create New Planning Strategies for Business Owners

The Tax Cuts and Jobs Act of 2017 introduced a new 20% tax deduction focused on pass-through businesses. As tax accountants pore through the Internal Revenue Service’s recently released 184-plus pages of guidance on the so-called Section 199A deduction for “qualified business income” (QBI), many business owners are wondering whether they will qualify. The QBI deduction has implications for both advisors and their clients.

First, a little background. Qualified business income is a shareholder’s portion of pass-through income. Certain items, such as capital gains, are excluded. Pass-through businesses are those that don’t pay tax at the corporate level and rather “pass-through” the tax onto the owner or owners who report that income on their own individual returns. The structures, including sole proprietorships, partnerships, S Corporations, and limited-liability companies, prevent double taxation at both the corporate and individual level. Specified-service businesses, which have special qualification rules for the deduction, are those in which the reputation of a specified individual is a principal asset to the company (more on these in a minute).

As determining whether you or your clients qualify for the deduction can be confusing, we’ve created the chart shown here, including details such as phaseouts. And as always, we recommend consulting with a tax accountant for more guidance:

As far as specified-service businesses, a bit of bad news for many professionals: Per the IRS, specified service trade or business (SSTB) includes a trade or business involving the performance of services in the field of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, investing and investment management, trading, dealing in certain assets or any trade business where the principal asset is the reputation or skill of one or more of its employees. It is important to note that these sorts of businesses are subject to QBI phaseouts based on taxable income.