The Treasury Department recently released over 180 pages of proposed regulations related to the Qualified Business Income (QBI) deduction. Good news, many ancillary services still qualify.
Qualified Business Income (QBI) Deduction
The deduction (referred to as the Section 199A deduction or the deduction for qualified business income) was created by the Tax Cuts and Jobs Act. The deduction is available for tax years beginning after Dec. 31, 2017. Eligible taxpayers can claim it for the first time on the 2018 federal income tax return they file next year.
The QBI deduction allows individuals (and some estates and trusts) to exclude up to 20 percent of its QBI from taxable income. This generally applies to income from sole proprietorships, partnerships and LLC’s, S corporations, trusts, and estates.
Specified Services Trades or Businesses (SSTB’s)
The original legislation prohibits the QBI deduction for income from several types of professional service businesses referred to as “Specified Services Trades or Businesses” or SSTB’s. The list includes services in our field of accounting, as well as law and health services, among others.
SSTB’s are defined in the regulations as:
“a trade or business involving the performance of services in the field of health…where the principal asset of such trade or business is the reputation or skill of one or more of the employees or owners…”
QBI Deduction for Health Service Businesses
The proposed regulations have further defined SSTB’s for purposes of the QBI deduction as well as providing some more specifics related to which health service businesses will have its income still qualify for the deduction.
Health services are further defined as the “provision of services by physicians, pharmacists, nurses, dentists, veterinarians, physical therapists, psychologists and other similar healthcare providers who provide medical services directly to a patient.” The regulations go on to exclude the following services that are considered only indirectly related to patient care: “health clubs, payment processing, or research, testing, and manufacture of pharmaceuticals or medical devices.”
Based on the proposed regulations, many ancillary services will still qualify for the QBI deduction. These services, while indirectly related to patient care, involve assets other than the direct professional provider and are thus not considered specified service trades or businesses.
While the final regulations are far from being issued, these proposed regulations offer some good insight as to what may still qualify for the QBI deduction and can be helpful in 2018 tax planning. Taxpayers may rely on the rules until final regulations are published in the Federal Register. For more information, reference IR-2018-162.