In the ever-evolving landscape of tax regulations, the recent release of the Treasury Department’s proposed regulations pertaining to the Qualified Business Income (QBI) deduction brings forth a ray of hope for a significant segment of professionals. Notably, these regulations shed light on the continued eligibility of many ancillary service providers for the QBI deduction, a potential boon for their tax planning strategies.

A Primer on the QBI Deduction

The QBI deduction, often referred to as the Section 199A deduction, was a consequential creation of the Tax Cuts and Jobs Act. As the deduction’s nomenclature suggests, it is aimed at reducing the taxable income by permitting eligible taxpayers to exclude up to 20 percent of their Qualified Business Income (QBI). This deduction has the potential to significantly lighten the tax burden for a range of business structures, including sole proprietorships, partnerships, LLCs, S corporations, trusts, and estates.

Navigating the Boundaries of SSTBs

One of the notable facets of the QBI deduction landscape is the exclusion of certain professional service businesses labeled as “Specified Service Trades or Businesses” (SSTBs). These include fields like accounting, law, and health services. SSTBs are defined as those trading in services within fields where the business’s primary asset is the reputation or skill of its owners or employees. This delineation initially led to the presumption that some ancillary services, even though they contribute significantly to the healthcare ecosystem, might be excluded due to their indirect connection to patient care.

A Healthier Definition

The proposed regulations have unveiled a more nuanced perspective on health service businesses, the crux of the matter for many ancillary providers. In this context, health services encompass a spectrum of healthcare providers – physicians, pharmacists, nurses, dentists, veterinarians, physical therapists, psychologists, and their ilk – who directly engage with patients to deliver medical services. Interestingly, the regulations explicitly exclude certain services like “health clubs, payment processing, or research, testing, and manufacture of pharmaceuticals or medical devices,” which are tangentially connected to patient care.

The Ancillary Advantage

Based on the proposed regulations, a significant number of ancillary service providers may still qualify for the QBI deduction. Ancillary services, often linked indirectly to patient care and equipped with assets beyond the direct professional provider, do not fall within the SSTB purview. This holds promising implications for businesses such as medical equipment suppliers, administrative support providers, and other auxiliary entities that contribute indispensably to the healthcare ecosystem but might have previously been uncertain about their QBI deduction eligibility.

The Path Forward

While these proposed regulations provide valuable insights, they are not set in stone until the issuance of the final regulations. However, they do offer a stepping stone for tax planning. Taxpayers can find guidance in these preliminary rules until the definitive regulations grace the pages of the Federal Register. It’s prudent to keep an eye on developments and stay informed through official channels such as IR-2018-162.

Understanding the intricate interplay between regulations and your business’s unique structure can be instrumental in optimizing your tax strategy. As these proposed regulations indicate, ancillary providers might be in a better position than they initially presumed, and seizing this opportunity can be a step towards a healthier financial future.

LBMC tax tips are provided as an informational and educational service for clients and friends of the firm. The communication is high-level and should not be considered as legal or tax advice to take any specific action. Individuals should consult with their personal tax or legal advisors before making any tax or legal-related decisions. In addition, the information and data presented are based on sources believed to be reliable, but we do not guarantee their accuracy or completeness. The information is current as of the date indicated and is subject to change without notice.