New Sec. 199A, enacted by P.L. 115-97, known as the Tax Cuts and Jobs Act (TCJA), provides taxpayers a deduction of up to 20% of qualified business income (QBI) earned from a business operated as a sole proprietorship or through a partnership, S corporation, trust, or estate. For business owners with taxable income in excess of $415,000 (for married taxpayers filing jointly; $207,500 for all other taxpayers), no deduction is allowed against income earned in a specified service trade or business (SSTB). In addition, when the owner's taxable income from any trade or business exceeds those same thresholds, the deduction is limited to the greater of:
* 50% of the owner's share of the W-2 wages paid by the business, or
* 25% of the owner's share of the W-2 wages paid by the business, plus 2.5% of the unadjusted basis immediately after acquisition (UBIA) of qualified property.
Any initial excitement business owners felt about the birth of Sec. 199A was tempered, however, as questions arose as to the types of businesses that qualified for the deduction and how the various limitations would be interpreted and applied (see "Understanding the New Sec. 199A Business Income Deduction," The Tax Adviser, April 2018, tinyurl. com/ycqdtfue). Thankfully, on Aug. 8, 2018, the IRS released proposed regulations (REG-107892-18) that address many of the biggest unknowns that have plagued the provision since its enactment, including the following:
SSTBs, INCLUDING THE DREADED 'CATCH-ALL'
The statute defines an SSTB, in part, as "any trade or business involving the performance of services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of the owners or employees."
Given the vague nature of the prohibited fields --to say nothing of the exceedingly broad scope of the finishing catch-all--practitioners and business owners alike wondered if any service business would escape the clutches of the SSTB designation.
The proposed regulations clear up much of the confusion by providing detailed examples of who is--and who isn't--in each of the separately delineated service fields. For example, while a doctor, nurse, or dentist is in the field of health, someone who merely endeavors to improve the overall wellbeing of a customer but is not in a medical services...