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Who Gets the Qualified Business Income Deduction?


As some of you may know, the Tax Cuts and Jobs Act (TCJA) introduced a 20-percent qualified business interest income deduction provision, which potentially benefits all taxpayers except C corporations.

For clients who are S corporation shareholders, partners and sole proprietors, they may also benefit as can trusts, estates and their beneficiaries (Sec. 199A. or see generally Conf. Rep. to the TCJA, p. 205-224). The provision is, however scheduled to expire in tax years beginning after 2025, so let’s explore what’s in it, who qualifies and who does not for tax planning purposes.

Dec 2nd 2020
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The TCJA also introduced a 21 percent tax rate for C corporations. Individual tax rates start lower, but then rise above the 21 percent rate.

The temporary nature of the benefit can affect such tax planning as whether to maximize fixed asset expenditures and then accelerate deductions for capital expenditures (see Section 179, which is phased out for larger taxpayers with more than 2.5 million in capital expenditures, and Section 168(k), the “bonus depreciation” provision). The provision is available whether or not one itemizes and has the potential for reducing the business person’s income tax, but not the self-employment tax.


In deciding whether to incorporate a particular business, if the business qualifies for the 20 percent deduction, the tax adviser cannot just compare contemplated income and apply corporate versus individual tax rates  The 20 percent qualified business income deduction is an important factor that can significantly reduce the effective tax rate on business income for the non-corporate taxpayer.

Shareholders of S corporations can qualify as to flow-through of business income. Shareholder wages at the S corporation level would reduce the income flow-through eligible for this deduction, which would not be the case as to S corporation dividends, which are generally tax free barring a history that includes being a C corporation.

Our discussion of who qualifies may at times be mitigated by particular rules within this concept. For example, the deduction is generally 20 percent of business income or if less, adjusted taxable income. Accordingly, an individual may be in a type of business that qualifies but have a lesser deduction, or no deduction at all, depending on the level of adjusted taxable income. A taxpayer with a qualifying business, but no adjusted taxable income has no incremental deduction.

The details of the 20 percent of business income deduction may at times require wages or capital expenditures to qualify, yet specifics of all such rules are generally beyond our scope.  However, we note that such details may mitigate or eliminate the deduction for a particular taxpayer who otherwise would qualify.

Wage income doesn’t qualify whereas fee income generally qualifies, albeit not for certain types of non-qualifying service providers, such as attorneys (On this important topic of distinguishing contractors, who get fees and employees who get wages, see “Understanding Employee vs. Contractor Designation,”; see Regs. 1.199A-2).

A touchstone of qualification is having business income, so the individual, partner, S corporation shareholder, trust or estate or beneficiary needs to be reporting income associated with a business (Regs. 1.199A-3). There are sundry rules regarding segregating or aggregating multiple trades or businesses (Regs.  1.199A-4).

What Doesn’t Qualify?

If certain requirements are satisfied, rental realty may qualify as a trade or business for this purpose (See Rev. Proc. 2019-38). Specified services in the following trades or businesses generally do not qualify:

  • health
  • law
  • accounting
  • actuarial science
  • performing arts
  • consulting
  • athletics
  • financial services
  • brokerage services
  • trading
  • dealing in securities
  • a trade or business where the principal asset is the reputation or skill of one or more of the employees or owners (See generally Regs. 1.199A-5(a)-(c).

In general, the first place for guidance on what is within the above types of non-qualifying services is Regs. 1.199A-5.  For example, the regulations take the position that vets and psychologists are within the definition of the “health” field but not so as to health spas and those manufacturing, testing, and selling drugs and medical devices (See pre-regulation commentary on this topic in “Application of Sec. 199A deduction to health care,” Eric Mauner, “Tax Clinic, The Tax Adviser, AICPA, May, 2018).

The field of law includes paralegals and mediators, but not stenography services or those delivering legal documents. “Accountants” for this purpose include enrolled agents and return preparers. The “performing arts” include directors as well as actors but not those broadcasting or disseminating videos and audios to the public. 

“Consulting” doesn’t include those providing training or educational courses, or working in architecture or engineering. Consulting does include being a lobbyist, but not sales work generally on the rationale it is not a “provision of professional advice and counsel to clients to assist the client in achieving goals and solving problems.” 

A building contractor isn’t a consultant generally for this purpose because the consulting services are “embedded in, or ancillary to, the sale of goods or performance of services on behalf of a trade or business that is otherwise not an SSTB (specified services trade or business) if there is no separate payment for the consulting services.”

Services in the field of athletics include those of the performer and coach in sundry sports. An athlete for this purpose includes the billiard player as well as the race car driver, but not the sportscaster. 

“Financial services” is rather broadly defined to include tasks such as managing wealth, developing wealth transition plans, developing retirement plans, serving as a retirement advisors, or in mergers and acquisitions. It doesn’t include making loans, but it does include arranging lending transactions.

A restaurant owner/chef would have business income generally available for the 20 percent of business income deduction, but would have a non-qualifying category of service income as to a $500,000 endorsement fee (Regs. 1.199A-5(b)(3)(xv)  Example 15).

The distinctions can be quite subtle as one works through the basic categories of non-qualifying services. There will likely be many classification disputes with the IRS as to what is or isn’t a qualifying service.

There are de minimis exceptions within the regulations that basically say non-qualifying service income can be treated as qualified if it is less than 10 percent of gross receipts for the trade or business for the year. The 10 percent element of this rule changes to 5 percent if the trade or business has gross receipts of more than $25 million (Regs. 1.199A-5(c)’).


Even if the type of service is listed as one that is generally non-qualified, such income can qualify at lower income levels. Mid-range income earners can qualify to a degree even if working in an area classified as non-qualifying.

As we write in late 2020, prospects of near-term changes in these benefits is unclear. However, as a general proposition, maximizing the benefits of 199A in 2020 seems generally an important year-end planning strategy.

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