What businesses qualify for the 20% QBI deduction?

Do you qualify for the 20% QBI deduction?

A new deduction is creating a lot of buzz for business owners this year. This applies for passthrough entities (S corporations, partnerships, and sole proprietorships) under Sec. 199A.

The Tax Cuts and Jobs Act (TCJA), generally provides owners, shareholders or partners a 20% deduction on their personal tax returns on their qualified business income (QBI).

Specified service trades or businesses (SSTBs) are defined in two categories.

  1. Trades or businesses performing 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 that trade or business is the reputation or skill of one or more of its employees (The TCJA specifically excluded engineering and architecture); or
  2. Any trade or business that involves the performance of services that consist of investing and investment management, trading, or dealing in securities, partnership interests, or commodities.
    The new rules limits the deduction for certain enumerated SSTBs — if the taxpayer’s taxable income is above certain threshold amounts.

$315,000 for taxpayers filing jointly, and

$157,500 for all other taxpayers, with a deduction phaseout range (or limitation phase-in range) of $100,000 and $50,000, respectively, above these amounts.

The IRS further defines SSTBs

Questions did arise about the definition of SSTBs in consulting and businesses where the principal asset is the “reputation or skill of one or more of its employees” (i.e. reputation and skill provision).

There are only three instances where a taxpayer would fall under this provision:

  1. A trade or business in which a person receives fees, compensation, or other income for endorsing products or services;
  2. A trade or business in which a person licenses or receives fees, compensation, or other income for the use of an individual’s image, likeness, name, signature, voice, trademark, or any other symbols associated with the individual’s identity; or
  3. Receiving fees, compensation, or other income for appearing at an event or on radio, television, or another media format.

Basically, the provision targets celebrities and public figures who make their living in the public eye. Many taxpayers gave a big sigh of relief when this information was released, as it was uncertain how expansive the IRS’ definition would be.

Chat with your Morgan & Associates CPA if you believe your business qualifies for the 20% QBI deduction this year.