Since the passage of the Tax Cuts and Jobs Act, business owners and tax practitioners alike have focused on the potential effect of Section 199A. Though it has been clear for some time that the 20% deduction afforded to those with “qualified business income” would be a boon for businesses structured as pass-through entities, it was unclear how much relief this tax change would provide to owners of professional services businesses. In particular, the carveout of any “specified service trade or business” (“SSTB”) could significantly limit Section 199A’s importance to many law firms, accounting firms, professional athletes, and the financial services industry, to name a few. It was also unclear as to whether this SSTB provision, found in 26 U.S.C. § 199A(d), would severely limit the deduction for businesses that could arguably be categorized as related to an SSTB (or had a some income from a “specified service”-type activity) and others that were clearly not related to an SSTB. Fortunately, with the final release of regulations last week, some of the uncertainties related to the classification of an activity as an SSTB have been resolved in Treas. Reg. § 199A-5(b). (Note: The Service also issued regulations relating to the effect of Section 199A on businesses with both SSTB and non-SSTB income. Those issues are not addressed within this memorandum but may have a significant impact on the applicability of this deduction.)
Even though many practitioners and trade groups requested that the Service provide guidance on whether specific trades or businesses would be considered an SSTB, it generally refused to provide an exhaustive listing. The Service indicated that these determinations are “factually dependent” and “beyond the scope of these regulations.” While it did not engage in a group by group analysis, it provided the following guidance with respect to certain industries referenced as an SSTB by Section 199A:
- No bright line exclusion of skilled nursing facilities or assisted living facilities from the definition of an SSTB.
- Sale of pharmaceuticals and medical devices by a retail pharmacy is not by itself an SSTB; however, a pharmacist could engage in an SSTB if it provided additional services.
- Veterinarians are generally considered to be engaging in an SSTB as they are engaged in a health field (notwithstanding that it relates to the health of animals).
- No bright line exclusion of physical therapists or other “health-related” occupations.
- Medical services need not be provided directly to a patient to be considered an SSTB.
- Not limited to those providing services requiring state licensure.
- Definition of “accounting” to be based on its common definition, which will generally include “core accounting” functions such as bookkeeping, write-ups, review, attest, and tax preparation and related services.
- No clarification on whether real estate settlement agents perform accounting services.
- Services generally provided by actuaries and “similar professionals” will be considered an SSTB.
- Looks towards the “trade or business of performing services rather than the performance of services themselves.” This will generally exclude insurance companies.
- The mere employment of an actuary does not the trade or business one engaging in actuarial science.
- Writers will be classified as engaging in an SSTB if their product is integral to the creation of performing arts, such as writing a song or screenplay.
- Staffing firms are not generally considered a “consulting” business so long as they are to fulfill personnel needs of others.
- Engineering services, which are specifically excepted elsewhere in Section 199A, will not be considered consulting services under this category.
- Service declined to adopt the definition of consulting in NAICS codes as this definition is highly fact dependent.
- Owners of sports clubs or teams are not categorically excluded from this definition as they generally are considered to be involved in a trade or business involving athletics.
- Owners of sports clubs or teams may be able to structure separate or ancillary services, such as concession, as separate business to avoid coverage; however, sales of tickets and broadcast rights will still be considered as part of an SSTB.
- Businesses purely involved in broadcasting or disseminating video involving athletics will not fall within this category.
- Taking deposits and making loans are excluded from the definition of “financial services” for purposes of SSTB definition.
- Typical activities of a bank or insurance carrier are not covered.
- Insurance agents offer investment advice may fall within this category if such advice is not ancillary to insurance sales.
- Definition does not include brokerage of real property. Instead, it applies to those that arrange transactions between buyers and seller of securities for a fee or commission.
- Although banking services not considered “financial” services, brokerage of a loan is considered a brokerage service for purposes of SSTB definition.
- Service failed to issue guidance as to whether insurance would be considered a security and, therefore, no clarification on whether insurance brokers are included.
- Service refused to categorically exempt large asset managers that engage in significant R&D involving investments from its purview.
- In general, commission-based sales of insurance products will not be considered performance of investment management services.
- Regulation clarifies the direct and indirect management of real property.
- Defines types of services to be considered as dealing in securities.
- Loan origination is not treated as the purchase of a security from borrowers that might require inclusion as a securities dealer.
- Guidance removes a reference to the negligible sales exception from dealership definition.
- Does not address whether loans sold outside of the normal course of business considered dealing in securities.
- Does not exempt banks from the potential classification as an SSTB if they also engage in dealing of securities.
- Use of commodities transactions to hedge income or expense from an active business involving commodities not included.
- Limits reputation/skill to fact patterns where the individual is engaged in the trade or business of receiving income from endorsement (e.g., licensing of likeness and appearance).
- Likely interpreted somewhat narrowly to avoid unintended inclusion of various industries.
- Determination will be focused on whether one is “receiving income from the endorsement of products” and not whether income is “received in connection with a separate trade or business of making endorsements.”
The Service indicated that whether or not a business is an SSTB under Section 199A has no bearing on its classification elsewhere under the Internal Revenue Code. The new regulations also provide clarification on certain franchising issues as they relate to the definition of an SSTB.
While these regulations are an important step towards clarifying a significant part of the TCJA, there are still many lingering issues that will only be clarified as time passes. Further, even though recent guidance provides clarification, the provisions of Section 199A are full of potential pitfalls and their application is highly dependent on the relevant facts. Aside from consideration as an SSTB, one must take into account other factors such as the tax structure of the entity, the amount and type of income, the total wages paid to employees, and other factors – otherwise, the deduction may be unnecessary limited. If you or your business is attempting to qualify for the benefits of Section 199A, you should consult with a professional who is up-to-date on those recent changes and their application to your situation.
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 Section 199A, through reference to I.R.C. § 1202, defines an SSTB as including a trade or business involving the performance of services in 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 its employees or owners.