Saturday, 23 March 2019

‘Clarifications’ make tax deduction murky

Jim HamillALBUQUERQUE, N.M. — Without question the hottest topic of discussion among tax practitioners now is the proposed regulations clarifying many aspects of the new 20 percent deduction for qualified business income. One of the key issues is the definition of a specified service trade or business.

The SSTB definition is important because it can affect the allowed deduction for business owners with taxable income above a statutory threshold. This threshold is $315,000 for married taxpayers filing jointly and $157,500 otherwise.

The deduction for income from an SSTB becomes zero when taxable income passes through a phaseout range, which ends at $415,000 of taxable income for married filing joint and $207,500 otherwise.

Most people do not have income in the threshold range, and they are entitled to the 20 percent deduction for all types of business, service or otherwise. For those fortunate to be threshold income earners, the goal is to avoid being in an SSTB.

Congress defined an SSTB by reference to a little-used provision of the law. But Congress also gave the Treasury Department broad authority to write regulations to interpret the law.

The proposed regulations note that the provision referenced in the law itself is not very clear. So the regulations made an effort to provide certainty in the definition of an SSTB. This means the regulations do not actually follow any existing statutory definitions of a service business.

Service businesses generally fall within the following: Accounting, law, health care, actuarial science, performing arts, consulting, financial services, and brokerage services. The regulations clarify much of what falls within these categories, but there is still some uncertainty.

What matters is what you do, not whether you are licensed within the general classification. So bookkeeping and tax return preparation fall within “accounting,” although one need not be licensed as a CPA to do either of those tasks.

Similarly, a paralegal falls within “law,” although he or she is not a member of the bar. Arbitration and mediation services provided by those with legal training is also in the law category. Stenography is not, because it can be done for a broad class of people, not just those within the field of law.

Health care is an SSTB if the service is provided directly to patients. This includes doctors, nurses, dentists, physician assistants and physical therapists, but not people who process payments or who earn fees from selling medical devices to health care providers.

Actuarial science means analysis and assessment of the financial costs of risk or uncertainty. It does not include analysis as an economist, mathematician, or statistician if not related to the cost of risk or uncertainty.

Performing arts includes actors, musicians and directors, but it does not include those who support these people with the operation of equipment or video production.

Athletes are included in performing arts by regulation (there is no statutory definition of an athlete as a performing artist). Athletes are those involved in competition, including players, coaches and team managers. They are not those who broadcast or provide video services for competitions.

Financial services includes only those who advise clients with respect to finances. This can include financial advisers, investment bankers, those who manage wealth, develop retirement plans, develop wealth transition plans, perform valuations, advise on M&A transactions or restructurings, and who perform underwriting services.

Brokerage services are limited to those who earn a fee for arranging transactions between a buyer and a seller related to securities. It does not include real estate or insurance brokerage services.

Consulting may be the wild card in all of these definitions. The regulations define consulting to be the “provision of professional advice and counsel to assist the client in achieving goals and solving problems.” “Advice and counsel” is pretty broad.

So an insurance brokerage is not an SSTB. But if an insurance agent advises on the use of life insurance to meet estate planning goals, perhaps that is consulting. Perhaps it is financial services.

A wedding planner provides advice and counsel to achieve goals and solve problems. Is this consulting? I don’t think it is intended to be, but the definition is broad enough to cause the tax adviser some grief. Expect more guidance as practitioners react to the proposed rules.

Jim Hamill is the director of Tax Practice at Reynolds, Hix & Co. in Albuquerque. He can be reached at [email protected]


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