The Section 199A Qualified Business Income Deduction

There is a lot of confusion surrounding the new Section 199A Qualified Business Income Deduction. Thankfully, our firm has finally completed a thorough and exhaustive analysis of the statute, proposed rules, and proposed regulations governing this new deduction.

First and foremost, if you have various lines of business in your company, such as providing services but also selling products, there is no need to separate them into separate LLCs. Section 199A(c)(1) makes it clear that Qualified Business Income is the net amount of qualified items within a trade or business. In other words, a qualified tax professional will need to do the following:

1. Categorize all of the various articles of income, gains, deductions, credits, and losses;

2. Identify the qualified items, and

3. Net those amounts together to arrive at the qualified business income amount.

What are the qualified items? Qualified items are all items not specifically derived from “specified services,” which include services associated with health, law, accounting, financial services, investing, investment management, brokerage services, dealing in securities or commodities, or any service that hinges on reputation or skill.[1] For those that doubted this “income segregation and categorization” approach that our firm developed, it has been confirmed in the proposed regulations published by the U.S. Department of the Treasury.[2]

More specifically, Section 199A(d)(2)(A) defers to Section 1202(e)(3)(A) for which there is no case law or clarifying regulations. Only two IRS Private Letter Rulings carved out exceptions for a business that was utilizing patented technology for testing and detecting a microorganisms[3] and a business that was researching, clinically testing, and manufacturing drugs.[4] Nevertheless, the significance of these rulings is the fact that these businesses were found not to be covered by Section 1202(e)(3)(A) despite their proximity to the listed business activities. This means that it will become absolutely critical for taxpayers to obtain written Tax Opinions that analyze their companies' overall activities as well as segmenting the various lines of business to qualify some if not most of its income as Qualified Business Income.

Let us be clear: it is impossible for any business to not have at least some qualified business income. If anyone tells you otherwise, stay far away from them. They are going to cost you a lot of money.

If you have a company and are trying to determine to what extent you qualify for the Section 199A Qualified Business Income Deduction, you absolutely need to schedule a free consultation with our firm. Contact us today by clicking here.

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[1] “[T]he term “qualified trade or business” means any trade or business other than 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 1 or more of its employees.” IRC § 1202(e)(3)(A).

[2] See Prop. Treas. Reg. § 1.199A-3(b)(5).

[3] PLR 201717010.

[4] PLR 201436001.

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