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Calculating New IRC 199A Qualified Pass-Through
Business Income Deduction
THURSDAY, MAY 10, 2018, 1:00-2:50 pm Eastern
FOR LIVE PROGRAM ONLY
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THURSDAY, MAY 10, 2018
Calculating New IRC 199A Qualified Pass-Through Business Income Deduction
Jeffrey N. Bilsky, Partner, National Tax Office
BDO USA, Atlanta
Will Hodges, Senior Manager
BDO USA, Atlanta
Notice
ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY
THE SPEAKERS’ FIRMS TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY
OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT
MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR
RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN.
You (and your employees, representatives, or agents) may disclose to any and all persons,
without limitation, the tax treatment or tax structure, or both, of any transaction
described in the associated materials we provide to you, including, but not limited to,
any tax opinions, memoranda, or other tax analyses contained in those materials.
The information contained herein is of a general nature and based on authorities that are
subject to change. Applicability of the information to specific situations should be
determined through consultation with your tax adviser.
BDO USA, LLP, a Delaware limited liability partnership, is the U.S. member of BDO International Limited, a UK
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PLANNING FOR TAX REFORM
Section 199A – Where are we now?
Jeff Bilsky, Partner – National Tax Office
Will Hodges, Senior Manager – National Tax Office
May 10, 2018
6
Agenda
➢ Overview of the Section 199A Deduction
➢ Comprehensive Example
➢ Uncertainties & Possible Opportunities
• Definition of Qualified Business Income
• Definition of Specified Services in the Absence of Regulations
• Wage Limitation Impacting Partner/Employees
• Restructuring to Create QBI
➢ Technical Corrections Bill
• Repeal of deduction for cooperative dividends
• Enactment of deduction for qualified production activities
• Modification of capital gain QBI exclusion
7
Overview of the Section 199A Deduction
➢ Calculation of qualified business income deduction
➢ Important definitions:
• Combined qualified business income amount
• Qualified business income
• Specified services trade or business
➢ Wages & capital limitations
8
Section 199A DeductionCalculation of Deduction
➢ The Section 199A deduction applies to years beginning after December 31, 2017
and for tax years ending before January 1, 2026
➢ Taxpayers other than C corporations are generally eligible to claim a deduction
equal to the lesser of:
1) The taxpayer’s combined qualified business income amount or
2) 20 percent of the taxpayer’s taxable income in excess of capital gains.
➢ Eligible taxpayers should include: Individuals, Trusts, Estates, Partnerships, S
Corporations, and Sole Proprietorships.
9
Section 199A DeductionCombined Qualified Business Income Amount
➢ Taxpayers “Combined Qualified Business Income Amount” is equal to the sum
of:
1) 20 percent of the taxpayer’s qualified business income with respect to
each qualified trade or business plus
2) 20 percent of the aggregate amount of qualified real estate investment
trust dividends and qualified publicly traded partnership income
➢ The QBI Deduction cannot exceed 20 percent of the taxpayer’s taxable income,
excluding net capital gain, recognized for the taxable year
➢ QBI is determined separately for each qualified trade or business
10
Section 199A DeductionDefinition of Qualified Business Income
➢ Qualified Business Income (QBI) includes net amount of domestic qualified
items of income, gain, deduction, and loss with respect to the taxpayer’s
qualified trade or businesses
• QBI does not include: REIT dividends and publicly traded partnership income;
Items of capital gain, dividends, interest not allocable to a trade or business,
amounts not generated in connection with a trade or business, and
reasonable compensation or guaranteed payments paid with respect to a
trade or business
➢ Qualified Trades or Businesses include any trade or business except a
“specified services” trade or business or the trade or business of performing
services as an employee
11
Section 199A DeductionUnused Deduction and QBI Losses
➢ There is no provision allowing for the carryover of unused QBI deduction
➢ Where the combined QBI (from all activities) generated by a taxpayer results in
a loss, the net amount is carried forward to the subsequent tax year
➢ The carryforward loss is treated as generated from a separate trade or business
in the subsequent tax year
12
Section 199A DeductionSpecified Services Trade or Business
➢ Specified Services Trade or Business means any trade or business involving
the performance of services in the fields of:
• Health, law, accounting, actuarial sciences, performing arts, consulting,
athletics, financial services, brokerage services,
• 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, or
• Which involves the performance of services that consist of investing and
investment management trading, or dealing in securities, partnership
interests, or commodities
13
Section 199A DeductionSpecified Services Exception
➢ Exception for specified service businesses does not apply where a taxpayer’s
taxable income does not exceed $315,000 (joint filer) or $157,500 (other filers),
subject to full phase-in at $415,000 and $207,500, respectively.
➢ Only the “applicable percentage” of qualified items of income, gain, deduction,
or loss, and the W-2 wages and the unadjusted basis immediately after
acquisition of qualified property, shall be taken into account in computing the
qualified business income, W-2 wages, and the unadjusted basis immediately
after the acquisition of qualified property of the taxpayer for a taxable year.
➢ Applicable percentage = 100% - ((taxable income in excess of threshold
amount)/$100,000 (or $50,000 for non-joint filers))
If the taxpayer’s income is below these threshold amounts,
the Specified Services Exception is not relevant
14
➢ Taxpayer (joint filer) with
$375,000 of taxable income for
the year.
➢ Included in taxable income is
$200,000 of income attributable
to a specified services trade or
business.
Section 199A DeductionSpecified Services Example
Applicable Percentage Calculation
Taxable Income 375,000
Less: Threshold Amount (315,000)
Taxable Income in Excess of Threshold 60,000
÷ Statutory Amount for Joint Filers 100,000
Percentage Ratio 60%
Statutory 100%
Less Percentage Ratio -60%
Applicable Percentage 40%
15
➢ Taxpayer (joint filer) with
$375,000 of taxable income for
the year.
➢ Included in taxable income is
$200,000 of income attributable
to a specified services trade or
business.
➢ Total QBI deduction is $16,000
($80,000 * 20 percent).
Section 199A DeductionSpecified Services Example
Specified Services/QBI Calculation
Specified Services Income 200,000
x Applicable Percentage 40%
Taxpayer's Includible QBI 80,000
16
Section 199A DeductionLimitations
Wages & Capital Limitation on QBI Deduction – In General
➢ The deduction attributable to 20 percent of the taxpayer’s QBI cannot exceed
the greater of
a) 50 percent of W-2 Wages paid with respect to the QBI or
b) The sum of 25 percent of W-2 Wages plus 2.5 percent of the unadjusted
basis of qualified property
➢ This limitation does not apply to taxpayers with taxable income not exceeding
$315,000 (joint filers) or $157,500 (other filers). The limitation is phased-in for
taxpayers with taxable income exceeding these amounts over ranges of
$100,000 and $50,000.
➢ The limitation does not apply to 20% of qualified REIT dividends and PTP
income.
If the taxpayer’s income is below these threshold amounts,
the Wages & Capital Limitation is not relevant
17
Section 199A DeductionLimitations
Wages & Capital Limitation on QBI Deduction – Wages
➢ W-2 Wages include total wages subject to wage withholding, elective deferrals,
and deferred compensation paid by the qualified trade or business with respect
to employment of its employees during the calendar year ending during the
taxable year of the taxpayer
➢ W-2 Wages do not include guaranteed payments under section 707(c) or non-
partner payments under section 707(a)
➢ “Wages” for profits interest partners who are currently treated as employees
receiving Form W-2 are not treated as wages
18
➢ Taxpayer has $1M of QBI and
pays $200,000 of W-2 Wages
during the taxable year (assume
no qualified property).
➢ Absent the wage limitation,
Taxpayer would be entitled to a
QBI deduction of $200,000.
➢ However as a result of the
wage limitation, Taxpayer’s QBI
deduction is limited to
$100,000.
Section 199A DeductionWages Limitation Example
Qualified Business Income 1,000,000
x Statutory 20% 20%
QBI Deduction - Pre-Wage Limitation 200,000
W-2 Wages 200,000
x Statutory 50% 50%
Wage Limitation 100,000
Eligible QBI Deduction (Lesser of above) 100,000
Wage Limitation
19
Section 199A DeductionLimitation
Wages & Capital Limitation on QBI Deduction – Qualified Property
➢ Qualified property includes the original unadjusted basis of depreciable
tangible property that is:
(i) held by and available for use in the trade or business at the close
of the taxable year,
(ii) used during the year in the production of QBI, and
(iii) has a remaining depreciable period.
➢ The term “depreciable period” means the later of 10 years from the
original placed in-service date or the last day of the last full year in the
applicable recovery period determined under section 168.
➢ Note that land is not included in the definition of qualified property
20
➢ Taxpayer has $1M of QBI, pays
$100,000 of W-2 Wages during
the taxable year, and has $6M
of qualified property at the
close of the taxable year.
➢ Absent the wage & capital
limitation, Taxpayer would be
entitled to a QBI deduction of
$200,000.
Section 199A DeductionWages and Capital Limitation Example
W-2 Wages 100,000
x Statutory 25% 25%
Wage Limitation 25,000
Unadjusted basis of qualified property 6,000,000
x Statutory 2.5% 2.5%
Capital Limitation 150,000
Wage Limitation 25,000
Capital Limitation 150,000
Wage and Capital Limitation 175,000
Wage and Capital Limitation
21
➢ Taxpayer has $1M of QBI, pays
$100,000 of W-2 Wages during
the taxable year, and has $6M
of qualified property at the
close of the taxable year.
➢ QBI deduction is limited to 25%
of W-2 Wages plus 2.5% of the
unadjusted basis of qualified
property.
➢ As a result of the wage &
capital limitation, Taxpayer’s
QBI deduction is limited to
$175,000.
Section 199A DeductionWages and Capital Limitation Example
Qualified Business Income 1,000,000
x Statutory 20% 20%
QBI Deduction - Pre-Wage Limitation 200,000
Wage Limitation 25,000
Capital Limitation 150,000
Wage and Capital Limitation 175,000
Eligibile QBI Deduction (Lessor of above) 175,000
QBI Deduction Calculation - Before Wage & Capital
Wage and Capital Limitation
23
Comprehensive Example
24
Section 199A DeductionExample
Comprehensive Example – Year 1 Facts
➢ During Year 1, Taxpayer A files a joint return reporting taxable income of
$375,000. A is allocated business income, W-2 wages, and unadjusted basis of
qualified property, respectively, from the three separate business activities:
➢ Activities 1 and 2 meet the definition of a qualified trade or business under
§199A(d)(1). Activity 3, however, is a specified services business.
➢ Additionally, during the year, A received qualified REIT dividends of $25,000,
qualified PTP income of $35,000, and net capital gains of $15,000.
Activity 1 Activity 2 Activity 3
Business Income/(Loss) $150,000 ($200,000) $30,000
W-2 Wages $100,000 $10,000 $10,000
Qualified Property $1,500,000 $75,000 $100,000
25
Comprehensive Example – Calculation of Deduction
Section 199A DeductionExample – Year 1
Calculation of Section 199A Qualified Business Income DeductionDeduction
Amount
Lesser of:
(A) Combined Qualified Business Income Amount 12,000
(B) Taxable Income (reduced by net capital gain) 360,000
Pass-through Deduction (Lesser of (A) and (B)) 12,000
26
Comprehensive Example – Combined Business Income Amount
Section 199A DeductionExample – Year 1
Deductible Amount for Each Trade or Business
Trade or
Business
Activity #1
Trade or
Business
Activity #2
Trade or
Business
Activity #3
Prior Year
Loss
Carryover
Amount Used
Total
Net Qualified Business Income per Qualified Trade or Business 150,000 (200,000) 30,000 - (20,000)
Reduction for Specified Services Trade or Business Income - - (18,000) - (18,000)
Allowable Qualified Business Income per Qualified Trade or Business 150,000 (200,000) 12,000 - (38,000)
Deduction Percentage 20% 20% 20% 20% 20%
Qualified Trade or Business Amount 30,000 (40,000) 2,400 - (7,600)
Limitation Based on Wages & Capital - - (240) - (240)
Qualified Trade or Business Amount 30,000 (40,000) 2,160 - -
Plus: 20% of Qualified REIT Dividends 5,000
Plus: 20% of Publicly Traded Partnership Income 7,000
Combined Qualified Business Income Amount 12,000
27
Comprehensive Example – W-2 Wages & Capital Limitation
Section 199A DeductionExample – Year 1
Limitation Based on Wages & Capital
Trade or
Business
Activity #1
Trade or
Business
Activity #2
Trade or
Business
Activity #3
Total
Limitation Based on Wages & Capital
50% of the Taxpayer's Allocable W-2 Wages 50,000 5,000 5,000 60,000
Reduction for Specified Services Trade or Business Income - - (3,000) (3,000)
(A) 50% Wages Limitation 50,000 5,000 2,000 57,000
Sum of:
25% of the Taxpayer's Allocable W-2 Wages 25,000 2,500 2,500 30,000
2.5% of the Taxpayer's Allocable Qualified Property 37,500 1,875 2,500 41,875
Subtotal 62,500 4,375 5,000 71,875
Reduction for Specified Services Trade or Business Income - - (3,000) (3,000)
(B) Sum of Wages & Capital Limitation Amounts 62,500 4,375 2,000 68,875
Greater of (A) 50% of W-2 Wages or (B) Wages + Capital Amount 62,500 5,000 2,000 69,500
Tentative Wage Limitation Amount - - 400 400
Threshold Percentage Based on Taxable Income 60% 60% 60% 60%
Calculated Wage Limitation Amount - - 240 240
28
Comprehensive Example – Calculation of Deduction
Section 199A DeductionExample – Year 1
Calculation of Section 199A Qualified Business Income DeductionDeduction
Amount
Lesser of:
(A) Combined Qualified Business Income Amount 12,000
(B) Taxable Income (reduced by net capital gain) 360,000
Pass-through Deduction (Lesser of (A) and (B)) 12,000
29
Section 199A DeductionExample
Comprehensive Example – Year 2 Facts
➢ During Year 2, Taxpayer A files a joint return reporting taxable income of
$350,000. A is allocated business income, W-2 wages, and unadjusted basis of
qualified property, respectively, from the three separate business activities:
➢ Activities 1 and 2 meet the definition of a qualified trade or business under
§199A(d)(1). Activity 3, however, is a specified services business.
➢ Additionally, during the year, A received qualified REIT dividends of $20,000,
qualified PTP income of $40,000, and net capital gains of $10,000.
Activity 1 Activity 2 Activity 3
Business Income/(Loss) $250,000 ($100,000) $40,000
W-2 Wages $40,000 $12,000 $12,000
Qualified Property $1,000,000 $100,000 $75,000
30
Comprehensive Example – Calculation of Deduction
Section 199A DeductionExample – Year 2
Calculation of Section 199A Qualified Business Income DeductionDeduction
Amount
Lesser of:
(A) Combined Qualified Business Income Amount 33,895
(B) Taxable Income (reduced by net capital gain) 340,000
Pass-through Deduction (Lesser of (A) and (B)) 33,895
31
Comprehensive Example – Combined Business Income Amount
Section 199A DeductionExample – Year 2
Deductible Amount for Each Trade or Business
Trade or
Business
Activity #1
Trade or
Business
Activity #2
Trade or
Business
Activity #3
Prior Year
Loss
Carryover
Amount Used
Total
Net Qualified Business Income per Qualified Trade or Business 250,000 (100,000) 40,000 (38,000) 152,000
Reduction for Specified Services Trade or Business Income - - (14,000) - (14,000)
Allowable Qualified Business Income per Qualified Trade or Business 250,000 (100,000) 26,000 (38,000) 138,000
Deduction Percentage 20% 20% 20% 20% 20%
Qualified Trade or Business Amount 50,000 (20,000) 5,200 (7,600) 27,600
Limitation Based on Wages & Capital (5,250) - (455) - (5,705)
Qualified Trade or Business Amount 44,750 (20,000) 4,745 (7,600) 21,895
Plus: 20% of Qualified REIT Dividends 4,000
Plus: 20% of Publicly Traded Partnership Income 8,000
Combined Qualified Business Income Amount 33,895
32
Comprehensive Example – W-2 Wages & Capital Limitation
Section 199A DeductionExample – Year 2
Limitation Based on Wages & Capital
Trade or
Business
Activity #1
Trade or
Business
Activity #2
Trade or
Business
Activity #3
Total
Limitation Based on Wages & Capital
50% of the Taxpayer's Allocable W-2 Wages 20,000 6,000 6,000 32,000
Reduction for Specified Services Trade or Business Income - - (2,100) (2,100)
(A) 50% Wages Limitation 20,000 6,000 3,900 29,900
Sum of:
25% of the Taxpayer's Allocable W-2 Wages 10,000 3,000 3,000 16,000
2.5% of the Taxpayer's Allocable Qualified Property 25,000 2,500 1,875 29,375
Subtotal 35,000 5,500 4,875 45,375
Reduction for Specified Services Trade or Business Income - - (1,706) (1,706)
(B) Sum of Wages & Capital Limitation Amounts 35,000 5,500 3,169 43,669
Greater of (A) 50% of W-2 Wages or (B) Wages + Capital Amount 35,000 6,000 3,900 44,900
Tentative Wage Limitation Amount 15,000 - 1,300 16,300
Threshold Percentage Based on Taxable Income 35% 35% 35% 35%
Calculated Wage Limitation Amount 5,250 - 455 5,705
33
Comprehensive Example – Calculation of Deduction
Section 199A DeductionExample – Year 2
Calculation of Section 199A Qualified Business Income DeductionDeduction
Amount
Lesser of:
(A) Combined Qualified Business Income Amount 33,895
(B) Taxable Income (reduced by net capital gain) 340,000
Pass-through Deduction (Lesser of (A) and (B)) 33,895
34
Uncertainties & Possible Opportunities
➢ Definition of qualified business income
➢ Specified services - guidance in the absence of regulations
➢ Wage limitation impacting partner/employees
➢ Restructuring to create QBI
35
Definition of Qualified Business Income
Section 199A(c)(1) defines Qualified Business Income as “the net amount of
qualified items of income, gain, deduction, and loss with respect to any qualified
trade or business of the taxpayer.”
Open Questions:
➢ What activities give rise to a trade or business?
➢ When does rental real estate rise to the level of a trade or business?
➢ Is QBI determined on an activity or entity basis?
➢ What if the taxpayer operates a trade or business that includes specified
services and non-specified services?
➢ Can taxpayers aggregate multiple trades or businesses?
36
Definition of Qualified Business Income
What activities give rise to a trade or business? When does rental real estate rise
to the level of a trade or business?
➢ The term “Trade or Business” is not separately defined for purposes of
section 199A. However, the section 162 definition applies:
“…to be engaged in a trade or business, the taxpayer must be involved
in the activity with continuity and regularity and…the taxpayer's
primary purpose for engaging in the activity must be for income or
profit” Groetzinger 107 S.Ct. 980 (1987)
Rental of even a single piece of real property may constitute a trade or
business, but it does not as a matter of law. Factual question. Curphey
73 TC 766 (1976)
➢ The determination of a trade or business is made at the entity level. If the
activity is conducted in a partnership, then, the partnership must conduct
the trade or business.
37
Definition of Qualified Business Income
Is QBI determined on an activity or entity basis? What if the taxpayer operates a
trade or business that includes specified services and non-specified services?
➢ Guidance is necessary
➢ Regulation section 1.199-4 as a roadmap to future regulations?
➢ De minimis exception similar to regulation section 1.199-1(d)(3)?
➢ Other reasonable methods?
38
Definition of Qualified Business Income
Aggregation of multiple trades or businesses?
Illustration:
Taxpayer conducts Activity 1 and Activity 2 within a single pass-through entity.
Assume Activity 1 generates $100 of income after a $60 W-2 wage expense and
Activity 2 generates $100 of income after a $10 W-2 wage expense.
➢ What is Taxpayer’s allowable Section 199A Deduction?
➢ What if Activity 1 and Activity 2 are conducted in separate pass-through
entities?
39
Trade or Business DeterminationPossible Aggregation
Taxpayer conducts Activity 1 and Activity 2 within a single pass-through entity.
Assume Activity 1 generates $100 of income after a $60 W-2 wage expense and
Activity 2 generates $100 of income after a $10 W-2 wage expense.
No Aggregation: Activity 1 generates a $20 Section 199A deduction and is not
subject to the wages limitation and Activity 2 generates a $20 deduction which
is reduced to $5 due to the wages limitation ($10 wages * 50% limitation).
Taxpayer’s total Section 199A deduction is therefore $25.
With Aggregation: Total aggregated income of $200 generates a $40 Section
199A deduction subject to a wages limitations of $35 ($70 total wages * 50%
limitation). Taxpayer’s total Section 199A deduction is therefore $35.
40
Trade or Business DeterminationPossible Aggregation
➢ Consider regulation section 1.469-4(d)(5) grouping elections for partnership
and S corporation entities.
➢ Possible re-grouping under regulation section 1.469-11(b)(3)?
➢ Aggregation of wages across multiple entities consistent with regulation
section 1.199-2?
42
Specified ServicesGuidance in the Absence of Regulations
What are services performed in the areas of health, law, accounting, actuarial
sciences, performing arts, consulting, athletics, financial services, & brokerage?
➢ Section 448 and Regulation Section 1.448-1T deal with the circumstances in
which a “qualified personal service corporation” can use the cash method of
accounting.
➢ Conference Report accompanying the Act suggests looking to Section 448 and
the Treasury Regulations thereunder as a framework for guidance in regards to
specified services businesses.
43
Specified ServicesTreas. Reg. 1.448-1T – Function Test
What are services performed in the areas of health, law, accounting, actuarial
sciences, performing arts, consulting, athletics, financial services, & brokerage?
➢ 95% or more of the time spent by employees of the corporation is devoted to
the performance of services in a qualifying field: health, law, engineering,
architecture, accounting, actuarial science, performing arts, or consulting.
➢ For purposes of satisfying the 95% test, any activity incidental to the actual
performance of services in a qualifying field is considered the performance of
services in that field.
44
Specified ServicesTreas. Reg. 1.448-1T – Health Services
➢ Includes provision of medical services by:
• Physicians,
• Nurses,
• Dentists, and
• Other similar healthcare professionals
➢ Does not include the provisions of services not directly related to a medical
field, even though the services may purportedly relate to the health of the
service recipient (e.g., operation of health clubs or health spas that provide
physical exercise or conditioning to their customers).
45
Specified ServicesTreas. Reg. 1.448-1T – Performing Arts
➢ Includes provision of services by:
• Actors and Actresses,
• Singers and musicians,
• Entertainers, and
• Other similar artists in their capacity as such
➢ Does not include the provisions of services by:
• Persons who themselves are not performing artists (e.g., managers or
promoters)
• Persons who broadcast or disseminate the performances of such artists (e.g.,
employees of a radio station that broadcasts the performances of musicians
and singers)
• Athletes (note, these type of services are specifically included in the
definition of specified services)
46
Specified ServicesTreas. Reg. 1.448-1T – Consulting
➢ The performance of services in the field of consulting means the provision of
advice and counsel.
➢ Does not include other services such as sales or brokerage, or economically
similar services.
➢ Facts and circumstances test to determine whether services are sales or
brokerage or economically similar services.
➢ Facts and circumstances include the manner in which the taxpayer is
compensated for the services provided (e.g., whether the compensation for the
services is contingent upon the consummation of the transaction that the
services were intended to effect).
47
Specified ServicesTreas. Reg. 1.448-1T – Examples
➢ Example 1 - Providing economic analyses and forecasts that are used to advise its clients
on their business activities. Consulting Services
➢ Example 2 - Providing services that consist of determining a client’s electronic data
processing needs. Consulting Services
➢ Example 3 – Determining a client's management and business structure needs including
advising on changes in the client's management and business structure. Consulting
Services
➢ Example 4 – Providing financial planning services including assisting in making decisions
and plans regarding the client's financial activities. Consulting Services
➢ Example 5 – Executing transactions for customers involving various types of securities or
commodities generally traded through organized exchanges or other similar networks.
Brokerage Services (Not Consulting)
➢ Example 6 – Studying a client's needs regarding its data processing facilities and making
recommendations to the client regarding the design and implementation of data
processing systems. Taxpayer's compensation for its services is typically based on the
equipment orders made by the clients. Sales Services (Not Consulting)
48
Specified ServicesTreas. Reg. 1.448-1T – Examples
➢ Example 7 – Assisting businesses in meeting their personnel requirements by referring job
applicants to employers with hiring needs in a particular area. Taxpayer's compensation
for its services is typically based on the job applicants, referred by the taxpayer to the
clients, who accept employment positions with the clients. Brokerage Services (Not
Consulting)
➢ Example 8 – Same as in example (7), except that the taxpayer's clients are individuals
who use the services of the taxpayer to obtain employment positions. The taxpayer is
typically compensated by its clients who obtain employment as a result of the taxpayer's
services. Not Consulting
➢ Example 9 – Assisting clients in placing advertisements for their goods and services.
Taxpayer's compensation for its services is typically based on the particular orders for
advertisements which the client makes. Brokerage Services (Not Consulting)
➢ Example 10 – Selling insurance, annuities, and other similar insurance products to various
individual and business clients. Taxpayer's compensation for its services is typically based
on the purchases made by the clients. Brokerage or Sales Services (Not Consulting)
49
What are services performed in the areas of health, law, accounting, actuarial
sciences, performing arts, consulting, athletics, financial services, & brokerage?
PLR 201436001: Pharmaceutical company that specialized in commercialization
of experimental drugs was engaged in qualified trade or business under section
1202(e)(3) despite proximity of its business activities to field of health.
➢ Company's activities involve the deployment of specific manufacturing assets and
intellectual property assets to create value for customers. Company is a
pharmaceutical industry analogue of a parts manufacturer in the automobile industry.
➢ Although Company works primarily in the pharmaceutical industry, which is certainly a
component of the health industry, Company does not perform services in the health
industry within the meaning of section 1202(e)(3).
Specified ServicesOther Guidance
50
What are services performed in the areas of health, law, accounting, actuarial
sciences, performing arts, consulting, athletics, financial services, & brokerage?
PLR 201717010: Developer of tool used to provide information to healthcare
providers was engaged in qualified trade or business
➢ Company provides laboratory reports to health care professionals. However, Company
neither discusses with, nor is informed by, healthcare providers about the diagnosis or
treatment of a healthcare provider's patients. Company's sole function is to provide
healthcare providers with a copy of its laboratory report.
➢ The skills employees bring to Company are not useful in performing medical tests and
that skills they develop at Company are not useful to other employers.
➢ None of Company's revenue is earned in connection with patients' medical care.
➢ Company is not in a trade or business (i) involving the performance of services in the
field of health or (ii) where the principal asset of the trade or business is the
reputation or skill of one or more of its employees.
Specified ServicesOther Guidance
51
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.
➢ PLR 201717010
➢ AICPA Comments: Suggest that guidance focus on the reputation or skill in providing
services based on whether customers, patients, or clients look to specific individuals
to perform the required tasks. For example, the assignment of a task to any trained or
qualified employee, is not a business relying on the reputation or skill of one or more
of its employees. However, a business that is dependent upon a specific employee’s
or owner’s skill in performing a task, is a specified trade or business
➢ NYSBA Report: Because of the uncertainty regarding Congress’ intention in choosing
this particular standard, we are unable to come to a consensus as to a single
particular standard to recommend. Section 1202 is a logical place to start.
A Broad vs. Narrow application will have significant impact on the ability to benefit
from the deduction
Specified ServicesOther Guidance
52
Section 1202 Guidance
➢ John P. Owen v. Commissioner
• Insurance brokerage corporation with extensive training programs and sales
structures
• Primarily relied on the services of independent contractors to conduct
business
• Courts found that the principal asset of the company was the training
program and sales structure rather than the taxpayer’s services.
➢ Not applicable to 199A as owner activities are also taken into account?
Specified ServicesOther Guidance
53
NYSBA Suggested Approaches (No Consensus)
➢ Publication of a list of business types are clearly qualified trade or businesses
or clearly specified services trade or businesses.
➢ Activity based standard like the one described in PLR201436001.
➢ Balance sheet test comparing goodwill and workforce assets to non-goodwill
and non-workforce assets.
➢ Mechanical test creating two-way rebuttable presumption regarding the
classification of a business as a qualified trade or business or a specified
services trade or business.
➢ Standard based on whether the trade or business involves the provision of
highly skilled services.
Specified ServicesOther Guidance
54
W-2 Wages LimitationPartners as Employees
Partner vs. Employee – Determining W-2
Wages
➢ W-2 wages do not include guaranteed
payments.
➢ Partnership interests are often held by
“employees” but Rev. Rul. 69-184 says a
partner cannot be treated as an employee
➢ Wages paid to these partner/employees
does not qualify as W-2 wages for purposes
of Section 199A.
➢ Possible structuring alternatives?
OperatingPartnership
InvestingPartners
Employees
Profits Interest Units
Employees
55
➢ Rev. Rul. 69-184 does not apply to
tiered partnership structures,
however, the IRS has requested
comments on the appropriate
application of Rev. Rul. 69-184 to
tiered partnership situations
➢ Valid business purpose needed to
form the Employee Partnership
OperatingPartnership
InvestingPartners
InvestingPartners
Employee Services
Profits Interest Units
EmployeePartnership
W-2 Wages LimitationPartners as Employees
56
OperatingPartnership
EmployeeS-Corporation
InvestingPartners
Employees
Employee Services
Profits Interest Units
W-2 Wages LimitationPartners as Employees
Upper-Tier
InvestingPartners
Employees
Profits Interest Units
Employees
Lower-Tier(OpCo)
New Investment
Entity
57
➢ Existing partnership operates a specified services
trade or business. Partnership incurs significant
administrative costs to manage its internal
operations.
➢ These costs are netted against operating income to
calculate a single net income amount. Not eligible for
QBI deduction subject to income limitations
Additional ConsiderationsRestructuring to Create QBI
SpecifiedServices
Partnership
IndividualPartners
Operating Partnership P&L Amount
Gross Revenue from Services 50,000,000
Less: Operating Expenses (20,000,000)
Less: Internal Mgmt Exp (10,000,000)
Operating Profit 20,000,000
Section 199A Deduction -
Net Taxable INCome 20,000,000
Federal Effective Tax Rate 37%
Partner Tax Liability 7,400,000
58
➢ Administrative function spun-
off into a new partnership.
➢ Specified Services Partnership
executes a Management
Services Agreement.
➢ Profit generated at the
Management Services
Partnership presumably is QBI
➢ Consider section 1.199-7?
SpecifiedServices
Partnership
IndividualPartners
ManagementServices
Partnership
Management Services Agreement
Additional ConsiderationsRestructuring to Create QBI
59
Specified
Services
Partnership
Management
Services
Partnership
Total Partner
Allocations
Specified
Services
Partnership
Management
Services
Partnership
Total Partner
Allocations
Gross Revenue from Services 50,000,000 0 50,000,000 Gross Revenue from Services 50,000,000 15,000,000 65,000,000
Less: Operating Expenses (20,000,000) 0 (20,000,000) Less: Operating Expenses (20,000,000) (10,000,000) (30,000,000)
Less: Internal Mgmt Exp (10,000,000) 0 (10,000,000) Less: Internal Mgmt Exp (15,000,000) 0 (15,000,000)
Operating Profit 20,000,000 - 20,000,000 Operating Profit 15,000,000 5,000,000 20,000,000
Section 199A Deduction - - - Section 199A Deduction - (1,000,000) (1,000,000)
Net Taxable INCome 20,000,000 - 20,000,000 Net Taxable INCome 15,000,000 4,000,000 19,000,000
Federal Effective Tax Rate 37% 37% 37% Federal Effective Tax Rate 37% 37% 37%
Partner Tax Liability 7,400,000 - 7,400,000 Partner Tax Liability 5,550,000 1,480,000 7,030,000
Net Tax Savings 370,000
Additional ConsiderationsRestructuring to Create QBI
Have we successfully created QBI?
60
➢ Repeal of deduction for cooperative dividends
➢ Enactment of deduction for qualified production activities
➢ Modification of capital gain QBI exclusion
Additional ConsiderationsTechnical Corrections Bill
61
➢ As originally enacted taxpayers were entitled to a 20 percent deduction of all
cooperative dividends
➢ As originally enacted, the cooperative dividend deduction created an un-level
playing field in the agricultural industries, the so-called “grain glitch”
➢ Additionally, the deduction for cooperative dividends created a potential
opportunity for specified services businesses to convert to a cooperative
structure to maximize potential section 199A benefits
➢ In order to correct for the grain glitch, the technical corrections bill eliminated
the deduction for cooperative dividends and added new section 199A(g)
➢ The technical corrections bill eliminates the potential specified services
cooperative planning opportunity
Additional ConsiderationsRepeal of Deduction for Cooperative Dividends
62
➢ As part of correcting the “grain glitch”, section 199A(g) creates a new
deduction for agricultural and horticultural cooperatives
➢ The deduction is based on qualified production activities and incorporates
concepts from former section 199
➢ Eligible cooperatives are entitled to a deduction equal to 9 percent of the lesser
of:
• Qualified production activities income for the year or
• The taxable income of the cooperative for the taxable year (calculated
without regard to certain patronage dividends, per-unit retain allocations,
and nonpatronage distributions).
➢ The deduction is subject a W-2 wages limitation.
Additional ConsiderationsDeduction for Qualified Production Activities
63
➢ Prior to the technical corrections bill, Section 199A(c)(3)(B) provided that the
certain investment type items, including any long-term capital gain, should not
be treated as QBI
➢ This raises the question: Is gain recognized on the sale of trade or business
property “investment type” gain? Possible exclusion of section 1231 gain or
capital gain on the sale of an operating business?
➢ The technical corrections bill deleted the words “investment type”
➢ Is this change sufficient to prevent inclusion of section 1231 gain as QBI?
Additional ConsiderationsModification of Capital Gain QBI Exclusion
64
Thank You!
65
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