Service Providers Treated Unequally for Valuable New Pass-Through Deduction
The Tax Cuts and Jobs Act, enacted in December, made sweeping changes to the United States tax system. One major change is the new deduction for Qualified Business Income (QBI). The QBI deduction allows taxpayers to deduct 20% of the income they make from pass-through trades or businesses (S Corporations, Partnerships, and Trusts).
The QBI deduction is fully available for any type of service provider who makes up to $157,500 ($315,000 for married filers). For those taxpayers who make more than that, the legislation was clear that the QBI deduction is prohibited if they are in the legal, accounting, performing arts, financial services, or health fields. Although certain threshold tests exist (to read more about these tests, see our previous blog here), other service providers such as architects and engineers are still allowed to take the QBI deduction. However, a big gray area remained.
The legislation prohibited one more group of taxpayers in a catchall provision. This provision stated that if the business’s principal asset was the “reputation or skill” of its employees or owners, then they were prohibited as well. The legislation left it up the IRS to define this “reputation or skill” clause.
In proposed regulations recently released, the IRS defines this catchall category very narrowly. The only activities included in this catchall is income from:
- Endorsing products or services;
- Licensing income for using an individual’s image, likeness, name, signature, or other trademark; and
- Appearance fees for performing on television, social media, or other forums.
Income from these activities is prohibited in the same manner as income from accounting, legal, and health services. This narrow definition is good news for individuals who feared being caught up in the catchall prohibition. However, this proposed definition could limit the IRS’s ability to prevent high-income service providers from re-classifying themselves outside of this narrow list of services by slightly re-structuring their offerings.
To learn more about how the new QBI deduction, and these new proposed rules, and to discuss how these rules may affect you, please contact us here or call 513-241-8313.