- Capital gains and losses
- 1231 gains and losses
- Dividends and dividend equivalents
- Interest income not connected with the trade or business
- Various income from controlled foreign corporations
- Guaranteed payment income received by the business owner
- Wage and salary income received by the business owner
- Other payments received by the business owner for services provided to the business
A 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, 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, or which involves the performance of services that consist of investing and investment management, trading, or dealing in securities, partnership interests, or commodities.
The legislation specifies one income threshold for SSTBs and one threshold for non-SSTBs. The threshold for SSTBs is more restrictive and always results in a deduction equal or less than the non-SSTB deduction. The thresholds are as follows:
SSTB – Phased out of the deduction for business owner income between $157,500 to $207,500 for single taxpayers and $315,000 to $415,000 for married filing joint taxpayers.
NON-SSTB – These businesses are not subject to direct phase-out but are subject to a wage and capital limitation based on the owner’s proportionate share of the business’s total W2 wages and capital property (defined under IRC 167). This limitation is phased in between $157,500 to $207,500 for singles and $315,000 to $415,000 for married filing joint. For taxpayers over the income threshold and fully subject to the limitation the amount of the QBI deduction cannot exceed the greater of:
- 50% of the owner’s share of W-2 wages; or
- The sum of 25% of the owner’s share of W-2 wages plus the owner’s share of 2.5% of the unadjusted basis immediately after acquisition (UBIA) of all “qualified property” in the business
- A trade or business in which a person receives fees, compensation, or other income for endorsing products or services,
- A trade or business in which a person licenses or receives fees, compensation or other income for the use of an individual’s image, likeness, name, signature, voice, trademark, or any other symbols associated with the individual’s identity, or
- Receiving fees, compensation, or other income for appearing at an event or on radio, television, or another media format.
In addition, the Proposed Regulations provide much-needed clarity around the meaning of the term SSTB, separately addressing each of the following listed services:
- Actuarial Service
- Performing Arts
- Financial Services
- Investment Banking
- Dealing in Securities, Commodities, and Partnership Interests
A specific discussion of each of these definitions is beyond the scope of this article but here are a couple industry samples:
Health: Medical services provided by individuals such as physicians, pharmacists, nurses, dentists, veterinarians, physical therapists, psychologists and other similar healthcare professionals performing services in their capacity as such who provide medical services directly to a patient (service recipient). The performance of services in the field of health does not include the provision of services not directly related to a medical services field, even though the services provided may purportedly relate to the health of the service recipient. For example, the performance of services in the field of health does not include the operation of health clubs or health spas that provide physical exercise or conditioning to their customers, payment processing, or the research, testing, and manufacture and/or sales of pharmaceuticals or medical devices.
Consulting: The provision of professional advice and counsel to clients to assist the client in achieving goals and solving problems. Consulting includes providing advice and counsel regarding advocacy with the intention of influencing decisions made by a government or governmental agency and all attempts to influence legislators and other government officials on behalf of a client by lobbyists and other similar professionals performing services in their capacity as such. The performance of services in the field of consulting does not include sales or economically similar services or the provision of training and educational courses. The determination of whether a person’s services are sales or economically similar services is based on all the facts and circumstances of that person’s business which may include, for example, the manner in which the taxpayer is compensated for the services provided. Performance of services in the field of consulting does not include the performance of consulting services embedded in, or ancillary to, the sale of goods or performance of services on behalf of a trade or business that is otherwise not an SSTB (such as typical services provided by a building contractor) if there is no separate payment for the consulting services.
Brokerage: Services in which a person arranges transactions between a buyer and a seller with respect to securities for a commission or fee. This includes services provided by stock brokers and other similar professionals, but does not include services provided by real estate agents and brokers, or insurance agents and brokers.
The proposed regulation has added a new de-minimis rule for trades and businesses with only a small portion of activities that are SSTB related. A trade or business (determined before the application of the aggregation rules) is not an SSTB if the trade or business has gross receipts of $25 million or less in a taxable year and less than 10 percent of the gross receipts of the trade or business is attributable to the performance of services in an SSTB. For trades or business with gross receipts greater than $25 million in a taxable year, a trade or business is not an SSTB if less than 5 percent of the gross receipts of the trade or business are attributable to the performance of services in an SSTB.
The proposed regulations provide that, in determining W-2 wages, a person may take into account any W-2 wages paid by another person and reported by the other person on Forms W-2 with the other person as the employer listed in Box c of the Forms W-2, provided that the W-2 wages were paid to common law employees or officers of the person for employment by the person. Persons that pay and report W-2 wages on behalf of, or with respect to, others can include certified professional employer organizations, statutory employers, and agents
Section 751 ordinary income is taken into account for purposes of computing QBI.
Section 481 adjustments (whether positive or negative) are generally included in QBI but only if the adjustment arises in taxable years ending after December 31, 2017.
Previously disallowed losses or deductions allowed in the taxable year are taken into account for purposes of computing QBI unless the losses or deductions were from taxable years ending before January 1, 2018.
A deduction for a net operating loss is not taken into account in computing QBI. However, to the extent that the net operating loss is disallowed under Section 461(l), the net operating loss is taken into account for purposes of computing QBI.
QBI does not include any item of short-term capital gain, short-term capital loss, long-term capital gain, or long-term capital loss, including any item treated as one of such items, such as gains or losses under Section 1231 which are treated as capital gains or losses.
QBI does not include any interest income other than interest income which is properly allocable to a trade or business. However, interest income attributable to an investment of working capital, reserves, or similar accounts is not properly allocable to a trade or business.
- Each activity to be aggregated must be considered a trade or business and reported on returns with the same taxable year.
- The same person, or group of persons, directly or indirectly, owns 50 percent or more of each of the trades or businesses to be aggregated for the majority of the taxable year in which the items attributable to each trade or business are included in income.
- None of the aggregated trades or businesses are an SSTB.
- The trades or businesses meet at least two of three factors, which demonstrate that the businesses are in fact part of a larger, integrated trade or business:
- The trades or businesses provide products and services that are the same (for example, a restaurant and a food truck) or they provide products and services that are customarily provided together (for example, a gas station and a car wash).
- The trades or businesses share facilities or share significant centralized business elements (for example, common personnel, accounting, legal, manufacturing, purchasing, human resources, or information technology resources).
- The trades or businesses are operated in coordination with, or reliance on, other businesses in the aggregated group (for example, supply chain interdependencies).
For each taxable year, individuals must attach a statement to their returns identifying each aggregated trade or business. The statement must contain (A) a description of each trade or business; (B) the name and EIN of each entity in which a trade or business is operated; (C) information identifying any trade or business that was formed, ceased operations, was acquired, or was disposed of during the taxable year; and (D) such other information as the Commissioner may require in forms, instructions, or other published guidance. If an individual fails to attach the required statement, the Commissioner may disaggregate the individual’s trades or businesses.
- Each owner’s allocable share of QBI, W-2 wages, and UBIA of qualified property attributable to each such trade or business.
- Whether any of the trades or businesses is an SSTB.
- Any QBI, W-2 wages, UBIA of qualified property, or SSTB determinations, reported to it by any RPE in which the RPE owns a direct or indirect interest.