The new QBI deduction is finally clearer

By Tony Nitti, CPA

QBI deduction
Image by ISCATEL57/iStock

New Sec. 199A, enacted by P.L. 115-97, known as the Tax Cuts and Jobs Act (TCJA), provides taxpayers a deduction of up to 20% of qualified business income (QBI) earned from a business operated as a sole proprietorship or through a partnership, S corporation, trust, or estate. For business owners with taxable income in excess of $415,000 (for married taxpayers filing jointly; $207,500 for all other taxpayers), no deduction is allowed against income earned in a specified service trade or business (SSTB). In addition, when the owner's taxable income from any trade or business exceeds those same thresholds, the deduction is limited to the greater of:

  • 50% of the owner's share of the W-2 wages paid by the business, or
  • 25% of the owner's share of the W-2 wages paid by the business, plus 2.5% of the unadjusted basis immediately after acquisition (UBIA) of qualified property.

Any initial excitement business owners felt about the birth of Sec. 199A was tempered, however, as questions arose as to the types of businesses that qualified for the deduction and how the various limitations would be interpreted and applied (see "Understanding the New Sec. 199A Business Income Deduction," The Tax Adviser, April 2018). Thankfully, on Aug. 8, 2018, the IRS released proposed regulations (REG-107892-18) that address many of the biggest unknowns that have plagued the provision since its enactment, including the following:


The statute defines an SSTB, in part, as "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 one or more of the owners or employees."

Given the vague nature of the prohibited fields — to say nothing of the exceedingly broad scope of the finishing catch-all — practitioners and business owners alike wondered if any service business would escape the clutches of the SSTB designation.

The proposed regulations clear up much of the confusion by providing detailed examples of who is — and who isn't — in each of the separately delineated service fields. For example, while a doctor, nurse, or dentist is in the field of health, someone who merely endeavors to improve the overall well-being of a customer but is not in a medical services field — e.g., a personal trainer or the owner of a health club — is not in the field of health. Also receiving good news were banks, real estate brokers, and property managers, who were also specifically excepted. In many ways, the descriptions and examples borrow from previous temporary regulations issued under Sec. 448, which contain a nearly identical list of businesses defining a "personal service corporation" for accounting method and tax rate purposes.

More importantly, the proposed regulations greatly narrow the scope of the catch-all, explaining that a business will be treated as having as its principal asset the skill or reputation of its owners or employees only if the business receives income for:

  • Endorsing products or services;
  • The use of the taxpayer's image, likeness, name, signature, voice, or trademark; or
  • Appearing at an event or on radio, television, or another media format.

This will come as welcome relief to many high-income famous figures whose reputation is the clear driver of their business; as an example in the regulations illustrates, a famous chef who both owns restaurants and endorses a line of cookware will be barred from claiming the deduction only against the endorsement income, even though the chef's reputation is likely the restaurants' principal asset.

The proposed regulations also provide a de minimis exception whereby, if a business has gross revenue of less than $25 million, as long as the revenue attributable to SSTB-type services is less than 10% of the total revenue, that activity will be ignored and none of the business will be treated as an SSTB. A similar rule is provided for businesses with gross revenue in excess of $25 million and SSTB revenue less than 5% of the total.


As a general rule, a business owner must determine the Sec. 199A deduction and apply the appropriate limitations for each separate trade or business. The proposed regulations recognize, however, that it is not uncommon for a taxpayer to conduct one trade or business through multiple entities. As a result, the regulations allow a business owner to elect to aggregate commonly controlled businesses and combine their QBI, W-2 wages, and UBIA of assets, provided they share at least two of the following three characteristics:

  • The businesses offer the same products or services, or customarily offer the same types of products or services together;
  • The businesses share facilities or centralized business elements; or
  • The businesses are operated in coordination with, or reliance upon, one or more of the businesses in the aggregated group.

"Common control" is defined as ownership of 50% or more of each business by the same person or group of people. Once a taxpayer chooses to group businesses together, those businesses must continue to be aggregated until they no longer meet the above test.


Because the statutory language insisted that the deduction — and limitations — be applied on a business-by-business basis, many common business structures suddenly became problematic.

To illustrate, consider a chain of hardware stores for which the owner establishes a separate company in each state in which the business operates. All of the payroll expenses, however, are housed in a centralized administrative entity in the owner's home state. Because the operating entities have no W-2 wages of their own, there was concern that the deduction related to each business, save for the administrative entity, would be zero.

The proposed regulations ameliorate this concern by allowing W-2 wages paid by a taxpayer on behalf of a common law employer to be allocated to that common law employer. Thus, in the example above, the W-2 wages of the administrative entity would be allocated among the operating businesses based on the wages attributable to the common law employees of each business. This same rule will allow a business to receive an allocation of the W-2 wages paid through a professional employer organization.


Perhaps the biggest complaint before issuance of the proposed regulations was the perceived potential for abuse. Employees, who are ineligible to claim the deduction against wage income, would reinvent themselves as independent contractors to claim the 20% deduction, the theory went. And owners of an SSTB — think partners in a law firm — would seek to "strip out" earnings of their SSTBs and move them to a qualifying business by establishing a commonly controlled self-rental entity or administrative company.

The proposed regulations effectively close both of these potential loopholes, however. In the case of the former, any employee who becomes an independent contractor but continues to provide substantially the same services to his or her former employer will be presumed to continue to be an employee solely for the purposes of Sec. 199A and thus will not be entitled to the deduction. The enterprising lawyers will be similarly denied. The proposed regulations provide that if a business rents property or provides services to a commonly controlled SSTB, the rental or service business will itself be treated as an SSTB, and its income will no longer be eligible for the deduction.

The proposed regulations represent a critical step forward in the evolution of Sec. 199A. They provide much-needed clarity in several key areas while greatly expanding the universe of business owners eligible to claim the deduction.

Tony Nitti, CPA, MST, is a partner with WithumSmith+Brown in Aspen, Colo.

To comment on this article or to suggest an idea for another article, contact Paul Bonner, a JofA senior editor, at or 919-402-4434.

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