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How the New QBI Deduction Can Benefit Service Providers

One of the biggest benefits of Tax Reform allows owners of pass-through businesses, such as S corporations, partnerships and sole proprietors, the opportunity to treat 20% of their profit this year as tax-free income. It is called the Qualified Business Income (QBI) Deduction.

Just last week, Forbes published an article titled, "New Tax Deduction 199A Will be Lost for Many in 2018." Our goal is to make sure none of our clients miss out on this opportunity.

Unfortunately, Congress chose to exclude "specified service businesses" from this benefit. Don't despair quite yet, however. Congress did leave open a window whereby owners of service businesses can still get relief with advance planning and taking timely action.

What Is a Specified Service Business?

While the Tax Reform bill adopted a fairly general and broad reference to what is a specified service business, we do know it includes:
  • Medical practices
  • Law firms
  • CPA firms
  • Athletes, actors and performers
  • Financial and brokerage services
  • Investment management and day-trading
The bill also included a catch-all provision for businesses whereby the principal asset is the reputation and skill of one of its owners or employees.

Determining whether a taxpayer is engaged in a specified service business is a critical step because income from such a business isn't QBI.

The Taxable Income Exception

Income from a specified service business can be treated as QBI only if the owner's taxable income is at or below an annually adjusted threshold. For 2018, the threshold $315,000 for an owner filing a joint tax return, and $157,500 for all others. The amount of specified service business income that can be treated as QBI phases out when taxable income exceeds the threshold amount and is fully phased out when taxable income exceeds $415,000 on a joint tax return ($207,500 for all other filers).

So, for 2018, owners with joint taxable income of $415,000 or more ($207,500 for all other filers) can't treat any income from a specified service business as QBI.

Reducing Taxable Income to Stay under the Threshold Amount

Business owners with taxable income near or slightly over the threshold amounts should consider traditional planning techniques to decrease their taxable income. These can include the following:
  • Bunching income into one year and deductions into the next so that the QBI Deduction can be claimed every other year.
  • Claiming Section 179 and Bonus Depreciation on any applicable assets.
  • Making or increasing deductible retirement plan contributions.
  • Making deductible HSA and IRA contributions.
  • Contributing to donor-advised funds or bunching charitable contributions into one year.
  • Monitoring capital gains and selling sufficient loss assets by year-end to offset them.
  • Gifting income-producing assets to children (but beware of kiddie tax rules).
  • Paying holiday or year-end bonuses to employees by December 31st.

If taxable income is sufficiently reduced, some or all of the net income from a specified service business could qualify for the QBI deduction.

If you are an owner of a specified service business, we can help you assess your qualification for the new QBI Deduction and develop a plan to maximize your tax savings. Don't miss out!

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