Qualified Business for Purposes of the Qualified Business Income Deduction
August 16, 2018
Back in December 2017, the President signed into law the 2017 Tax Cuts and Jobs Act amid much fanfare. Included in that legislation was the highly anticipated provision for a Qualified Business Income Deduction (QBID), which allows owners of sole proprietorships, S corporations or partnerships to deduct up to 20% of certain income earned by a business. Despite totaling 23 pages, that provision left many, many unanswered questions. Since then, we waited for Treasury regulations that could put some meat on the bones. Such guidance came in the form of proposed regulations, which were issued on August 8. Although proposed, a taxpayer may rely on them even though they are not final. The regulations totaled 184 pages, plus another 8 pages that cover methods for calculating wages for the deduction. Needless to say, the regulations cover a myriad of topics relating to the deduction. This article focuses on what most consider to be the most important topic: the definition of a qualifying business.

Trade or Business
A taxpayer must be engaged in a “qualified trade or business” to claim the QBID. Such a business is any trade or business other than a trade or business of performing services as an employee and a “specified service trade or business” (SSTB). Also, guaranteed payments paid to a partner for services to the business are excluded.

A trade or business for the QBID is defined using the traditional tax definition of the phrase under Code Section 162. A taxpayer must be involved in the activity “with continuity and regularity” (and not “merely sporadically”); and the taxpayer’s primary purpose for engaging in the activity must be for income or profit. As a result, whether an activity is a trade or business is a factual decision. Every business must be able to separately establish that it rises to the level of a Section 162 trade or business and that could present problems for lessors. There is not an exception for real estate professionals as under passive loss rules, meaning even those individuals will have to establish that the rentals satisfy Section 162.

Although there are aggregation rules permitting the combination of separate businesses, the regulations do not adopt the activity-based measurement system used for passive loss limitation purposes. So, if businesses used for the QBID do not match up with activities used for passive loss purposes, managing suspended losses will undoubtedly be more complex. More importantly, grouping for passive loss purposes does not control in determining trades or businesses for the QBID.

For QBID purposes, the rental or licensing of property to a related trade or business is treated as a trade or business if the rental or licensing and the other business are commonly controlled. Aggregation, addressed later in this article, may then be applied.

A SSTB is 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, any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its owners or employees, or investing and investment management, trading, or dealing in securities, partnership interests, or commodities.

However, even if a business is an SSTB, it may fully or partially qualify for the QBID, if the taxpayer’s taxable income is otherwise below a certain threshold. Such computations are beyond the scope of this article.

If a business both sells product and performs services, a de minimis rule is available. If a trade or business has gross receipts of $25M or less for the tax year, it will not be treated as a SSTB if less than 10% of the gross receipts of the business are attributable to the performance of services in one of the disqualified fields. If gross receipts exceed $25M, the 10% threshold is replaced with 5%.

Disqualified Fields under the SSTB Rules
The regulations then speak to the various types of disqualified fields.


Disqualified: Doctors, pharmacists, nurses, dentists, veterinarians, physical therapists, psychologists and other similar healthcare professionals who provide services directly to a patient

Not disqualified: People who provide services that may improve the health of the recipient such as the operator of a health club or spa or the research, testing and sale of pharmaceuticals or medical devices

Question: Is a radiologist who reads and interprets test results but doesn’t treat patients a health professional for this purpose? Stay tuned for further court cases and rulings that will fill such voids.

Disqualified: Lawyers, paralegals, legal arbitrators and mediators

Not disqualified: Those that provide services not unique to law, like printing, delivery services or stenography services

Disqualified: Accountants, (licensed as a CPA or not), enrolled agents, return preparers, financial auditors, bookkeepers and similar

Not disqualified: Payment processing and billing analysis

Actuarial Science
Disqualified: Actuaries and similar professionals

Not disqualified: Analysts, economists, mathematicians and statisticians not engaged in analyzing or assessing the financial costs of risk or uncertainty of events

Performing Arts
Disqualified: Actors, singers, musicians, entertainers, directors and similar professionals who provide services that lead to the creation of performing arts

Not disqualified: Those who broadcast or disseminate video or audio to the public, and those who maintain or operate equipment or facilities used in the performing arts, such as a company that provides lighting services for performances

Disqualified: Those who provide professional advice and counsel to clients to assist in achieving goals and solving problems, including government lobbyists

Not disqualified: Sales people and those who provide training or educational courses. Also excluded are any services ancillary to the sale of goods in a business that is not a SSTB (such as a building contractor) as long as there is no separate fee for the consulting services.

Disqualified: Athletes, coaches, team managers

Not disqualified: Broadcasters or those who maintain or operate equipment used in an athletic event

Financial Services
Disqualified: Those who provide financial services to clients, including managing wealth, developing retirement or transition plans, M&A advisory and valuation work. In other words, financial advisors, investment bankers, wealth planners and retirement advisors.

Not disqualified: Banking

Brokerage Services
Disqualified: A broker who arranges transactions between a buyer and a seller with respect to securities; i.e., a stock broker

Not disqualified: Real estate agents and brokers; insurance agents or brokers

Investment Management
Disqualified: Those who receive fees for providing investing, asset management or investment management services

Not disqualified: Real estate management

Disqualified: Those who trade in securities, commodities or partnership interests

Not disqualified: A farmer or manufacturer who engages in hedging transactions as part of their trade or business

The Reputation or Skill of One or More of Its Owners or Employees. This is a category that received a taxpayer friendly definition.

Disqualified: 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. So, a famous chef’s restaurant is not disqualified, no matter what the reputation of the chef. But if he receives endorsements or has income from licensing, such income is disqualified.

Business Splitting Not Allowed
After the QBID was enacted, taxpayers considered splitting a qualified business out of an SSTB, and using an intercompany charge to the SSTB. Treasury thought of that by stating that an SSTB includes any trade or business that provides 80% or more of its property or services to an SSTB, if the two businesses share 50% or more common ownership. If the percentage is below 80%, only the income earned from the SSTB is treated as income earned in an SSTB.

Some taxpayers may believe that moving some ownership to related parties may keep common ownership below 50%. The regulations also anticipated that by requiring the application of certain attribution rules between related parties, like family members.

Income Earned by Employees Turned Independent Contractors
Such sole proprietors will be scrutinized. The general employee vs. independent contractors are to apply to determine the correct status of a contractor. If the contractor was an employee and is providing substantially the same services to the former employer, it is presumed that it is an employee. Such a presumption can be rebutted.

Aggregation is permitted, not required, when the following requirements are met:

1) The same person or group of persons (not necessarily including the electing taxpayer) directly or indirectly own 50% or more for the majority of a tax year of each business to be aggregated. For S corporations, the ownership is measured by reference to the outstanding stock; for partnerships, it is measured by reference to the interest in capital or profits in the partnership. There are attribution rules for these purposes. The businesses must share the same tax year.

2) None of the businesses may be SSTBs.

3) The businesses to be aggregated must satisfy two of the following three factors:

A. They must provide products or services that are the same or customarily offered together;
B.  They must share facilities or significant centralized business elements, such as personnel, accounting, legal, manufacturing, purchasing, human resources or information technology resources; or
C. The businesses are operated in coordination with, or reliance upon, one or more of the businesses in the aggregated group.

Aggregation is done at the owner level. Thus, one owner of a business may elect to aggregate that business with another business while a second owner may not. When businesses are tiered in a tiered structure, downstream pass-through entities will be required to provide unaggregated information to owners.

The rules explained above merely scratch the surface of all of the rules relating to the QBID. There are many other rules relating to limitations, phaseouts, calculations, loss carryovers and much more. Your Miller Cooper tax professional stands ready to guide you through this labyrinth of QBID rules.

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