Explaining the Specified Service Trade or Business Exclusion from the New Section 199A Deduction

Introduction

The new Section 199A pass-through deduction identifies certain business fields that may not utilize the deduction if the owner’s income is above certain thresholds or phase-outs. These businesses are identified in the new law as Specified Service Trade or Businesses.

What is a Specified Service Trade or Business?

The new Section 199A defines a Specified Service Trade or Business as:

v 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 1 or more of its employees or owners,

• any banking, insurance, financing, leasing, investing, or similar business,

• any farming business (including the business of raising or harvesting trees),

• any business involving the production or extraction of products of a character with respect to which a deduction is allowable under section 613 or 613A,

• any business of operating a hotel, motel, restaurant, or similar business, and

• any business which involves the performance of services that consist of investing and investment management, trading, or dealing in securities, partnership interests, or commodities.

It is important to note that the new law specifically excludes architecture and engineering from being classified as a Specified Service Trade or Business. Therefore, business owners in those fields are eligible for the pass-through deduction regardless of the income thresholds discussed below.

What are the Income Thresholds and Phase-Outs?

For 2018, specified service taxpayers with income below $157,500 (or $315,000 if married filing joint) will be eligible to claim the full 20% deduction. Specified service taxpayers that are above that threshold, but still have income below $207,500 (or $415,000 if married filing joint) will be eligible for a partial deduction. These figures will be adjusted for inflation moving forward in future years.

Confused by the Specified Service Trade or Business Definition?

If you are confused by the new law’s definition of a Specified Service Trade or Business you are not alone. These definitions are very vague and many service fields do not perfectly fit the definition as it is currently written. For example, is the hair stylist for a famous musician in the field of performing arts? Congress has tasked the Tax Commissioner with drafting regulations for the new Section 199A, which will hopefully bring clarity to this issue. Be sure to consult with a qualified tax adviser when determining your eligibility for this new deduction, especially if you are unsure if you qualify.

Disclaimer: Reading this blog post does not create an attorney-client relationship. This post should not be used as a substitute for the advice of a competent attorney or tax professional admitted or authorized to practice in your jurisdiction.