QBI: SSTBSChapter 2 pp. 47 - 81

2019 National IncomeTax Workbook™

Chapter 2 Intro

Determine whether atrade or business is an SSTB

SSTB Limitations:Phase in rangeDe minimis ruleAntiabuse rule Employee presumptionRebut the presumption

First Half Second Half

p. 47

2

Definition Of A Service Trade Or Business pg. 48

I.R.C. § 199A(d)(2) defines an SSTB as any trade or business involving the performance of services in the following fields

3

Definition of SSTB –I.R.C. 199A(d)(2)

p. 48

Health LawAccounting

ActuarialPerformingArts

Consulting

AthleticsFinancial

BrokeragePrinciple asset-Reputation

4

Definition of SSTB – I.R.C. 199A(d)(2)B continued:

Investing

Trading

Engineers Architecture

p. 48

Investment Management

Dealing in securities, partnership interests, or commodities

5

Hedging

Law Change Final Regulations:

Income, deduction, gain, or loss from a hedging transaction entered into in the normal course of business IS included in income from the trade or business

p. 49

6

I.R.C. 448 Guidancep. 49

• Conference Report references the definition of SSTBs in Reg. 1.448. But 199A notlimited by 448.

• Can look to 448 for guidance.

• I.R.C. 448 prohibits certain taxpayersfrom using the cash method. Qualified personal service corporations are exempt from this prohibition.

7

Guidance – definition of an SSTB

I.R.C. 1202

I.R.C. 448

I.R.C. 199A

p. 49

8

Guidance 448 - distinctionp. 49

199A

448

Trade or business of performing services involving one of the listed fields

Performance of services themselves

9

Health p. 49

In Out

Not directly related to medical service, i.e.:health clubspayment processingresearch, testing

?

Grey?Discuss

Medical service by physicians, nurses, Dentists, and other similarhealth care professionals

10

Health Care Facilities p. 50

Medical and health services

Unrelated to healthcare:housing, meals, laundry

?

Facts and Circumstances! 11

Example 2.1 Residential CareFacility p. 50

Housing, meals, laundry, entertainment, etc. No medical

contracts

Bills residents directly

Health?

Green AcresNursing Home

Health careorganizations

12

Example 2.2 Surgical Centersp. 50

contracts

Provides facilities for outpatient surgery Bills patient for facility costs only

Bills patients for medical costs

Health?

Meadow LakesSurgical Center

Professional MedicalOrganizations

13

Example 2.3 - Pharmacists

Rural Healthcare Brett – pharmacist

Only 1 pharmacist reviewing & filling ordersNeeds help occasionally make recommendations

inoculations drug interactions

contracts

Brett -Health?

p. 51

RuralHealthcare

Brettpharmacist

14

Proximity to Patients p. 51

Final regulations remove the requirement that medical services be provided directly to patients.

Radiologist - HEALTH

Patient DoctorPersonal Contact

15

Example 2.4 - Lab servicesp. 51-52

Tests to detect medical conditionDo not diagnose or treatNot healthcare professionals

Send test results

Do not inform Zoya of diagnosis or treatment

Health?

ZoyaDevelopment

HealthcareProfessionals

16

Lawp. 52

In Grey? Out Lawyers PrintersParalegals Delivery services Arbitrators Stenography Mediators Services that do not Similar professions require skills unique

to the field of law

17

Accounting p. 52

In Grey? Out Accountants Billing processingEnrolled agents Depends onReturn preparers facts and circumstancesFinancial Advisors Not limited to CPA, butcommon understanding of accounting

18

Actuarial Sciencep. 52

In Grey? OutActuaries Analysist Similar professionals Economists

Mathematicians Statisticians Mere employment of actuary does not meanbusiness is actuarialscience

19

Performing Artsp. 53

In Grey? OutActors Do not require arts skillsSingers - maintenance, operationMusicians of facilities Entertainers BroadcastersDirectors Managers, promotorsWriter- song ScreenplaySimilar professionals

20

Example 2.5 - Royaltiesp. 53

Writes and recordsa song

Song is licensed or streamed

Song playedpublicly

Performing Arts?

AriSinger &Songwriter

21

Example 2.6 Movie profitsp. 53

Performing Arts?

PassiveOwner

Services

Performing Arts?

BrendaMovie LLCFilm productioncompany

22

Consultingp. 54

In Grey? OutProfessional advice & Salescounsel – to help Training & educationachieve goals & solve Consulting embedded inproblems sale of goods, i.e.:Advocacy – building contractor

government agencies Influence legislators Look at how

compensated!23

Example 2.7 Ancillary consultingp. 54

Consulting – setup, operation, & repair

Sale of equipment

Consulting?

Micro ComputersInc.

Customerthen

24

Example 2.8 Personnel consultingp. 54

Destinee Personnel Studies clients org charts and makesrecommendations

Does not provide workers. Comp not affected by clientsdecision

Consulting?25

Example 2.9 Temporary Staffingp. 54

Eva owns a temporary staffing firm – software consulting

Eva – reviews resumes Pays Eva a fixed and refers candidates fee worker hired

Consulting?

Clients need temporary workers with experience in various software

26

Example 2.10 Licensing Softwarep. 55

Evaluates clients’ software needsAdvises client on products he licensesHelps to implement software

Consulting?

Felipe licenses Computer softwareto clients

Client pays aFlat price

27

Consulting

Changes in final regulations:• Architecture and engineering not consulting • Provided in conjunction with goods and

services is a question of facts and circumstances

• If separately billed, consulting not in conjunction with goods and services

p. 55

28

Example 2.11 Economic Analysisp. 55

Business ActivitiesEntering new businesses Business in different areasOverall economic trends

Consulting?

Anna –Analysis

& Forecasts

Clientsrecommendations

29

Example 2.12 Data Processingp. 55

Recommends design and implementation of systemsNo add’l services provided

Consulting?

Erin – determines clients’ data processing needs

Clientsrecommendations

30

Example 2.13 Business Management p. 56

Advises on changes to management and businessstructure Consulting?

Floyd determinesManagement & Business structure needs

Clientsrecommendations

31

Example 2.14 Financial planningp. 56

Provides advice on budgets, strategies, etc. Consulting?

Rodney studies financial situation

ClientsAssists clients in making decisions

32

Example 2.15 Securities andCommodities p. 56

Sarah purchases orders through stock exchange

Compensation based on orders placed

Consulting?

ClientsSara provides economic analysis and forecasts

Wall Street

33

Example 2.16 Data Processingp. 56

Client orders data processing equipthru Jim

Jim’s compensation based on equipment orders

Consulting?

ClientsJim makesrecommendations ondesign and implementation of dataprocessing systems

34

Example 2.17 Personnelp. 56

Studies business and refers job applicants

Compensates based on job applicants who accept employment

Consulting?

Pierre assistsbusinesses meet personnel needs

Clients

35

Example 2.18 Personnelp. 56

Finds job openings forhis clients

Compensates based on finding a job

Consulting?

Pierre assists workers find jobs

workers

36

Example 2.19 Advertising p. 57

Client purchases advertising thru Susan, based on her recommendations

Compensationbased on advertisingorders

Consulting?

Susan assists clients in making decisionson advertising

Client

37

Example 2.20 Insurance p. 57

Recommends various insurance products

Compensation based on insurance purchases made by client

Consulting?

David studiesclients insurance needs

Client

38

Consulting - RECAPp. 57

Taxpayer Client

Follow the money. What is the compensation primarily for?

Advice = Consulting

Other product or service? = Not consulting, even if some advice provided as well

39

Athleticsp. 57- 58

In Grey? OutPerformance of Services not requiringservices by individuals skills unique to who participate in athletic athletic competitioncompetition – maintenance Athletes broadcastCoaches concessions Team managersSports clubs

40

Example 2.21- Sports Teams p. 58

Sells broadcasting rights

Coreypartner

Income Athletics? Treat as SSTB?

K & L Partnersowns a professional sports team

Broadcasting LLC

41

Financial Services p. 58

In Grey? OutManaging wealth Taking deposits Finances Making loansRetirement plans Banking Transition plans Insurance (?) Advisory agent may do Financial capital financial servicesArranging lending trans.

42

Example 2.22 Franchisingp. 58

Financial planning Office #1

Financial planning Office #2

Franchising:Right to use name,Intellectual property, & marketing

Financial Services?

Hector

43

Brokerage Services p. 59

In Grey? OutArranges transactions Not transactions betweenbetween buyer and real estate agents and seller with respect to brokers or insurancesecurities agents and brokers Stock broker

But, what is a security?44

Security definedp. 59

I.R.C. 475 defines security:• Stock in corporation• Partnership interest in widely held or publicly

traded partnership• Note, bond, debenture • Interest rate currency • Option, forward contract, short position in

security But not hedges in a security

45

Example 2.23 Brokerage p. 59

Customer places orderCompensation basedon orders

Buy or sell

Brokerage?

John executes transactions for customers in securities

Client

Wall Street

46

Investingp. 59

In Grey? OutReceipt of fees for Directly managing realproviding investment propertyadvice Commission based sale

Banks -Investment on insurance policiesManagement, outsideDe minimis exception

47

Investing - Banksp. 60

Single trade or businessInvesting over de minimis (10%/5%)Entire business SSTB!

RPE - S Corp Bank – more than one trade or business can segregate SSTB business from non-SSTB business

48

Trading – securities, commoditiespartnership interests p. 60

Trading in securities,commodities or partnership interestsAll relevant facts and circumstances: Source & type of profit(own account or other) But, need to define

Securities, Commodities and Partnership Interests!

49

Securities p. 60

Definition of securities: • discussed earlier

Business of dealing in securities: • Regularly purchasing securities from and

selling securities to customers in the ordinarycourse of business

• Also: assume offset, assign, terminate position in securities

50

Securities - Loans

Originating loans not SSTB

Sale of loans is SSTB NOTE:

Temporary regs. said negligible sale OK. But final regs. removed negligible.

So any sale of loans could cause the business to beSSTB!

p. 60

51

Commodities - definition p. 60

Definition of Commodities• Commodity actively traded• Notional principal contract with respect to a

commodity• Derivative instrument in a commodity

NOT: position that is a hedge (clearly identified in books)

52

Commodities – Dealing p. 60

Business of dealing in commodities• Regularly purchasing commodities from and

selling commodities to customers in the ordinarycourse of business

• Regularly offering to enter into, assume, offset, assign, terminate a position

• Excludes qualified active sales

53

Qualified Active Sales p. 61

Sale of commodities in the active conduct of acommodities business as a producer, processor, merchant, or handler of commodities is OK.(Not held for speculation)

Conditions required:• Directly hold commodities • Directly incur substantial expenses • Significant activities

54

Partnership Interests p. 62

• Regularly purchasing partnership interests from and selling partnership interests to customers

• Regularly offering to enter into, assume, offset, assign, terminate positions in apartnership interest

55

Principal Asset – reputation orskill

Endorsing services

p. 62

Endorsing products

Use of image

Use of likeness

Appearing at eventOn the

radio

Appearingon TV

Use of name

Use of voice

56

Example 2.24 – Skill & reputation p. 62

Sales: ½ sale of bicycles½ bicycle repairs

8 employees,Including, Kalinda

Employees are highly skilled in the field

Is it an SSTB?

Mountain Cyclery S Corp owned by Kalinda

57

Example 2.25 endorsement feep. 63

Disregarded entity Disregarded entity

Lance – well know chef

500,000 fee for Use of name on

cookware SSTB?

restaurant restaurant

58

Example 2.26 PartnershipCompensation

p. 63

Partnership

Likeness Use of name

50% &Guaranteedpayment

SSTB?

Meryl -actress

Shoe company

partner partner

59

Questions?

60

Chapter 2 - Part 2

SSTB Limitations

p. 63

61

SSTB Limitation

The SSTB limitation may reduce or eliminate the QBI deduction for an SSTB Owner with taxable income above the phasein range.

p. 63

Above - NO QBI, W-2 Wages, UBIA can be used

Below - Limitation has no effect

Within - Limitation partially applies

62

SSTB (joint)

3 different calculations, depending on income

$421,400 W-2 & specified service limitations

Phasein period:Partial W-2 and specified service limitations

$321,400 Only limit is taxable income

p. 64

63

2019 Phasein Ranges p. 64

2018 2019Lower:Single 157,500 160,700Married Filing Separate 157,500 160,725Joint 315,000 321,400

Upper:Single 207,500 210,700Married Filing Separate 207,500 210,725Joint 415,000 421,400

64

Ex 2.27- Taxable Income Limit below the Threshold

P. 64

Lisa – Single.Doctor. Singlemember LLC

QBI 170, 000Wages 20,000UBIA 0Taxable Income 150,000

Below threshold – SSTB and W-2 limitations do not apply. Lesser:QBI x 20% (170,000 x 20%) = 34,000Taxable Income x 20% (150,000 x 20%) = 30,000

65

Form 8995 – Example 2.27 p. 65

• 2 new QBI forms for 20198995 – Simplified Computation8995-A - Regular Computation

• Required to be attached to return

66

SSTB Limitation

3 different calculations, depending on income

421,400 W-2 & SSTB

Phase in period:Partial W-2 and SSTB

321,400 Only limit is taxable income

p. 64

67

Treatment of SSTB NIB

TI before QBID at or below the threshold; SSTB is treated as QBI

TI, before QBID, exceeds the threshold and the phase-in range; SSTB is not a QUB and does not generate QBI, W-2 wages, or UBIA of qualified property

68

Treatment of SSTB NIB

TI before QBID exceeds the threshold but is within the phase-in range: SSTB is treated as a QBI but only the applicable percentage of QBI, W-2 wages and UBIA of qualified property are taken into account in determining QBID

69

Taxable Income in the PhaseinRange – Applicable % p. 66

Applicable percentage:

FORMULAS

MFJ 1 – (taxable income – 321,400)100,000

Single 1 – (taxable income – 160,700)50,000

70

Taxable income within thephasein range – Applicable % p. 66

321,400 381,400 421,400Taxable Income

60% 40%used for W-2 used for SSTBlimitation limitation

71

Example 2.28 Taxable income in phasein, Not an SSTB p. 66

FACTS: Ben & Carla Gomez - Joint returnTaxable income $381,400Ben S/H in Mega Games S Corp - NOT an SSTBMega Games: • Leases all equipment • W-2 wages 45,000• QBI - 306,400

72

How To Figure the Deduction NIB

QBU is reduced to The greater of 50% of wages or 25% of wages plus 2.5% of UBIA

73

Within the Phase-in Range pg. 14

TP must calculate the disallowance % using the following calculation

1- $381,400 - $321,400 = .40 = 40%$100,000

W 2 limit = 60%

Example 2.28 Taxable income in phasein Not SSTB - TEST p. 66

If TI below If TI above321,400 TI 381,400 421,400

QBI x 20% Wages x 50%306,400 45,000x 20% x 50%

61,280 compare 22,500If lesser, no limit! If lesser, limit applies

75

Example 2.28 TI in phaseinNot SSTB p. 66

321,400 TI 381,400 421,400

60% thru phaseinQBI x 20% Wages x 50%306,400 45,000x 20% x 50%61,280 at risk 38,780 22,500

lose 60% of the 38,780 = 23,26861,280 – 23,268 = 38,012

76

Example 2.28 - Mega Games K-1p. 67

Mega Games Inc. K-1Box 17 – Ben’s shareQBI – 306,400 (not always Box 1)Wages – 45,000UBIA - zeroNo statement that Mega is an SSTB

77

Example 2.28 – Form 8995-Ap. 68-69

Look at pages 68 and 69 and compare to our calculation. Same calculation, laid out in a different manner.

78

Example 2.29 Mega Games IS an SSTB p. 70

321,400 Taxable income 421,400381,400

W-2 limit 60% 40% SSTB limit

Now we’re going to use both the 60% and 40% limit!

Remember this?

79

Within The Phasein Range

Non SSTB pg.14TP must cal. the disallowance % using the following:TI - $321,400 = Reduction %

$100,000Reduce Wages by %Reduce QBID by %

SSTB pg.66Determine the applicable reduction % using the following:100% - TI - $321,000 = AP

$100,000

Example 2.29 Mega Games IS an SSTB p. 70

321,400 TI 381,400 421,400

W-2 limit 60% SSTB limit 40%QBI 306,400 Wages 45,000

x 40% SSTB limit x 40%122,560 18,000 x 20% x 50%24,512 at risk 15,512 9,000

lose 60% x 15,512 (W-2 limit) = 9,30724,512 – 9,307 = 15,205

81

Ex 2.29 SSTB Phasein pg. 70

Determine the excess amount: QBI of $306,400 X 40% = $122,500 X 20% = $24,510 Reduced amount over the greater of 50% wage or 25% wages +

2.5% QBIA (ex 2.29 no QBIA) $45,000 X 40% = $18,000 X 20% =

$9,000

$15,512 Multiplied by the reduction amount X 60% = 9,307 QBID is lesser of $24,512 - $9,307 = $15,205 or (TI) $381,400 X 20% = $76,280

Example 2.29 Form 8995-Ap. 71-73

Look at pages 71 – 73 and compare to our calculation. Same calculation, laid out in a different manner.

83

Aggregation of Businessesp. 74

If an individual chooses to aggregate trades orbusinesses, the individual must combine:

QBIW-2 wages UBIA of qualified property

BEFORE applying the Wage Limitation

Remember, an SSTB cannot be aggregated.

84

85

Aggregation of Businessesp. 74

Trade or Business

#1

Trade or Business

#2

Has some SSTB income

Aggregate?

Above the PhaseinSSTB p. 74

Taxable Inc. SSTB Entity

321,400

421,400 NO QBI, W-2 wages, or UBIA, so No QBI deduction

Full QBI, W-2 wages, and UBIA - No limit on QBI deduction

Partial QBI, W-2 wages, and UBIA. Partial QBI deduction

86

Example 2.30 passthroughentity SSTB p. 74

Capital Partnership-Owns Atlanta Doves

500 partners -Direct / Indirect

Still must treat income as SSTB!

SSTBTest Here!

Passive PassivePassive

87

Schedule K reporting p. 74

RPE conducting an SSTB must disclose to thepartners that the entity conducts an SSTB, regardless of the partners’ taxable income.

RPE must disclose owners’ allocable share of QBI, W-2 Wages, and UBIA or presumed to be zero.

88

De Minimis Rule – Not treated as an SSTB p. 74

Gross receipts at or under 25,000,000

10% SSTB income

Not SSTBincome

Gross receiptsover 25,000,000

SSTB income5%

Not SSTBincome

89

90% 95%

De Minimis Rule – Example 2.31p. 75

Landscaper – sells equipment and design (consulting)Does not sell the trees, shrubs, flowers it recommendsInvoices separatelyOne set of books - single trade or business

2,000,000

250,000

Total Gross Receipts

Consulting Gross Receipts 90

De Minimis Rule – Example 2.32p. 75

Veterinarian services & develops and sells organic dog food at clinics and online.Maintains separate set of books, separate employeesTreats as separate trades or businesses for 162 and 199A3,000,000

1,000,000 Vet - SSTB91

Services or Property provided to SSTB – Antiabuse rule

SSTB

T or B

products > 50% or services ownership

Portion provided to SSTB must be treated as a separate SSTB. Portion not provided to SSTB, eligible for 199A

p. 75

92

Example 2.33 – leasing to SSTBp. 76

Patterson Dental – Owns a building in which it conducts a dental practice

Pays rent

Income from leasing the building to the dental practice is SSTB income

Dental Practice Building

93

Example 2.34 – leasing to SSTB and Non-SSTB p. 76

Patterson Dental – Owns a building in which it conducts a dental practice and rents to a coffee shop

Pays rent

Income from leasing the building to the coffeeshop is NOT SSTB income

Coffeeshop

Dentist Office

Dental Practice

94

Example 2.35 – related SSTBp. 76

B & B Law

B & B Rentals

B & B Staffing

Brown and Buckley partnership divides into 3 partnerships:

All property

All Services

Each partnership will be treated as an SSTB 95

Example 2.36 – unrelated SSTBp. 76

B & B Law

B & B Rentals Unrelated 3rd

party tenants

50% toB & B

50% toUnrelated tenants

What if B & B Rental rents 50% to unrelated tenants?

B & B Rentals will treat 50% as SSTB and 50% not as an SSTB 96

Performing Services as anEmployee p. 77

“The trade or business of performing services as anemployee is not a trade or business for purposes of Section 199A”

Within the meaning of I.R.C. 3401(a)

3401(a) – all remuneration for services performed as an employee, including paid in other than cash

97

Performing Services as anEmployee p. 77 - 78

3401(a) defines wages subject to withholding.

3401(a) also lists 23 items of compensationthat are not considered wages for withholding purposes. They are listed on pages 77 and 78.

199A refers to wages as defined by 3401(a).The 23 items listed could, potentially, qualify asQBI, if all 199A requirements are met.

98

Performing Services as anEmployee p. 78

For 199A purposes, it is immaterial how the employer treats the worker.

If a worker should be treated as an employee, it is of no consequence that the employer treated the worker as a nonemployee.

99

W-2 vs 1099

Presumed Employeep. 78 - 79

an employee non-employee

Properly Provision of substantially the treated as same services, now treated as a

Presumed to be an employee for 3 years

But, rebuttal possible!

2017 2018 2019 2020

100

Rebuttal of presumption thatworker is an employee p. 79

Under federal law, regulations, and principles(including common law employee classification)The worker is performing services in a capacity other than as an employee.

Applies regardless if services directly, or indirectlythrough an entity or entities.

101

Rebuttal of presumption thatworker is an employee

Rebut with:ContractsPartnership agreements Other evidence to support

status as nonemployee

p. 79

102

WrittenDocuments

Example 2.37 presumed employee p. 79

PRS partnership

Allen quits job enters into a contract

Disregarded Entity

Allen performing same services, is presumed to be employee, unless Allen can rebut presumption

Allen

103

Example 2.38 presumed employee - entity p. 79

Upper MountainLaw Firm

Terminates employment relationship

Lower Mountain Law FirmPartnership

Contract –legal services

Coral is performing same services, presumed to be employee, unless she can rebut presumption

Coral & otherAssociates

104

Example 2.39 Promotionp. 80

Apex EngineeringPartnership

Edward Project engineer

After 10 years, project engineers considered for partner

Employee, but after 10 years became partner

Edward presumed to be employee, but can rebut presumption by showing he became partner as a career milestone. 105

Example 2.40 Promotionp. 80

Firefly Financial Partnership

Fatima – financial advisor

Firefly offers certainemployees the optionof becoming a partner

Employee, but becamepartner

Fatima presumed to be employee, but can rebut presumption by showing she materially modified her relationship with the firm. 106

Allocations of expenses p. 80

Individualor RPE

T or BT or B T or B

shared expenses

Allocate using a reasonablemethod

107

Multiple Businesses - Books and Records P. 81

IRS believes that multiple trades or businesses generally will not exist within an entity unless different methods of accounting could be used for each trade or business.

No trade or business will be considered separate and distinct unless a complete separate set of books and records is kept for such trade or business.

108

Applicable Datesp. 81

General:Final Regulations 199A-5 applies to tax yearsending after February 8, 2019.

But, apply to tax years ending after 12/22/17:• Provisions on services or property provided to

an SSTB • Presumption that former employees are still

employees 109

Questions?

110