For individuals whose income comes from a Specified-Service Trade or Business, present company included, the Qualified Business Income Deduction will begin to phase out completely as income approaches the upper income limits.
Phase-In/Phase-Out
SSTBs phase out of QBID as their income works its way through the taxable income thresholds
Specified Service Trade or Business (SSTB)
So, what exactly is a specified-service trade or business?
Your business is a specified-service trade or business (SSTB) if the principal income-generating asset you have is the reputation or skill of one or your employees or you as the owner. That includes a trade or business in which you receive income for providing most services (i.e. legal, accounting, health, consulting, etcetera) (you receive income for) endorsing products or services your image, likeness, name, signature, voice, trademark, or any other symbols associated with your identity; or for appearing at an event or on radio, television, or other media format
Exceptions
Some notable exceptions to the SSTB limits are for those businesses involved in Architecture, Engineering, and there are also De Minimis rules. De Minimis means negligible or trivial.
The Qualified Business Income Deduction is IRC Sec. 199A of the IRC. Its predecessor, the Domestic Production Activities Deduction, IRC Sec. 199, was available for architects and engineers, so congress carved them out of the SSTB definition to make sure they weren’t harmed by the law change.
If a business has gross revenues of less than $25 million and less than 10% of their revenues comes from Specified-Services, it’s deemed to be a negligible amount and the business doesn’t have to worry about the SSTB rules.
If its gross revenues are greater than $25 million, then the percent drops down to 5%.
Strategy
Because the Qualified Business Income Deduction has strict taxable income limits for SSTBs, the basic strategy is to lower your taxable income, but we want to do that while maintaining the cash you’re taking home. Depending on your particular set of facts and circumstances, we employ a lot of different strategies, I’m just going to list a few here.
By accelerating the depreciation on your business assets, we can reduce taxable income, without it having an effect on your cash flow.
Contributions to your retirement are typically tax deductible, thus lowering your taxable income. It’s always better to pay your future self, rather than paying the IRS.
Just because your main source of income is coming from an SSTB, it doesn’t mean all your income is disqualified. You might have other sources of income that still qualify like rental real estate.
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