For certain small businesses—many sole proprietors and owners of pass-through entities— the new Tax Cuts and Jobs Act that went into effect tax year 2018 was good news: a 20% deduction for qualified business income (QBI).
The new tax law includes additional rules within the pass-through deduction qualification for specified service trade or business (SSTB).
- IF taxable income less than $315,000 for married filing jointly (MFJ) or $157,500 for single filers, the full 20% deduction is applied regardless of what kind of business you own.
- IF taxable income is between $315,000 and $415,000 for MFJ or between $157,500 and $207,500 for single filers, the deduction is limited based on a percentage calculation.
Business Types that Qualify
The Internal Revenue Service (IRS) specifies types of businesses that qualify as specified service trade or business as outlined below.
|Health||Physicians, pharmacists, nurses, dentists, veterinarians, physical therapists, psychologists and other similar healthcare professionals performing services who provide medical services directly to a patient||Services not directly related to a medical services field, such as the operation of health clubs or spas, payment processing, or the research, testing, manufacture and sale of pharmaceuticals or medical devices|
|Law||Lawyers, paralegals, legal arbitrators, mediators and similar professionals||Services that do not require skills unique to the field of law, such as services by printers, delivery services or stenography services|
|Accounting||Accountants, enrolled agents, return preparers, financial auditors and similar professionals|
|Actuarial science||Actuaries and similar professionals|
|Performing arts||Actors, directors singers, musicians, entertainers and similar professionals||Services that do not require skills unique to the creation of performing arts, such as the maintenance and operation of equipment or facilities for use in the performing arts, or the provision of services by persons who broadcast video or audio of performing arts to the public|
|Consulting||Consulting, including providing advice and counsel with the intention of influencing decisions made by a government or governmental agency, and all attempts to influence legislators and other government officials on behalf of a client by lobbyists and other similar professionals||The performance of services, other than advice of counsel, such as sales, training of educational courses. It also excludes embedded or ancillary services that are otherwise not SSTBs, if there is no separate payment for the consulting services.|
|Athletics||Athletes, coaches and managers in sports, such as baseball, basketball, football, soccer, hockey, martial arts, boxing, bowling, tennis, golf, snowboarding, track and field, billiards, racing and other athletic performance||Services that do not require skills unique to athletic competition, such as the maintenance and operation of equipment or facilities for use in athletic events or the provision of services by persons who broadcast video or audio of athletic events to the public|
|Financial services||Managing wealth, advising clients with respect to finances, developing retirement plans, developing wealth transition plans, the provision of advisory and other similar services regarding valuations, mergers, acquisitions, dispositions, restructuring (including in title 11 or similar cases), and raising financial capital by underwriting, or acting as a client’s agent in the issuance of securities and similar services. This includes services provided by financial advisors, investment bankers, wealth planners, retirement advisors and other similar professionals.||Taking deposits or making loans, but does not include arrange lending transactions between a lender and borrower|
|Brokerage services||Services in which a person arranges transactions between a buyer and a seller with respect to securities for a commission or fee, including services provided by stockbrokers and other similar professionals||Services provided by real estate agents and brokers, or insurance agents and brokers|
|Investing & investment management||Investment and investment management, in which a fee is received for providing investing, asset management or investment management services, including providing advice with respect to buying and selling investments|
|Trading||Trading, including the trade or business of trading in securities (as defined in Sec. 475(c)(2)), commodities (as defined in Sec. 475(e)(2)) or partnership interests|
|Dealing in securities||Dealing in securities, including dealing in securities (as defined in Sec. 475(c)(2)), commodities (as defined in Sec. 475(e)(2)) or partnership interests|
|“Catch-all” category||Any trade or business where the principal asset is the reputation or skill of one or more of its owners or employees, as demonstrated by:|
If you have a blend of income from an specified service trade or business (SSTB) and a non-SSTB:
When gross receipts from the SSTB are under a specified threshold percentage, a rule specifies that the SSTB is allowed to be fully eligible for the QBI deduction.
A business is not treated as an SSTB when:
- Gross receipts are $25 million or less and less than 10% of the gross receipts are from an SSTB
- Gross receipts are more than $25 million and less than 5% of the gross receipts are from an SSTB
It is! Fortunately, you don’t have to be an accountant to get your taxes right. If you use current tax software or assistance from a professional tax preparer, everything will fall into place.
Checklist for Small Business Deductions
There are ways to save money with tax deductions for small business, as explained in our checklist article. Small business insurance is among the key tax deductions. While important for protecting your business, premiums can often be a tax deducted including:
- General Liability Insurance
- Commercial Property InsuRance
- Commercial Auto Insurance
- Professional Liability Insurance
- Cyber Insurance
- Business Interruption Insurance
- Workers’ Compensation Insurance
- Group Health Insurance
- Life Insurance
Learn more about the insurance coverages that might apply to your business. If you are interested in getting insurance quotes to compare, use our online quote request tool to consider your options.