« Section 199A: The New Small Business Tax Break—Part II | Main

February 22, 2019

Section 199A: The New Small Business Tax Break—Part III


As tax attorneys in Columbus, Ohio, Nardone Limited routinely assists individuals and businesses with representation in tax examinations, audits, and civil litigation with the Internal Revenue Service (the “IRS”) and the Ohio Department of Taxation. As part of that representation, our tax attorneys keep individuals and businesses informed about new information and guidance provided by the IRS. This article is the third in a series of articles exploring what some tax professionals describe as the best small business tax break of the last half-century—the Section 199A Qualified Business Income Deduction (the “Deduction”).

Brief Reintroduction

Our last article on Section 199A introduced the concept of a specified service trade or business (“SSTB”), which we said is not a qualified trade or business (“QTOB”) for Section 199A purposes. At first pass, the statutory language suggests that SSTB-classification disqualifies a trade or business from the Deduction; however, there is an exception (the “Exception”).i Before we discuss the Exception, we should revisit the definition of an SSTB.

SSTB Defined

For purposes of Section 199A, an SSTB is any trade or business that involves the performance of services in one of the following fields: health; law; accounting; actuarial science; performing arts; consulting; athletics; financial services; brokerage services; investing and investing management; trading; dealing; or a business where the principal asset is the reputation or skill of one or more of its owners or employees.ii Although the Code is broad, the Regulations provide more specific examples of jobs within these fields that do, and do not, fall in SSTB purview.

Calculating the Deduction for an SSTB

The Deduction for qualified business income (“QBI”) from an SSTB is subject to a “phase-out” (the “Phase-out”) once a taxpayer’s taxable income exceeds $157,500 for single filers and $315,000 for joint filers (the “Threshold”).iii

Similar to a QTOB, a taxpayer with QBI from an SSTB enjoys a full 20 percent deduction is their taxable income is less than or equal to the Threshold. But, unlike a QTOB, the Deduction for an SSTB is eliminated once a taxpayer’s taxable income exceeds $207,500 for single filers and $415,000 for joint filers.  The gray area between $157,500 to $207,500 and $315,000 to $415,000 for single and joint filers, respectively, is where the Phase-out occurs.

Calculating the Phase-out

Mechanically speaking, the Phase-out is better described as a “phasing-in” of the “wage/investment” limitation for a QTOB (the “Limitation”) described in our previous article. If you recall, the Limitation is a function of QBI, W-2 wages, and the unadjusted basis in qualified property associated with a trade or business. For an SSTB, these three variables are “phased-out” of the Deduction calculation as a percentage (described in the next paragraph) of their actual values used in the QTOB calculation. Meaning, the QBI, W-2 wages, and unadjusted basis in qualified property values used in the SSTB calculation are less than those used in the QTOB calculation. This difference in value results in a difference in the Deduction between QTOBs and SSTBs.

The percentage described above is equal to 100 percent minus a percentage calculated by the difference between taxable income and the Threshold, divided by either $50,000 for single filers or $100,000 for joint filers (the “Phase-Out Percentage”). The Phase-Out Percentage cannot be less than zero, which results in the complete phase-out of the Deduction once taxable income hits $207,500or single filers and $415,000 for joint filers. The Phase-Out Percentage is then multiplied against the QBI, W-2 wages, and qualified property amounts associated with the SSTB, reducing their values.

Finishing the Deduction Calculation

Once the Phase-On Percentage is applied, the Deduction calculation for an SSTB is lockstep with that of a QTOB. But, because the SSTB calculation QBI, W-2 wages, and qualified property values are a percentage of those used for the QTOB calculation, the SSTB Deduction is smaller. The following are the final steps for the Deduction calculation; however, they are no different than those described in the previous article.

When taxable income exceeds the Threshold, the Limitation is the lesser of: (i) 20 percent of QBI from an SSTB, or (ii) the greater of: (a) 50 percent of W-2 wages from an SSTB, or (b) 25 percent of W-2 wages from an SSTB, plus 2.5 percent of the unadjusted basis in qualified property associated with an SSTB. 

The percentage of phase-in is the difference between a taxpayer’s taxable income and the Threshold, over either $50,000 for single filers or $100,000 for joint filers (the “Phase-In Percentage”). The Phase-In Percentage is used to determine the reduction amount used against the 20 percent of QBI deduction starting point.

The Phase-In Percentage is multiplied against the difference between: (i) 20 percent of QBI and (ii) the Limitation. This figure represents the phase-in of the Limitation, or the amount by which the 20 percent of QBI starting point is reduced to determine the Deduction amount.

Businesses Related to an SSTB

Many taxpayers with SSTB enterprises operate under an organizational structure that keeps their operational entity separate from their real estate entity and sometimes even a management entity. For example, it is not uncommon that an accountant, attorney, dentist, or doctor will conduct their business using two entities. The first entity contains the primary operations of the firm or practice. And, the second entity contains the real property in which the first entity operates.

Under the Section 199A Regulations, when a trade or business provides property or services to an SSTB, and there is a 50 percent or more common ownershipiv between the two trades or businesses, the portion of the trade or business providing property or service to the SSTB is treated as an SSTB.v Thus, the Deduction for either entity is subject to the SSTB Phase-Out limitations even though the entity providing the property or services is otherwise considered a QTOB.

Example: Doctor, a dentist, operates his dental practice using three different entities: Clinic LLC, which holds the clinical operations of the practice; Real Estate LLC, which holds the office building used by the practice; and Management LLC, which holds the non-clinical operations of the practice.  Doctor is the 100 percent owner of all three entities. 

On their own, the activities of Real Estate LLC and Management LLC qualify them as QTOBs, which would subject them to the lesser restrictive Deduction limitations for QTOBs. Clinic LLC is an SSTB because it holds the operations of a trade or business in the health field, which would subject it to the more restrictive Deduction limitations for SSTBs. However, because Real Estate LLC and Management LLC provide property or services to Clinic LLC, with which they share over 50 percent common ownership, all three entities are considered SSTBs.

Therefore, Doctor is unable to take the Deduction for any QBI generated by the three entities once Doctor’s taxable income exceeds $207,500 (if filing single) or $415,000 (if filing joint). Doctor would remain eligible for the Deduction if Doctor’s taxable income falls below these thresholds.


There is a common theme across these first three Section 199A articles—the Deduction is complex.  We now see that the Deduction, in the case of an SSTB, requires an additional level of calculations.  There is also additional analysis required to determine if or when the trade or businesses ancillary to a taxpayer’s SSTB are required to be included as an SSTB even though they would otherwise qualify as a QTOB.  Therefore, it is important that taxpayers work with experienced tax law professionals who understand Section 199A from a legal perspective.  The tax and business attorneys at Nardone Limited have this understanding and are prepared to discuss your Section 199A planning today.


i I.R.C. § 199A(d)(3).

ii Reg. § 1.199A-5(b)(1).

iii I.R.C. § 199A(d)(3)(A).

iv Common ownership means a direct or indirect ownership by related parties within the meaning of Sections 267(b) or 707(b). Reg. § 1.199A-5(c)(2)(ii).

v Reg. § 1.199A-5(c)(2)(i).

Please view the site disclaimer regarding the advice on this blog.


The comments to this entry are closed.

« Section 199A: The New Small Business Tax Break—Part II | Main

February 22, 2019


Feed You can follow this conversation by subscribing to the comment feed for this post.

The comments to this entry are closed.