5. Qualified Business Income (QBI)
QBI is defined in Section 199A(c) as the “ordinary income – less ordinary deductions – you earn
from a sole proprietorship, S corporation, or partnership.
QBI does NOT include:
• any wages you earn as an employee
• Ex) independent K and employee doing the same job –self‐employment income of independent K is QBI, not the employees
wages
• Short‐term capital gain or loss;
• Long‐term capital gain or loss
• Dividend income
• Interest income any wages you earn as an employee
• For shareholder or partner of flow‐through, QBI does not include any wages or guaranteed payment received from
the business.
• QBI does not include income that is NOT “effectively connected with the conduct of a U.S. trade or business.”
7. QBI earned in a “qualified trade or business”
Section 199A(c) requires only that QBI be earned in a “qualified trade or business”
• Minimal guidance:
• PLR 201436001 (a pharmaceutical research and clinical testing company was a QTB because it did not “offer value
to customers primarily in the form of services … [or] individual expertise”)
• PLR 201717010 (a health care technology company providing laboratory reports was a QTB because the company
never offered a patient a “diagnosis or treatment recommendation,” but rather only issued the reports.)
• T.C. Memo 2012‐21 (In Owen v. Commissioner, the Tax Court concluded that a corporation’s principal asset did not
include the reputation or skill of one or more employees even though the court acknowledged that the success of
the corporation was attributable to its owners.)
14. QBI earned in a “qualified trade or business”
Section 199A(c) requires only that QBI be earned in a “qualified trade or business”
• Minimal guidance:
• PLR 201436001 (a pharmaceutical research and clinical testing company was a QTB because it did not “offer value
to customers primarily in the form of services … [or] individual expertise”)
• PLR 201717010 (a health care technology company providing laboratory reports was a QTB because the company
never offered a patient a “diagnosis or treatment recommendation,” but rather only issued the reports.)
• T.C. Memo 2012‐21 (In Owen v. Commissioner, the Tax Court concluded that a corporation’s principal asset did not
include the reputation or skill of one or more employees even though the court acknowledged that the success of
the corporation was attributable to its owners.)
15. Specified Service Trades or Businesses (SSTBs)
Section 199A(d)(1) states these are two types of businesses that are not eligible for the 20% QBI deduction:
(i) Anyone who is in the business of being an employee and
(ii) Any “specified service trade or business”
Section 199A(d)(2)(a) defines a “specified trade or business” in reference to Section 1202(e)(3)(A), which includes:
“Any trade or business involving the performance of services in the fields of health, law, engineering,
architecture, accounting, actuarial services, 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.”
But the Section 199A modified the definition of “specified service businesses” found in section 1202 :
(i) Removing architects and engineers; and
(ii) The definition of disqualified businesses for purposes of Section 199A ignores 1202(e)(3)(B), and these types of
businesses are not disqualified businesses for purposes of Section 199A: banking, finance, insurance, leasing,
investing, farming, any business giving rise to depletion, any business operating a hotel or restaurant
(iii) And Section 199A(d)(2)(B) adds more businesses that do not qualify for the 20% QBI deduction: businesses of
investing, investment management, trading, or dealing in securities, partnership interests, or commodities.
19. SSTBs Examples and the De minimus Rule
See 1.199A‐5(b)(3) for all examples.
(viii) Example 8. D is in the business of providing services that assist unrelated entities in making their personnel structures more efficient. D studies its client's
organization and structure and compares it to peers in its industry. D then makes recommendations and provides advice to its client regarding possible changes
in the client's personnel structure, including the use of temporary workers. D does not provide any temporary workers to its clients and D's compensation and
fees are not affected by whether D's clients used temporary workers. D is engaged in the performance of services in an SSTB in the field of consulting within the
meaning of section 199A(d)(2) or paragraphs (b)(1)(vi) and (b)(2)(vii) of this section.
(xi) Example 11. G is in the business of providing services to assist clients with their finances. G will study a particular client's financial situation, including, the
client's present income, savings, and investments, and anticipated future economic and financial needs. Based on this study, G will then assist the client in
making decisions and plans regarding the client's financial activities. Such financial planning includes the design of a personal budget to assist the client in
monitoring the client's financial situation, the adoption of investment strategies tailored to the client's needs, and other similar services. G is engaged in the
performance of services in an SSTB in the field of financial services within the meaning of section 199A(d)(2) or paragraphs (b)(1)(viii) and (b)(2)(ix) of this
section.
1.199A‐5(c)(1):
(c) Special rules—(1) De minimis rule—
(i) Gross receipts of $25 million or less. For a trade or business with gross receipts of $25 million or less for the taxable year, a trade or business is not an SSTB if
less than 10 percent of the gross receipts of the trade or business are attributable to the performance of services in a field described in paragraph (b) of this
section. For purposes of determining whether this 10 percent test is satisfied, the performance of any activity incident to the actual performance of services in
the field is considered the performance of services in that field.
(ii) Gross receipts of greater than $25 million. For a trade or business with gross receipts of greater than $25 million for the taxable year, the rules of paragraph
(c)(1)(i) of this section are applied by substituting “5 percent” for “10 percent” each place it appears.
*See 1.199A‐5(c)(1)(A) for Examples