Treasury Publishes Proposed Regulations on 20% QBI Deduction

August 14, 2018


On August 8 the U.S. Treasury and Internal Revenue Service (IRS) released highly anticipated proposed regulations providing rules and clarification regarding the 20% Qualified Business Income (QBI) deduction.  Concurrently, the IRS also released a FAQ listing, which walks through the basics of the QBI deduction and Notice 2018-64, which provides guidance on ways in which taxpayers can compute “W-2 wages” with regard to the QBI deduction limitation.  The regulations attempt to clarify certain important issues, including what businesses do and do not qualify and how income from fiscal year businesses should be treated.

Although these regulations are proposed in nature and subject to change prior to finalization, taxpayers may rely on these proposed regulations before they become final.


The Tax Cuts and Jobs Act (TCJA) created a new deduction under Internal Revenue Code section 199A, which generally allows for eligible non-corporate taxpayers to claim a deduction equal to 20% of their QBI, effective for tax years 2018 through 2025.  Eligible taxpayers include owners in certain passthrough entities which are not classified as a Specified Service Trade or Business (SSTB).  The deduction is subject to certain limitation calculations impacted by W-2 wages and certain property of a qualified business.  Taxpayers with taxable income under $315,000 (for joint filers) or $157,000 (for single filers) will not be subject to the limitations imposed for section 199A.  Below are highlights of some of the more significant provisions addressed in the proposed regulations.


Listed SSTBs 

Probably the most sought after explanation relating to the QBI deduction has to do with whether a business is qualified or not.  As mentioned, a business classified as an SSTB will not qualify and the regulations provide a detailed description of each.  Those included are businesses in the fields of: (1) Health; (2) Law; (3)Accounting; (4) Actuarial Science; (5) Performing Arts; (6) Consulting; (7) Athletics; (8) Financial Services; (9) Brokerage Services; (10) Investing & Investment Management; (11) Trading; (12) Dealing in Securities; and (13) “Any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees or owners…”   

Though the descriptions of each type of non-qualified SSTB is too lengthy to include here, the most troubling type of SSTB related to the final one mentioned above.  A plain reading of this category seemed to leave most businesses classified as an SSTB and left practitioners confused.  After all, what business doesn’t rely on the reputation or skill of its employees or owners?   Thankfully, for taxpayers, the Treasury narrowed this down to businesses receiving endorsement, licensing and other related income for use of names, images, signatures, appearances, etc. (i.e. the type of income that entertainers or celebrities might receive for making appearances or endorsements).

These provisions also contain a de minimis rule for businesses with $25 million or less in gross receipts.  In this case, the business will not be treated as an SSTB as long as less than 10% of its revenue is from one or more of the fields described above.  For those businesses with more than $25 million in gross receipts the same exception applies if less than 5% of its revenue is from SSTBs.


The regulations allow for taxpayers who own more than one qualified business to aggregate the items associated with QBI as long as certain requirements are met.  Aggregation would be elected by the non-corporate taxpayer who is eligible for the QBI deduction.  This is a taxpayer friendly provision as it can help taxpayers maximize their QBI deduction.  This election, however, should be carefully considered as once it is made a taxpayer must aggregate in all subsequent tax years.  

Fiscal Year Businesses

The regulations also clarify the treatment of income generated by fiscal year taxpayers whose tax years begin in 2017 and end in 2018.  This taxpayer friendly section of the regulations explain that all of the fiscal year pass-through income would be considered for purposes of the QBI deduction (assuming it otherwise qualifies as QBI) even though some of the income was generated in 2017 prior to the QBI deduction becoming law.   

Effect on Other Taxes

The regulations make clear that a taxpayer’s QBI deduction will not reduce their self-employment income nor net investment income.  Therefore, the QBI deduction will not provide a benefit against self-employment tax or the net investment income tax.


QBI is limited to the greater of 50% of W-2 wages or 25% of W-2 wages plus 2.5% of certain qualified property.  If a taxpayer has a QBI loss from one or more qualified businesses, but has overall positive QBI, a netting approach must be employed to offset the qualified businesses with income from those with a net loss before applying the W-2 and qualified property limitations.  

Anti-Abuse Provisions 

The regulations contain several anti-abuse provisions preventing taxpayers from circumventing the various restrictions and limitations under the section 199A QBI deduction.  Notably, the regulations state that in certain circumstances former employees will continue to be treated as employees if they are providing substantially the same services to the employer before and after becoming a non-employee.  For example, simply changing the way an employee is paid (i.e. from W-2 to 1099) with no real change in the employee-employer relationship will not result in a greater QBI deduction. 

In addition, QBI does not include “reasonable compensation” paid to an S corporation shareholder-employee nor does it included guaranteed payments paid to a partner in a partnership.  With respect to S corporations, the regulations state that “…even if an S corporation fails to pay a reasonable wage to its shareholder-employees, the shareholder-employees are nonetheless prevented from including an amount equal to reasonable compensation in QBI.”  Therefore, if an S corporation reduces a shareholder-employee’s wages to an “unreasonable” level in order to inflate QBI, the IRS will presumably reduce the amount of QBI that the shareholder-employee can take into account in computing his or her QBI deduction.

Evan Gernant, CPA, MST, is a Partner in the Tax Services Group at WISS. For more information on the QBI deduction contact Evan at 973.577.2686 or


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