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QBI deduction: de minimis rules related to SSTBs

de minimis, SSTB, QBI, pass-through, deductionWith the new proposed regulations for Section 199A regarding the 20% tax deduction for Qualified Business Income (QBI), there have been many concerns and questions, especially since this deduction isn’t available to owners who have more than $315,000 of taxable income and have income from a business that is considered a Specified Service Trade or Business (SSTB). Some questions were raised in reference to the fact that some owners are involved in multiple business activities within one business. We aren’t allowed to separately state or allocate SSTB profits from non-SSTB profits but rather, all profits must be fully considered SSTB income or considered non-SSTB income. So, here I am going to explain the de minimis rule for SSTBs.

Under the proposed regulations, a business will be considered an SSTB if gross receipts from the business are $25 million or less for the year and 10% or more of those gross receipts are derived from SSTB business activity. What exactly does this mean? Let’s take a look at an example.

Small business deduction regulations

Company A, who is an S Corporation, generates $15 million in gross receipts in 2018 from an activity that is considered a non-SSTB. In addition to the $15 million, they also generate $1 million from related business activity, but this business activity is considered to be an SSTB. The S Corp separately bills their clients for these two different activities. Since the SSTB income is about 6% ($1 million/$16 million), which is 10% or less of the total revenue, none of the income is considered income from an SSTB.

If the gross receipts for a business exceed $25 million, then only 5% of the total gross receipts is allowed to come from SSTB activity.

For further explanations or questions, contact your Henry+Horne professional tax advisor!

Christine Sanchez