If you operate an out-of-favor business (known in the law as a “specified service trade or business”) and your taxable income is more than $207,500 (single) or $415,000 (married, filing jointly), your Section 199A deduction is easy to compute. It’s zero.
This out-of-favor specified service trade or business group includes any trade or business:
- involving the performance of services in the fields of health, law, consulting, athletics, financial services, and brokerage services; or
- where the principal asset of such trade or business is the reputation or skill of one or more of its employees or owners; or
- that involves the performance of services that consist of investing and investment management trading or dealing in securities, partnership interests, or commodities. For this purpose, a security and a commodity have the meanings provided in the rules for the mark-to-market accounting method for dealers in securities [Sections 475(c)(2) and 475(e)(2), respectively].
If you were not in one of the named groups above, you likely worried about being in a reputation and/or skill of owners and/or employees out-of-favor specified service business. If you were worried, you joined a large group of worried businesses, because many businesses depend on reputation and/or skill for success.
For example, the National Association of Realtors believed real estate agents fell into this out-of-favor category.
Don’t worry, be happy. The IRS has come to the rescue by regulating the draconian reputation and/or skill provision down to almost nothing. The reputation and/or skill out-of-favor specified service business includes you if you:
- receive fees, compensation, or other income for endorsing products or services;
- license or receive fees, compensation, or other income for the use of your image, likeness, name, signature, voice, trademark, or any other symbols associated with your identity; or
- receive fees, compensation, or other income for appearing at an event or on radio, television, or another media format.
Example. Harry is a well-known chef and the sole owner of multiple restaurants, each of which is a single-member LLC—disregarded tax entities that are taxed as proprietorships. Due to Harry’s skill and reputation as a chef, he receives an endorsement fee of $500,000 for the use of his name on a line of cooking utensils and cookware.
Results. Harry’s restaurant business is not an out-of-favor business, but his endorsement fee is an out-of-favor specified service business.
If you have questions about how the law will treat your business income for the new Section 199A 20 percent tax deduction, please use the following link to book your complimentary strategy call with your team at Luster Tax Consulting and we can discuss your situation.