Proposed regulations on the Qualified Business Income (QBI) deduction (also known as Section 199A and the pass-through deduction), were finally released on August 8.  This has been anticipated all year, by some of us as though it features Iron Man and Captain America saving the world.  …Okay, that’s an exaggeration, but we have been eager for guidance.  In the months since its passage, commentators have commented, experts have espoused their expertise, and number crunchers have crunched away at the financial, strategic, and even metaphysical import of this brand-new provision.

I’ve been a part of that crowd, so I’m not pointing fingers.  I’ve talked groups into catatonia, created flowcharts that look like Dali paintings, and written about changing effective tax rates and comparisons of different entity types to the point I’m afraid my reflection is going to start quizzing me on the wage base limitation.

My point is this: a lot of ink has been spilled on this topic.  And it’s not over yet.  These proposed regulations are gasoline on the fire, dragging us all back into this new set of rules.  So here are a few things you may find interesting about the current state and interpretation of the qualified business income deduction, both what we already knew from the original statute (as a refresher) and some of what we are learning from the proposed regulations.

But first, a couple of caveats: 1) these are proposed regulations; they are not final and would generally apply to tax years ending after the date of Treasury adoption as final, but taxpayers may rely on them pending finalization; and 2) there is a lot of additional analysis needed and to be provided.

  1. The deduction (20% of the qualifying income in its purest, most unfettered state) is limited to 20% of the taxpayer’s taxable income (MINUS net capital gain). Therefore, if you have losses and/or deductions that take taxable income below the income that otherwise qualified, you will not enjoy the full 20% deduction.
  2. If qualifying trades or businesses show a net loss for the year, not only is there no deduction for that year, that loss carries forward to reduce any qualified business income in the following year.
  3. There are many trades or businesses that don’t qualify for the deduction (but only over a certain income threshold, so don’t stop reading yet). These include (but are not limited to): services in the fields of health, law, accounting, performing arts, consulting, athletics, financial services, brokerage services, etc. (not to mention “any” business where the “principal asset” is the reputation or skill of one or more employees. The proposed regulations provide a significant amount of much-needed guidance in this area as to how each specified field/service is defined, even providing several examples.  Also, they speak to the previously puzzling “reputation or skill” category, clarifying that category as including such things as fees for endorsements, income from licensed images, signatures, , receipts from advertising appearances, etc.  Also included: a de minimis rule to determine whether a business is a specified service trade or business (SSTB) if only a portion of its receipts are attributable to one or more of the aforementioned services.
  4. However, even income from those SSTBs could generate a deduction if the taxable income of the taxpayer is low enough. In other words, a taxable income threshold must be met before the exclusion of that income is triggered, and that happens over a phase-out range of taxable income (starting at $315,000 to $415,000 for married filing jointly taxpayers; half that for everyone else).
  5. A taxpayer may be engaged in both one or more specified service businesses that do NOT qualify and other businesses that DO, so proper accounting for each activity is crucial. Taxpayers and pundits have theorized for months over how or if aggregation of income from complementary and commonly-owned businesses of one taxpayer may work.  The proposed regulations speak to that, providing standards for aggregation that rely on several factors, including common ownership, complementary products/services, shared centralized business elements, and interdependence (in short, aggregation is allowed but subject to the right facts).
  6. Even qualifying income (and otherwise excluded income that qualifies due to lower taxable income, as indicated above) is subject to limitations based on W-2 wages paid and investment in depreciable property, which begin to apply at certain taxable income thresholds (below which they aren’t a problem, like the restriction on specified service businesses). The proposed regulations have an entire subsection devoted to how “W-2 wages” and “unadjusted basis immediately after acquisition (UBIA) of qualified property” are to be defined, calculated, and allocated, as well as a simultaneously released IRS Notice (2018-64), further discussing W-2 wage calculation.
  7. Reasonable compensation is not part of the income that can qualify for the deduction, be it W-2 income from an S corporation or guaranteed payments from an LLC/partnership (for either services or use of capital).
  8. Investment income (interest, dividends, capital gains, ) does not qualify for the deduction.
  9. Taxpayers with a specified service trade or business that fall within the partial phase-out/phase-in range for both the income itself and the application of wage/property limitations must apply BOTH limitations (trust me; it’s math and fractions and stuff).
  10. There is a whole effective-tax-rate-differential to be considered here when looking at entity types in light of both this deduction and the new rates (for individuals AND corporations), so again: math (I wrote on this a while back).

Is that everything?  No, it is not.  With both the original statute and now these proposed regulations, there are many complexities to be explored – and we continue doing just that.  For example, there is a whole regime of special rules for how pass-through entities (including businesses and trusts) are to compute and report the necessary information for the deduction to their owners and beneficiaries.  Hopefully, however, the above is enough to give you a sense of what we all have before us.  Want to know more?  Keep checking our site, or feel free to call or email me!

Michael A. Carraway, Jr., CPA

Michael A. Carraway, Jr., is a partner with GranthamPoole PLLC and a recognized leader in the field of partnership and corporate taxation, having worked with many clients on entity and transaction structuring matters.  He has also written, taught, and spoken on many topics in the area over the years and has served as a technical subject matter expert in several practices.  Please contact Mike at,, or 601-499-2400. CPA License # R2705


***The above does not represent tax advice.  Each situation is fact-dependent, and you should seek the advice of a competent advisor. GranthamPoole PLLC is a provider of tax, accounting, advisory and strategic services, partnering with clients across a broad spectrum of industries and sizes.

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