Thus, a construction company that provides incidental consulting services will not be a specified service business. Recent regulations explain that consulting services “embedded in, or ancillary to,” the sale of other goods or services will not cause a business to be a specified service trade or business.
Fortunately, the IRS answered both questions in the negative. That was a welcome omission for owners of architectural and engineering firms since those fields are sometimes grouped with other professions for tax purposes.Ī specified service trade or business also includes “consulting” and “any trade or business where the principal asset of such trade or business is the reputation or skill of one or more… employees or owners.” That language led some construction business owners to question whether their activities could be described as consulting, or whether the deduction might be limited if their business was too dependent on the name recognition, reputation, or skill of certain owners or employees. One of the major barriers to claiming the deduction is that the tax benefit phases out for individuals whose taxable income exceeds certain amounts (approximately $320,000 for married people and $160,000 for single individuals in 2019, indexed annually for inflation) and are engaged in a “specified service trade or business.” A specified service trade or business includes any trade or business that involves the performance of services in the fields of law, medicine, accounting, and investment management, among others, but specifically excludes engineering and architecture. Recent IRS regulations have clarified these and other issues, generally in taxpayer-friendly ways. When the deduction was added to the tax code, construction business owners, in particular, faced uncertainty about whether they qualified for the deduction if their income exceeded a specified amount, whether they could combine multiple trades or businesses into a single business (or separate a single business into multiple businesses), and whether income from rental activities qualified for the deduction. Among other things, the deduction is reduced or even eliminated depending on the owner’s income, the nature of the business, how the business is organized (the deduction is only available to pass-through businesses such as partnerships, S corporations, and sole proprietorships), how much the business pays in wages, and how much property it uses. Like nearly all provisions of the tax code, however, the deduction is subject to a myriad of exceptions, limitations, and special rules. Thus, a business owner who qualified for the deduction could earn a taxable income of $500,000 but pay tax on as little as $400,000, resulting in tax savings of nearly $40,000. The Tax Cuts and Jobs Act of 2017 created a lucrative new tax incentive for certain business owners: the ability to deduct up to 20% of their qualified business income.