Taxpayer-Friendly 20% Business Deduction Proposed Regulations Issued

by Gregory L, White, CPA | Oct 09, 2018

On August 8, the IRS released taxpayer-friendly proposed regulations on the new qualifying business income deduction (QBID). The QBID is generally allowed for 20 percent of an individual or trust’s business income.

Example: In 2018, Bob has $100,000 in business income from his taxidermy business. Bob can take a deduction of $20,000 on his 2018 tax return. Note: two limitations can restrict this deduction in the case of higher income taxpayers (see discussion below). An additional limit of 20 percent of ordinary taxable income can also apply.

In total, the regulations were 184 pages long. This article focuses on a few of the more interesting provisions of the regulations.


The proposed regulations are “reliance” regulations — generally taxpayers may rely on the proposed regs, in their entirety, until final regs are published. Even though taxpayers may rely upon these proposed regulations, taxpayers aren’t bound by them.


Higher income taxpayers don’t qualify for the QBID if the income is from “specified service trades or businesses” (SSTBs). The proposed regulations provide some much welcome relief. The following is a discussion of some of the highlights of the proposed regulations provisions on SSTBs:


The proposed regulations define consulting as the “provision of professional advice and counsel to clients to assist the client in achieving goals and solving problems.” It expressly includes lobbying.

Brokerage Services

The proposed regulations provide that this includes services in which a person arranges transactions between a buyer and a seller with respect to securities for a commission or fee. Importantly, this includes stockbrokers and similar professionals, but excludes real estate agents and brokers, as well as insurance agents and brokers.

Principal Asset: Skill or Reputation of One or More Employees/Owners

Before the issuance of the proposed regulations, perhaps the greatest source of uncertainty involved the “principal asset” SSTB. This resulted in treating a business as an SSTB if its principal asset was the skill or reputation of one or more of the owners or employees. The proposed regulations apply a very narrow definition to this category. Essentially, it’s limited to the following types of income.

  • Receiving income for endorsing products or services,
  • Licensing or receiving income for the use of an individual’s image, likeness, name, signature, voice, trademark or other symbols associated with the identity, and
  • Receiving appearance fees (including fees or income to reality performers performing as themselves on television, social media or other forums).


Only business income qualifies for the QBID. The proposed regulations adopt the existing definition of “business” under §1621. Fortunately, there is a wealth of caselaw under §162.

Application to Rental Properties in General

Rental income from real property should generally be treated as “qualifying business income.”

In Curphey v. Commissioner2, the Tax Court emphasized that the qualification of rental property as a §162 business is based on facts and circumstances. Additionally, the Tax Court stated that it had “repeatedly held” that rental of a single piece of property is a business. A few exceptions should be noted:

  • Triple net leases (i.e., leases where the lessee pays property taxes, insurance and repairs) have been treated as insufficient to result in a business. In Union National Bank of Troy3, a district court held renting property under a triple net lease didn’t amount to a business. This case involved the definition of business for purposes of §1231 (not §162), but nonetheless provides some guidance. See PLR 8350008 for a similar result.
  • Taxpayers in the Second Circuit (New York, Connecticut and Vermont) must clear a higher bar. The Second Circuit held that rental of a single-family residence didn’t rise to the level of a business, even though the landlord arranged for repairs4.

Renting or Licensing to a Controlled Business

The proposed regulations5 remove the business requirement for property leased to a commonly controlled entity. Even if it isn’t a business, is treated as a business if leased to a business under common control.

Example: Seth owns a building that houses a hardware store. He leases the building to his wholly owned S corporation that operates the hardware store. The lease is a triple net lease. Even though a triple net lease may not constitute a business, it will be treated as a business under the special common control rule.

Renting Property to a Commonly Controlled SSTB

Rental of property to a commonly controlled SSTB results in treatment of the rental income as SSTB income (and therefore subject to more stringent limits)6.

Example: Michelle, a CPA, operates her practice through her wholly owned S corporation. She also owns the building which houses the CPA practice. She rents 50 percent of the building to her S corporation, and 50 percent to others. Fifty percent of rental income is treated as SSTB income, and therefore subject to the stringent deduction rules that apply to SSTBs.


Two limits apply to higher income taxpayers. The first limit reduces the QBID if taxpayers have insufficient wages or property. The second limit restricts or eliminates the deduction for taxpayers with certain types of service income from SSTBs.

Section 199A provides two limits on the QBID that applies only to higher income taxpayers:

  • For married taxpayers filing a joint return, taxable income exceeds $315,0007. For taxpayers between $315,000-$415,000, the limit is phased in. Those whose income exceeds $415,000 are fully subject to the limits.
  • Single, head of household, married filing separate, and trusts – taxable income amounts are exactly half the amounts shown above.

The Two Limits

The first limit requires higher income taxpayers to have some wages or property to fully utilize the QBID. The QBID is limited to the greater of:

  • 50 percent of wages, or if greater,
  • 25 percent of wages plus 2.5 percent of the unadjusted basis of qualified tangible depreciable property.

The second limit reduces or eliminates the deduction for higher income for income arising from a SSTB. Generally, this includes business such as health, accounting, law, and similar professions.


Generally, the wage and property limits are calculated separately for each business. This has the effect of reducing the QBID for higher income taxpayers who lack enough wages or property in one of their businesses.

The aggregation rules allow taxpayers to group businesses together for purposes of the wage and property limits.

Example: A higher income taxpayer owns interest in two separate businesses. XYZ, Inc. (an S corporation) pays lots of wages (far more than the amount needed to fully utilize the QBID); however, ABC, LLC pays no wages. If the taxpayer aggregates, the excess wages of XYZ can be used to allow for a full QBID from the ABC (even though ABC would otherwise lack enough wages on its own).

Note that an SSTB (see discussion below) can never be grouped with any other business8.

Requirements to Aggregate

The following requirements must all be met before a taxpayer can aggregate:

  • Each activity must, itself, be a business.
  • The businesses must be under common control. The same persons, or group of persons, must directly or “indirectly” own a majority interest (50 percent or more) in each business to be aggregated.
  • The entities must have same taxable years9.
  • The businesses to be aggregated must meet two of the three following factors:
    1. Products/Services Test — The businesses provide products and services that are the same (e.g., restaurant and food truck) or that are customarily provided together (e.g., a gas station and car wash).
    2. Sharing Test — The businesses share either facilities or “significant” centralized business elements (such as personnel, accounting, legal, manufacturing, purchasing, human resources, or information technology resources).
    3. Coordination/Reliance —The businesses are operated in coordination with, or reliance on, one or more businesses in the aggregated group (e.g., supply chain interdependencies)


Wages paid by third party payors (such as common paymasters) are treated as if paid by a common law employer. This allows taxpayers to include wages paid by common paymasters in the wage limit. The amounts in question must be paid to common law employees of the taxpayer12.


It’s likely that we’ll be relying upon the proposed regulations next filing season.

Greg White headshotGregory L. White, CPA, is an Adjunct Professor at Golden Gate University and founder of WGN, PS in Seattle. You can contact him at

This article appears in the fall 2018 issue of the WashingtonCPA Magazine, read more articles here.

Learn more at the Pacific Tax Institute, October 29-30, at the Bell Harbor International Conference Center in Seattle. Register here.

Register for other tax update courses instructed by Greg White along with George Koutelieris here.

1 Prop. Reg. 1.199A-1(b)(13).
2 73 TC 766. Note that the Curphey opinion cited Lagreide v. Commissioner, 23 TC 508. Lagreide held that the rental of a single piece of property (in this case a single-family residence) was a business.
3 8 AFTR 2d 5133.
4 Grier v. United States, 218 F.2d 603.
5 Prop. Reg. 1.199A-1(b)(13).
6 Prop. Reg. 1.199A-5(c)(2).
7 Taxable income is determined prior to the QBID.
8 Prop. Reg. 1.199A-4(b)(iv).
9 Prop. Reg. 1.199A-4(b)(1)(iii).
10 Prop. Reg. 1.199A-4(b)(1)(v)(B).
11 Prop. Reg. 1.199A-4(b)(1(v)(C).

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