In order to claim the new Section 199A deduction, business income must have come from a qualified trade or business. While the IRS has not provided specifically what is a qualified trade or business, they have given details on what is not a qualified trade or business.
The first condition is that the income must be earned other than as the result of being an employee. Taxpayers cannot claim the deduction against W-2 income. This comes as no surprise considering the deduction was intended all along for self-employed and business owners.
The second condition is that income from specified service businesses are not eligible for the deduction. Specified service businesses are “any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees or owners” as defined by the IRS, going further to detail as “substantially all of the activities of which involved the performance of services in the fields of health, law, accounting, actuarial science, performing arts or consulting.” The IRS has provided a non-inclusive list of examples of the previously noted specified service trade or businesses, which they also note includes any similar professionals in their capacity as such:
- Health - Physicians, Pharmacists, Nurses, Dentists, Veterinarians, Physical Therapists, Psychologist, Other similar health care professionals who provide medical services directly to a patient
- Law - Lawyers, Paralegals, Legal arbitrators, Mediators
- Accounting - Accountants, Enrolled agents, Return preparers, Financial auditors, Actuarial science
- Performing arts - Actors, Singers, Musicians, Entertainers, Directors
It is important to remember however, that if taxable income is below a certain dollar threshold ($315,000 for married filing jointly, $157,500 for all others) then the exclusion of income from specified service business does not apply, meaning that income from those service businesses is eligible for the 20% deduction (subject to other limitations).