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Section 199A Proposed Regulations Provide De Minimis Safe Harbor for Specified Service Businesses

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Section 199A Proposed Regulations Provide De Minimis Safe Harbor for Specified Service Businesses

New proposed regulations under I.R.C. § 199A provide a de minimis exception for owners of passthrough entities which offer a mix of products and specified services.

QBI Deduction and Specified Service Trade or Business

Generally, I.R.C. § 199A provides a deduction to non-corporate taxpayers of up to twenty (20%) percent of their “qualified business income” (QBI). QBI is income derived from a “qualified trade or business” which is defined as any trade or business other than:

  • The trade or business of performing services as an employee, and
  • A “specified service trade or business” (SSTB).

Thus, owners of an SSTB with taxable income above a certain threshold are excluded from taking the twenty (20%) percent QBI deduction. Section 199A defines an SSTB to include any trade or business that “involves the performance of services in” a specified service activity, e.g. health, law, accounting, performing arts, consulting, athletics, investment management, financial and brokerage services.

Based on the absence of any threshold in the original statutory language, many business owners were concerned that even a small amount of specified service activity by their business could “taint” the entire enterprise, i.e. make it ineligible for the QBI deduction. Similarly, the Treasury Department and the IRS felt that requiring all taxpayers to evaluate and quantify any amount of specified service activity would create administrative complexity and undue burdens for both taxpayers and the IRS. Therefore, the proposed regulations provide for a de minimis rule analogous to the regulations under I.R.C. § 448.[i]

De Minimis Rule

Under the de minimis rule, if a trade or business has gross receipts of $25 million or less for the tax year, it will not be treated as a SSTB provided less than 10% of the business’s gross receipts are attributable to the performance of specified services. If a trade or business has gross receipts in excess of $25 million, less than 5% of gross receipts must be attributable to the performance of specified services to qualify for the exception.


The proposed regulations are not binding until they are adopted as final. However, taxpayers may rely on the rules set forth therein until then. The de minimis rule provides much-needed clarity to mixed product-service businesses, as well as a bright-line rule not subject to easy manipulation. Thus, it will almost certainly be included in the final regulations.

Looking Ahead

Unfortunately, as proposed, the de minimis rule appears to act as a “cliff” i.e. once a business earns 10% of its gross receipts from a specified service, ALL of the income from the enterprise is treated as income from an SSTB. Ten percent is also not a particularly high bar to clear, and many businesses which are predominantly product-oriented may still be precluded from taking the QBI deduction.

Several commentators are calling for the cliff to be replaced with a phase-out or allocation requirement in the final regulations. However, it is unlikely the regulations will be finalized before the 2018 filing season, so passthrough entities providing specified services in addition to other products and services should be very careful not to exceed the 10% (or 5%) threshold for the 2018 tax year.

[i] See Treas. Reg. § 1.448-1T(e)(4).

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