The Internal Revenue Service (“IRS”) issued final regulations which provides guidance with respect to implementing the new qualified business income (“QBI”) deduction (“Section 199A”) which, as added by the Tax Cuts and Jobs Act (“TCJA”) allows the owners of pass-through entities like limited liability companies, partnerships, S corporations, and sole proprietorships to deduct 20% of their qualified business income. With the final regulations, owners of Long-Term Care Facilities (“LTCF”) Skilled Nursing Facilities (“SNF”) may not have the ability to take advantage of the QBI deduction.
Background
The TCJA enacted in 2017 provides taxpayers a deduction of QBI from a qualified trade or business operated directly or through a pass-through entity under the following two components:
- Eligible taxpayers may be entitled to a deduction of up to 20% of QBI from a domestic business operated as a limited liability company, partnership, S Corporation or sole proprietorship. For taxpayers with taxable income that exceeds $315,000 for a married couple filing a joint return, or $157,500 for all other taxpayers, the deduction is subject to limitations such as the type of trade or business, the taxpayer’s taxable income, the amount of W-2 wages paid by the qualified trade or business and the unadjusted basis immediately after acquisition (“UBIA”) of qualified property held by the trade or business. Income earned through a C corporation or by providing services as an employee is not eligible for the deduction.
- Eligible taxpayers may also be entitled to a deduction of up to 20% of their combined qualified real estate investment trust (“REIT”) dividends and qualified publicly traded partnership (“PTP”) income. This component of the section 199A deduction is not limited by W-2 wages or the UBIA of qualified property.
The IRS defines QBI as qualified items of income, gain, deduction and loss from any qualified trade or business. Importantly, a qualified trade or business does not include a specified service trade or business (“SSTB”) which by IRS definitions includes “a trade or business involving the performance of services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, investment management, trading, dealing in certain assets or any trade or business where the principal asset is the reputation or skill of one or more of its employees.”
The QBI deductions based on income begin to be phased out when an SSTB owner’s taxable income (calculated before any QBI deduction) exceeds $157,500 for single filer or $315,000 for a married filing joint filer. The phaseout is complete when the owner’s taxable income exceeds $207,500 for single filer or $415,000 for a married filing joint filer.
Application to LTCF and SNF
In the final regulations the IRS acknowledges that LTCF and SNF provide multiple services to their residents. The IRS provides an example in Reg. §1.199A-5(b)(3) to help determine if an LTCF or SNF is performing services in the field of health and categorized as an SSTB. The example states the following: X is the operator of a residential facility that provides a variety of services to senior citizens who reside on campus. These services include housing, laundry, meals, entertainment and other similar services. The residential facility contracts with outside third-parties who provide medical, health and physical therapy services to its residents. The outside third-parties bill the residents directly for any medical, health and physical therapy services performed. It is determined the X does not perform services in the field of health and not categorized as an SSTB.
Owners of LTCF and SNF would need to review all the services provided at the facility to their residents. The LTCF and SNF may be categorized as an SSTB if the organization is “providing services in the field of health” including nursing and physical therapy and billing their residents directly for these services. If an LTCF or SNF determines that their facility meets the SSTB determination, owners of LTCF and SNF would be ineligible for the QBI deduction when their income rises above certain thresholds.
Since LTCF and SNF provide multiple services to their residents, the IRS states it will require a facts and circumstances inquiry that is beyond the scope of the final regulations in order to determine if the facility is in the trade or business of performing services in the field of health.
Conclusion
It can be challenging for owners of LTCF or SNF to determine if their facility is in the trade or business of performing services in the field of health. Owners of LTCF and SNF should review the final regulations closely and ensure they are applying them correctly to their business structure and how this specifically impacts their business.
Author: John Smith | [email protected]
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