The IRS has recently issued the final regulations on the qualified business income deduction (IRC section 199A) that was part of the Tax Cuts and Jobs Act (TCJA).
A little background:
The qualified business income deduction represents a deduction up to 20% of income from a domestic business operated as a sole proprietorship or through a partnership, S corporation, trust or estate. The deduction is subject to a number of limitations including those imposed on businesses classified as a “specified service trade or business.”
What exactly is a “Specified service trade or business”?
Section 199A, through reference to other internal revenue code sections, defines a specified service trade or business as a trade or business involving the performance of services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or 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.
Implications for Healthcare Businesses
Despite hard lobbying by the senior care industry, the Treasury department and IRS have not provided clear guidance as to the applicability of these rules relative to Skilled Nursing Facilities (SNF) and Assisted Living Facilities (ALF). However, most facilities will unfortunately be classified as a specified service trade or business and depending upon income not eligible for the deduction except in the case below.
The final regulations included an additional example whereby an operator had a residential facility that provided a variety of services to senior citizens that resided at the facility. The determining point is whether a resident pays the SNF or ALF directly for any healthcare services. If they do, it does not qualify for the deduction. If, however, the health and medical services are directly billed by and paid to an outside provider, it does qualify for the deduction.
As you can see from the discussion above, there are no simple answers regarding applicability of this new deduction and we encourage all SNF and ALF owners to discuss section 199A with their accountant or tax advisor, as each situation is unique.