Draft Publication 535 Clarifies 199A Deduction Rules for Real Estate and Insurance Brokers

Real estate and insurance agents and brokers can qualify for the Section 199A qualified business income deduction, according to a new draft of  IRS Publication 535. These taxpayers are not engaged in a specified service trade or business under Section 199A. This language clarifies this rule in agreement with proposed reliance regulations the IRS released last August.

Service Businesses Excluded from 199A

Section 199A generally allows individuals, estates and trusts to deduct up to 20% of their qualified business income (QBI) from sole proprietorships and pass-through entities. However, for wealthier taxpayers, income from a specified service trade or business (SSTB) generally is not QBI.

The SSTB exclusion starts to kick in when taxable income for 2018 exceeds these threshold amounts:

  • $157,500, or
  • $315,000 for married taxpayers who file joint returns.

Once taxable income exceeds the applicable threshold amount, the SSTB exclusion is phased in over the next $50,000 ($100,000 for joint filers). SSTB income is fully excluded from QBI when taxable income exceeds $207,500 ($415,000 for joint filers).

In proposed reliance regulations that were released in August, 2018, the IRS provided extensive details about what exactly constitutes an SSTB.

Brokerage Services as SSTB

Section 199A includes brokerage services in the list of SSTBs. According to Proposed Reg. §1.199A-5(b)(2)(x):

  1. In a brokerage service, a person arranges transactions between a buyer and a seller with respect to securities for a commission or fee.
  2. This includes services provided by stock brokers and other similar professionals.
  3. However, brokerage services do no not include services provided by real estate agents and brokers, or insurance agents and brokers.

The latest draft of the Pub 535 text for 199A agrees with this definition. This reverses draft language the IRS released in December that included real estate agents and brokers, and insurance agents and brokers in the SSTB category.

Worksheets and Schedules for 199A Deduction

The draft Pub 535 also offers worksheets and schedules for:

  • figuring the 199 deduction
  • calculating QBI from an SSTB when taxable income is in the phase-in range
  • aggregating business operations
  • loss netting and carryforwards
  • the 199A deduction for patrons of specified agricultural and horticultural cooperatives.

Pub 535 Cautions and Comments

The IRS cautions that this new material is only a draft, so it may change before it is incorporated into the 2018 version of Publication 535. And of course, any IRS Publication is simply the agency’s interpretation of the law, and carries no legal weight on its own.

Finally, members of the public can submit comment on the draft at WI.1040.Comments@IRS.gov.

By Kelley Wolf, J.D., LL.M

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