Most attorneys, accountants, and other professionals operate as unincorporated sole practitioners, or through partnerships and limited liability partnerships (LLP), making them owners of pass-through entities. Such professionals may be able to cut the effective tax rate on the income from their practices through the use of the qualified business income (QBI) deduction [Internal Revenue Code (IRC) section 199A]. This deduction, which was created by the Tax Cuts and Jobs Act of 2017 (TCJA), is up to 20% of QBI, but limitations and other rules can limit or prevent any write-off. This article discusses some key issues related to the QBI deduction for professionals in light of recently proposed regulations (REG-107892-18, 8/8/18).


The QBI deduction is a personal deduction claimed on an individual’s federal income tax return as a reduction to adjusted gross income (AGI). The deduction does not reduce business income or gross income. Rules on the treatment of the QBI deduction for state income tax purposes depend on each state’s conformity with federal income tax rules and special state-level rules. It appears that in New York State and New York City, the QBI deduction is not allowed, because income taxes start with federal AGI, which does not include the QBI deduction. Future guidance from the New York Department of Taxation and Finance could, however, allow the deduction to be treated as an itemized amount for state and city income tax purposes.

The QBI deduction is 20% of qualified business income for a professional with taxable income up to $315,000 on a joint return or $157,500 on any other type of return. For example, a sole practitioner who is single and has taxable income of $125,000 can claim the full 20% of QBI deduction.

When a professional’s taxable income exceeds this threshold, then two limitations come into play:

General limitation.

The deduction is the lesser of 1) 20% of QBI, or 2) the greater of a) 50% of W-2 wages, or b) 25% of W-2 wages plus 2.5% of the unadjusted basis immediately after acquisition (UBIA) of qualified property.

Limitation for specified service trades or businesses.

The amount of QBI that can be taken into account phases out over the next $100,000 for joint filers or $50,000 for other filers. In effect, a practitioner with taxable income over $415,000 on a joint return or $207,500 on another type of return cannot take any QBI deduction, as all of the QBI has been phased out.

For example, if a partnership’s taxable income is less than the threshold amount, but each of the partnership’s individual partners has income that exceeds the threshold amount plus $50,000 ($100,000 for a joint return), none of the partners may claim a QBI deduction with respect to any income from the partnership’s specified service trade or business (defined below).

Guaranteed Payments

Qualified business income means the net amount of items of income, gain, deduction, and loss attributable to the practice. Not taken into account are capital gains and losses (including IRC section 1231 gains), dividends, and interest income on working capital, reserves, and similar accounts (i.e., investment-type interest). Interest income on accounts or notes receivable received, however, is part of QBI.

QBI does not include guaranteed payments received for services performed for the practice [IRC section 707(c)]; however, the partnership’s related expenses for making the guaranteed payments may be part of QBI.

While guaranteed payments are not part of QBI, they do factor into the partners’ taxable income. Because taxable income limits or bars the QBI deduction, the impact of guaranteed payments needs to be taken into account.

Specified Service Trades or Businesses

A specified service trade or business (SSTB) includes any 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. Engineering and architecture are not included. Proposed regulations help to clarify what constitutes an SSTB. Below are the rules for law and accounting:


This includes the provision of services by lawyers, paralegals, legal arbitrators, mediators, and similar professionals. It does not include the provision of services that do not require skills unique to the field of law; for example, services by printers, delivery services, or stenography services.


This includes the provision of services by accountants, enrolled agents, return preparers, financial auditors, and similar professionals in their capacity as such. The provision of services in the field of accounting is not limited to services requiring state licensure as a CPA. The field of accounting does not include payment processing and billing analysis.

Multiple Activities

If professionals derive income from rentals of property to their partnerships, proposed regulations help to clarify when the income is or is not treated as an SSTB. In general, an SSTB includes any trade or business that provides 80% or more of its property or services to an SSTB if there is 50% or more common ownership [determined under IRC sections 267(b) and 707(b)]. If less than 80% is provided but there is 50% common ownership, then that portion of the trade or business providing property or services to the commonly owned SSTB is also treated as part of the SSTB.

If professionals derive income from rentals of property to their partnerships, proposed regulations help to clarify when the income is or is not treated as an SSTB.


A law firm that is a partnership owns its own office building and employs administrative staff. The firm divides into three partnerships: Partnership 1 performs legal services to clients, Partnership 2 owns the building and rents it to the firm, and Partnership 3 employs the administrative staff through a contract with Partnership 1. All three partnerships are owned by the same individuals (the original firm partners). Because the common ownership test is met, all three partnerships are treated as one SSTB.

Calculating the QBI Deduction

The QBI deduction is applied at the individual level; it does not affect practice income that is passed through to the owners. Thus, as stated earlier, it is the professional’s taxable income that determines the amount of the deduction.

Schedule K-1, however, must report items needed by professionals to compute their deductions. More specifically, on Schedule K-1 of Form 1065, “other information” must include the following:

  • Section 199A income (code Z)
  • Section 199A W-2 wages (code AA)
  • Section 199A unadjusted basis (code AB)
  • Section 199A REIT dividends (code AC)
  • Section 199A PTP income (code AD).

Special Basis Adjustments

Partnerships may make special basis adjustments under IRC sections 734(b) or 743(b). Proposed regulations provide that partnership special basis adjustments are not treated as separate qualified property [Treasury Regulations section 1.199A-2(c)(1)(iii)]. Allowing the special basis adjustments to be treated as separate qualified property could result in a duplication of UBIA if, for example, the fair market value of the property has not increased and its depreciable period has not ended.

Impact on Self-employment Tax

The QBI deduction does not reduce net earnings from self-employment for purposes of calculating self-employment tax. In effect, self-employment tax is calculated as though there were no QBI deduction.

More Guidance to Come

Some of the guidance from the proposed regulations may be changed when final regulations are released. Comments to the proposed regulations are being accepted no later than October 1, 2018. In the meantime, FAQs posted by the IRS help to clarify some of the rules for this important tax deduction (

Sidney Kess, JD, LLM, CPA is of counsel to Kostelanetz & Fink and a senior consultant at Citrin Cooperman & Company, New York, N.Y. He is a member of the NYSSCPA Hall of Fame and was awarded the Society’s Outstanding CPA in Education Award in May 2015. He is also a member of The CPA Journal Editorial Advisory Board.