American Cultural Resources Association - Important Info on the New Tax Bill

Important Info on the New Tax Bill

03/12/2019 8:00 PM | Deleted user

Image source 401kcalculator.org The Internal Revenue Service recently released new regulations interpreting tax reform provisions with the potential to affect many ACRA businesses. The regulations are good news for CRM firms because they support arguments that CRM firms should be able to use the new 20% pass-through deduction without a cap.

In December 2017, Congress passed the Tax Cuts and Jobs Act, 500+ pages of statutory language that the IRS was left to interpret and apply through new regulations. Of particular interest to CRM firms is Section 199A, known as the 20% pass-through deduction. As Burr Neely explained in an email blast to members at the time, Section 199A gives pass-through businesses a 20% deduction, but that deduction phases out after a particular threshold for specialized service trade or businesses (SSTBs).

Because many CRM firms are organized as pass-through businesses, they stand to be dramatically affected by these regulations depending on whether they are defined as SSTBs:

If a business is NOT an SSTB, its income generally IS eligible for the Section 199A Deduction and the deduction is NOT subject to the cap.
If a business IS an SSTB, its income generally IS eligible for the Section 199A Deduction. eligible for the deduction, but the deduction is CAPPED after a certain level of income (when the business owner’s taxable income exceeds $157,500; if married filing jointly, $315,000).

The tax reform bill explicitly excludes architecture and engineering firms from the definition of SSTBs, but includes any trade or business involving the performance of services in several categories, including “consulting” – a broad and vague term.

While the waters are still a bit murky, the new Section 199A regulations weigh against treating CRM firms as SSTBs – therefore maintaining their eligibility for the Section 199A deduction without a cap. The regulations state that while “consulting” includes “the provision of professional advice and counsel to clients to assist the client in achieving goals and solving problems,” it does not include the performance of services other than advice and counsel, nor does it include consulting that is embedded in, or ancillary to, the sale of goods if there is no separate payment for the consulting services. As a recent article from Forbes (link below) explains, “you are a consultant if you are paid ONLY for providing advice and counsel. To the contrary, if you get paid only upon the ‘consummation of the transaction your services were intended to affect,’ you are NOT a consultant.” The consummation of the transaction your services were intended to affect. In the CRM context, you likely get paid when you perform a CRM investigation or deliver the report. That means that you can argue you are not a consultant under this definition.

Some examples the IRS provided:

Government lobbyists: they provide professional advice and counsel to clients to assist in achieving goals and solving problems, and therefore qualify as SSTBs.
Staffing consultant: if the company comes into a workplace, identifies the staffing needs, tells the employer what to do, then gets paid and leaves, the company is a consultant and an SSTB.
Staffing consultant: if the company comes into a workplace, identifies the staffing needs, tells the employer what to do, then actually provides the staffing, the company is NOT a consultant and NOT an SSTB: it is paid for providing employees (not just for the advice and counsel).
Building contractor: while a building contractor inevitably provides advice and counsel as part of its job, those services are ancillary to its central business (e.g., building a new office space). As long as there is no separate fee for the consulting services, the contractor should not be treated as an SSTB.

These analyses appear to exclude CRM firms from the definition of an SSTB and preserve their eligibility for the full Section 199A deduction, without a cap – which is great news for ACRA members.

DISCLAIMER: This blog post is not intended to provide legal advice to any particular company or entity. Be sure to discuss your entity’s specific tax situation with your tax counsel and accountant.

For more information:

IRS final rules

Forbes: IRS Publishes Final Guidance On The 20% Pass-Through Deduction: Putting It All Together

KPMG: What's New in Tax

BDO: Tax Reform’s 199a Redefines “Consulting” for Government Contractors