How Does the IRS Define “Actuarial Science” Services From a QSBS Perspective?

One of the many areas of 26 U.S.C.A. § 1202 that is creating the questions from corporations looking to determine if their company qualifies for the tax exemption falls under Section 1202(e)(3)(A); which broadly states how the IRS defines excluded trades or businesses for the qualification of Section 1202. Before analyzing the qualifications Section 1202(e)(3)(A) defines Qualified trades or businesses in the negative:

“[E]xcluding any trade or business involving the performance of services in the fields of health, law, engineering, architecture, 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 1 or more of its employees.”

26 U.S.C.A § 1202(E)(3)(A).

Regulations That Clarify the Broad Language of Section 1202(e)(3)(A)

While guidance in Section 1202 is limited, other regulations help clarify how the IRS likely views these trades or businesses in a QSBS/Section 1202 perspective. These regulations are:

  • Temporary regulations under 26 U.S.C.A. § 448(d)(2) provides definitions for certain fields.
  • A number of cases and IRS rulings (Private Letter Rulings) under Section 448and Section 1202 provide additional guidance regarding what constitutes certain trades or business. These cases and private letter rulings can be found at the bottom of the article.
  • Code of Federal Regulation § 1.199A-5 is used to define businesses that qualify under the qualified business income deduction (QBID); however, the IRS looks at these definitions to expand on the broad language found under § 1202(e)(3).

Actuarial Science Services Defined Under the Code of Federal Regulations

Under § 1.199A-5: Specified service trades or businesses and the trade or business of performing services as an employee, the term definition of performance of services in the Actuarial Science field as:  

“[T]he provision of services by individuals such as actuaries and similar professionals performing services in their capacity as such.”  

Reg. §1.199A-5(b)(2)(v).

However, there are exceptions that this provision has left out of discussion; such as provisions of services by:

  1. Analysts,
  2. Economists, 
  3. Mathematicians, and/or
  4. Statisticians who are not engaged in analyzing or assessing the financial cost of risk or uncertainty of events. See T.D. 9847, see also 84 Fed. Reg. at 2972.

This article does not constitute legal or tax advice. Please consult with your legal or tax advisor with respect to your particular circumstance.