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).
Financial 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 “Financial Services” field as:
“[T]he provision of financial services to clients including managing wealth, advising clients with respect to finances, developing retirement plans, developing wealth transition plans, the provision of advisory and other similar services regarding valuations, mergers, acquisitions, dispositions, restructurings (including in title 11 or similar cases), and raising financial capital by underwriting, or acting as a client’s agent in the issuance of securities and similar services….includes arranging lending transactions between a lender and a borrower.”Reg. §1.199A-5(b)(2)(ix).
A More Specific List of Positions Include:
- Financial advisors,
- Investment bankers,
- Wealth planners,
- Retirement advisors, and
- Other similar professionals performing services. See Reg. §1.199A-5(b)(2)(ix)
However, there are exceptions that this provision has left out of discussion; such as, the performance of services of taking deposits or making loans.
This article does not constitute legal or tax advice. Please consult with your legal or tax advisor with respect to your particular circumstance.