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).
Accounting 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 Accounting field as:
“[T]he provision of services by individuals such as accountants, enrolled agents, return preparers, financial auditors, and similar professionals performing services in their capacity as such.”Reg. §1.199A-5(b)(2)(iv).
“As noted in the preamble to the proposed regulations, the provision of services in the field of accounting is not limited to services requiring state licensure. It is based on a common understanding of accounting, which includes tax return and bookkeeping services. Whether a real estate settlement agent is engaged in the performance of services in the field of accounting depends on the facts and circumstances including the specific services offered and performed by the trade or business.”T.D. 9847
However, there are exceptions that this provision has left out of discussion; such as:
- Payment Processing, and/or
- Billing Analysis. See Reg. §1.199A-5(b)(2)(iv)
Private Letter Rulings Providing Guidance on What Activities are Considered the Performance of Services in the Field of Accounting
The Private Letter Ruling that helps analyze a real-world example of what does not qualify as “Accounting” services is found in PLR 8927006 which involves the billing of insurance claims is not considered to fall under the Accounting services.
The company’s business surrounds the processing of computerized billing. Statements are created and mailed on a monthly basis until the patient’s payments are complete.
“The taxpayer’s service does not consist of the preparation of audit and financial statements or the preparation of tax returns nor does the taxpayer perform bookkeeping services for its clients, except to the extent necessary to process the computerized billings and to maintain accounts receivable balances in the computer. Therefore, the taxpayer is not in the business of providing accounting services within the meaning of section 1.448-1T(e)(5)(vii)…”I.R.S. Tech. Adv. Mem. 8927006 (July 7, 1989)
This article does not constitute legal or tax advice. Please consult with your legal or tax advisor with respect to your particular circumstance.