How Does the IRS Define “Law” 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 448 and Section 1202 provide additional guidance regarding what constitutes certain trades or business.
- 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).
Law 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 law field as:
“[T]he performance of services by individuals such as lawyers, paralegals, legal arbitrators, mediators, and similar professionals performing services in their capacity as such.”Reg. §1.199A-5(b)(2)(iii).
However, there are exceptions that this provision has left out of discussion; such as, the performance of services that do not require the expertise or unique skills to perform in the law field . Some examples include:
- The Services by Printers,
- Delivery services, or
- Stenography services. See Reg. §1.199A-5(b)(2)(iii)
This article does not constitute legal or tax advice. Please consult with your legal or tax advisor with respect to your particular circumstance.