Are Physicians a Specified Trade or Business?
Whether or not physicians are considered a specified service trade or business (SSTB) has significant tax implications. Generally, yes, physicians are considered an SSTB, impacting their eligibility for the Qualified Business Income (QBI) deduction.
Introduction: The Shifting Sands of Section 199A
The Tax Cuts and Jobs Act (TCJA) of 2017 introduced Section 199A, which allows eligible self-employed individuals and small business owners to deduct up to 20% of their Qualified Business Income (QBI). However, this deduction is limited for taxpayers with income exceeding certain thresholds if they operate a specified service trade or business (SSTB). Determining whether are physicians a specified trade or business? is crucial for accurately calculating their tax liability. The SSTB designation can significantly reduce or eliminate the QBI deduction for high-income earners. Understanding the nuances of this rule is vital for physicians to optimize their tax planning.
Defining a Specified Service Trade or Business (SSTB)
An SSTB is defined as any trade or business involving the performance of services in the fields of:
- Health
- Law
- 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 one or more of its employees or owners.
The health category inherently includes physicians, dentists, and other medical professionals. The reputation or skill provision can also apply if the physician’s name or brand is the primary driver of the business’s value.
Income Thresholds and Their Impact
The applicability of the SSTB rules depends on the taxpayer’s taxable income. Here’s a simplified table:
| Taxable Income Range (Single) | Taxable Income Range (Married Filing Jointly) | SSTB Impact |
|---|---|---|
| Below $182,100 | Below $364,200 | Fully eligible for QBI deduction regardless of SSTB status. |
| $182,100 – $232,100 | $364,200 – $464,200 | QBI deduction may be limited, but not completely eliminated. Phase-in rules apply. |
| Above $232,100 | Above $464,200 | QBI deduction is completely disallowed if the business is an SSTB. For physicians, this threshold is crucial. |
These thresholds are adjusted annually for inflation. As income increases within the phase-in range, the allowable QBI deduction decreases until it is completely eliminated at the upper limit. This creates a substantial incentive for tax planning.
Tax Planning Strategies for Physicians
If are physicians a specified trade or business? and their income exceeds the thresholds, they may consider various tax planning strategies:
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Structuring the Business: While difficult for medical practices, explore structuring options to potentially separate non-SSTB activities. This requires careful analysis and may not be feasible for many practices.
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Increasing Business Expenses: Legitimate business expenses can reduce taxable income, potentially bringing it below the SSTB thresholds. These expenses should be ordinary and necessary for the business.
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Maximize Retirement Contributions: Contributions to qualified retirement plans reduce adjusted gross income (AGI), which can impact the taxable income used to determine SSTB eligibility.
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Wage vs. Capital Income: Analyze how income is categorized. Some income may be recharacterized to fall outside the scope of QBI.
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Consult with a Tax Professional: Given the complexity of Section 199A, consulting with a qualified tax advisor is essential. They can provide personalized advice based on your specific circumstances.
Common Mistakes and Misconceptions
Several common mistakes can lead to incorrect QBI deduction calculations:
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Ignoring the Income Thresholds: Failing to consider the income thresholds and incorrectly assuming eligibility for the QBI deduction.
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Misclassifying Income: Incorrectly classifying income as QBI when it is not, or vice versa.
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Overlooking the SSTB Rules: Assuming that the SSTB rules do not apply to their business without proper analysis.
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Not Documenting Calculations: Failing to adequately document the QBI deduction calculation, which can lead to penalties if audited.
FAQs
Are physicians automatically considered a specified service trade or business (SSTB)?
Yes, generally, physicians performing medical services are considered an SSTB. The definition of an SSTB under Section 199A includes any trade or business involving the performance of services in the field of health.
What happens if a physician’s taxable income is below the SSTB thresholds?
If a physician’s taxable income is below the applicable thresholds, they are generally eligible for the full QBI deduction, regardless of whether they operate an SSTB. The thresholds are adjusted annually for inflation.
Can a physician who owns a medical practice still claim the QBI deduction if their income exceeds the SSTB thresholds?
Potentially, but the QBI deduction will be either limited or completely disallowed. The extent of the limitation depends on how far above the thresholds their taxable income falls. Phase-in rules apply within certain income ranges.
Are employed physicians subject to the SSTB rules?
No, the SSTB rules primarily affect self-employed physicians, partners in partnerships, and S corporation shareholders. Employed physicians receiving W-2 wages are not subject to the QBI deduction limitations.
Does it matter what type of medical practice a physician owns?
No, the type of medical practice generally doesn’t affect SSTB designation. Whether it’s a solo practice, group practice, or specialty clinic, the delivery of medical services typically classifies it as an SSTB.
Can a physician structure their business to avoid being classified as an SSTB?
While difficult, some physicians may explore restructuring options, but this is highly fact-specific. The core activity of providing medical services usually necessitates an SSTB designation. Separating non-SSTB activities might be possible in some cases.
What is the “reputation or skill” clause in the SSTB definition?
The “reputation or skill” clause applies to businesses where the principal asset is the reputation or skill of one or more employees or owners. While potentially applicable in some specific physician scenarios (celebrity doctors), the health classification typically overrides this.
How is the QBI deduction calculated for physicians with income within the phase-in range?
The QBI deduction is calculated using a complex set of rules that consider taxable income, QBI, and a wage limitation. Tax software or a qualified tax professional is recommended for accurate calculations.
What documentation should physicians keep to support their QBI deduction?
Physicians should maintain detailed records of their income, expenses, and QBI calculations. This includes financial statements, tax returns, and any supporting documentation used to determine eligibility for the QBI deduction.
If a physician also owns a non-SSTB business, how are the QBI rules applied?
The QBI deduction is calculated separately for each business. If the physician’s overall taxable income exceeds the SSTB thresholds, the SSTB rules will apply to the medical practice.
Are there any recent court cases or IRS guidance that clarify the SSTB rules for physicians?
Yes, the IRS has issued various notices, regulations, and rulings providing guidance on Section 199A and the SSTB rules. Consult the most recent IRS publications and court cases for the latest developments. Consult a qualified tax advisor for specific guidance.
How often should physicians review their tax planning strategies in light of the SSTB rules?
Physicians should review their tax planning strategies annually with a qualified tax professional, especially in light of changing income levels, tax laws, and business structures. This will ensure they are maximizing their tax benefits and complying with all applicable regulations.