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We are trying to determine if small agencies under an S-corp qualify for the new Section 199A (pass through deduction). The companies that are excluded from this deduction are investment firms, consultants, law firms and financial service firms. The companies the IRS says fit the definition are architects and engineering firms. Do any of you have any insight into the use of this deduction? Thank you.
I am in search of this answer too, seems the answer isn't anywhere to be found clearly. My gut tells me we are going to be in the group that gets the hammer dropped on us. I think we are going to switch to a c-corp just to be safe. Meeting with the accountant on Monday to confirm things, but so far, he isn't even clear on it.
"I can tell them what’s in the law, but they are in sort of a grey area. Unfortunately the only guidance out there is the law itself and the committee report. The key question is whether their business is “a trade or business where the principal asset of such trade or business is the reputation or skill of 1 or more of its employees or owner”. I suspect that a small agency might fit into this category, but it depends on how much advertising placement that they do. The committee reports refer us back to another regulation that give examples of what constitutes a consulting business (not qualifying for the deduction).
Example (9). FTC A taxpayer is in the business of assisting clients in placing advertisements for their goods and services. The taxpayer analyzes the conditions and trends in the client's particular industry, and then makes recommendations to the client regarding the types of advertisements which should be placed by the client and the various types of advertising media (e.g., radio, television, magazines, etc.) which should be used by the client. The client will then purchase, through the taxpayer, advertisements in various media based on the taxpayer's recommendations. The taxpayer's compensation for its services is typically based on the particular orders for advertisements which the client makes. The taxpayer is not considered to be engaged in the performance of services in the field of consulting. The taxpayer is engaged in the performance of services economically similar to brokerage services. Relevant to this determination is the fact that the compensation of the taxpayer for its services is contingent upon the consummation of the transaction the services were intended to effect (i.e., the placing of advertisements by clients). "
So you can see its pretty grey. Let me know if you need a good accountant. They understand our business very well.
On advice of our accountant, we did not make the switch to C corp. The FICA and the "grey area" was enough for us not to take the risk to convert. The FICA taxes in the amount we would have to increase our salaries (due to not being able to take distributions) would take a bite out of what the C corp tax rate would have saved. We are proceeding under the assumption we will be able to take the tax credit because we do not feel we fall into the exclusion, our reputation is not based on the owners and not based on employees. As the owners, we do not do any production work, and most of our employees are not client facing, although clients do meet them sometimes. It is the product we put out that our reputation is built on. And I will argue that we are a product business if it comes down to it, as I have always looked at our business as a product business.