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Staffing Firms and the New Pass Through Deduction

ASA Seeks Clarification on Pass Through Deduction

February 15, 2018
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Provisions under the newly enacted “Tax Cuts and Jobs Act of 2017” enable “Pass Through” business entities (S-Corporations, Limited Liability Companies, Partnerships, and Proprietorships) to potentially exclude up to 20% of profits from federal taxation.

In many respects, the law’s provisions and their potential applicability to certain industries was vaguely worded. Certain industries are excluded from the “Pass Through” tax break (lawyers, accountants, physicians, and consultants, for example). Other industries are clearly eligible for the income tax exclusion, including manufacturers and investors in real estate. However, other industries, including Staffing, are left to try to interpret poorly written regulations to determine eligibility.

The key language is the Act’s definition of “specified services” that are not eligible for the income tax exclusion:

“…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 the employees or owners...”

The language may call into question as to whether any service related business will be eligible for the tax break. The language also may point towards a need to evaluate the type of temporary staffing services being offered to clients – will travel nursing revenues be ineligible for the tax break because of their health nature, while light industrial staffing revenues remain eligible?

In response, the American Staffing Association has retained legal counsel to represent the industry in working with the US Treasury Department, offering further guidance as far as applicability of the tax provisions to the staffing industry. This area of the tax law has been identified as a priority by the Internal Revenue Service for administrative guidance. As such, it is hoped that during 2018, further guidance will be offered in terms of applicability of these provisions to the staffing industry.

It will be important for staffing firms to remain nimble during 2018, so that proper responses can be effected once further guidance is received. Now is the time to discuss compensation methodologies and choice of entity with your tax advisor, which will allow for flexibility in 2018 once more clarity is offered with regard to the tax regulations.