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Staffing Industry Secures a Big Income Tax Win, Officially Eligible for New 2018 Tax Break

January 23, 2019

BJ Hoffman, CPA, CFE

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Final regulations issued by the IRS last week affirmed that most staffing firms will indeed be eligible for the new 2018 “pass-through entity” tax deduction, under the Tax Cuts and Jobs Act (TCJA). As indicated in our August, 2018 post, we were optimistic that the staffing industry would be eligible for the new tax deduction, as outlined in Section 199(A) of the Internal Revenue Code. Last week’s pronouncement confirms the good news.

The new tax break allows owners of certain “pass-through” business entities (S-corporations, LLCs, LLPs, partnerships, and sole proprietorships) to potentially deduct up to 20% of “Qualified Business Income” – or “QBI” - from federal taxable income.

When passed, the TCJA left tax professionals with a litany of questions concerning a taxpayer’s eligibility for the new tax break, due to the unclear language in the law. Certain industries (including consulting, medicine, accounting, and law) were specifically barred from benefitting under section 199A, while others were clearly eligible. However, a wide swath of industries (particularly those in certain service businesses) were left guessing as to whether they would benefit. The temporary staffing industry was particularly uncertain as to their standing under the TCJA.

Before the final regulations were issued, the American Staffing Association had written to the Treasury Department and outlined several arguments as to why the staffing industry should be able to claim the tax deduction. The principal argument was that staffing firms are selling labor (and are not providing excluded services, such as health or law). The arguments were clearly successful.

The actual amount of the tax deduction is extremely complicated and is based upon certain formulas, including the amount of the business’s wages, and will vary greatly from company to company, depending upon specific and unique taxpayer circumstances. Those staffing firms who offer true consulting services (workforce consulting, for example) should also be wary of some continuing limitations on the ability to claim the tax deduction.

It is imperative for staffing firms to coordinate closely with their tax advisors in order to maximize the potential benefits. Still, this month’s news is a “huge win” for the staffing industry.