{"id":9751,"date":"2020-06-22T05:56:03","date_gmt":"2020-06-22T12:56:03","guid":{"rendered":"http:\/\/evergreensmallbusiness.com\/?p=9751"},"modified":"2022-09-29T09:35:56","modified_gmt":"2022-09-29T16:35:56","slug":"physician-199a-deductions-can-work-if-you-know-rules","status":"publish","type":"post","link":"https:\/\/evergreensmallbusiness.com\/physician-199a-deductions-can-work-if-you-know-rules\/","title":{"rendered":"Physician 199A Deductions Can Work (if You Know Rules)"},"content":{"rendered":"

\"Physician<\/a><\/p>\n

This week, I talk about physician 199A deductions.<\/p>\n

More specifically, I talk about how many physicians who own part or all of their medical services practices can take the Section 199A deduction.<\/p>\n

Yes, I know. The law and the regulations lead you to conclude otherwise. But many physicians can use the 199A deduction.<\/p>\n

And for one of three reasons: their taxable income falls or can be pushed below the thresholds\u2026 or they can use separate financial records to cull out qualified business income amounts \u2026 or in some special cases because what the physician does<\/em> doesn\u2019t count as specified service trade or business.<\/p>\n

But let\u2019s start with a quick review.<\/p>\n

First The 199A Deduction in a Nutshell<\/h2>\n

The 199A deduction works like this. Someone who earns income from a sole proprietorship, partnership or S corporation gets a deduction equal to (potentially) 20 percent of the \u201cqualified business income.\u201d<\/p>\n

Basically? The qualified business income equals the amount shown on the Schedule C or the K-1 from the partnership or S corporation.<\/p>\n

For example, someone who earns $100,000 as a self-employed physician probably gets a $20,000 199A deduction. Someone who earns $200,000 maybe gets a $40,000 deduction. Someone who earns $1,000,000 might get a $200,000 deduction.<\/p>\n

And then I should mention a couple of bookkeeping glitches. First, some business expenses (like for a pension or self-employed health insurance) don\u2019t get counted on the Schedule C or on the partnership or S corporation tax return. So you have to adjust the Schedule C or K-1 number.<\/p>\n

The other bookkeeping glitch. Not all of the income that shows up on a K-1 counts as qualified business income. Pretty much, only what shows in box 1.<\/p>\n

Warning:<\/strong>\u00a0 I\u2019m cutting some corners here and skipping over some details. But if you need more precise information, don\u2019t worry. We\u2019ve got a bunch of 199A articles here at the blog.<\/a>\u00a0 And for people who just can\u2019t get enough, you can even purchase and download a copy of our \u201cMaximizing Section 199A Deductions<\/a>\u201d e-book.<\/p>\n

The Rub for Physicians<\/h2>\n

The only problem with a physician taking the Section 199A deduction? The law and related regulations say you lose the deduction if you earn your business income providing medical services and taxable income rises too high.<\/p>\n

The exact language comes from the final regulation and is worth quoting here with the critical phases italicized and boldfaced:<\/p>\n

(ii)<\/strong>\u00a0Meaning of services performed in the field of health.<\/em><\/strong>\u00a0For\u00a0purposes\u00a0of section 199A(d)(2) and\u00a0paragraph (b)(1)(i)\u00a0of this section only, the\u00a0performance of services in the field of health\u00a0means the provision of medical\u00a0services\u00a0by\u00a0individuals\u00a0such as physicians<\/em>,<\/strong> pharmacists, nurses, dentists, veterinarians, physical therapists, psychologists, and other similar healthcare professionals performing\u00a0services\u00a0in their capacity as such. The performance of\u00a0services\u00a0in the field of health does not include the provision of\u00a0services\u00a0not directly\u00a0related\u00a0to a medical\u00a0services\u00a0field, even though the\u00a0services\u00a0provided may purportedly relate to the health of the\u00a0service recipient. For\u00a0example, the performance of\u00a0services\u00a0in the field of health does not include the operation of health clubs or health spas that provide physical\u00a0exercise\u00a0or conditioning to their customers,\u00a0payment\u00a0processing, or the research, testing, and manufacture and\/or\u00a0sales\u00a0of pharmaceuticals or medical devices<\/em>.<\/strong><\/p><\/blockquote>\n

And this other bit. The income level that causes a physician to lose the deduction? For 2020, the physician taxpayer loses her or his deduction as taxable income rises from $326,600 to $426,600 for joint filers, and from $163,300 to $213,300 for single filers.<\/p>\n

Note that the law phases out the deduction as taxable income moves through the ranges just given. Accordingly, once a married taxpayer\u2019s taxable income exceeds $426,600 or a single taxpayer\u2019s taxable income exceeds $213,300, boom, no Section 199A deduction.<\/p>\n

The Three Ways Physicians Salvage Section 199A Deduction<\/h2>\n

Now that you\u2019ve got that background, let\u2019s talk about how a physician can usually take the Section 199A deduction on at least some and maybe all of their business income.<\/p>\n

As mentioned, a physician enjoys roughly three ways to salvage the Section 199A deduction.<\/p>\n

Income Below or Pushed Below Thresholds<\/h3>\n

The first way? Which is obvious probably? When the physician’s taxable income falls below the thresholds.<\/p>\n

For example, a single taxpayer making (say) $163,300 or less as a sole proprietor? She or he gets the Section 199A deduction. Even if the \u201cbusiness\u201d provides \u201cmedical services.\u201d<\/p>\n

The same thing happens with a married taxpayer making $326,600. She or he gets the Section 199A even if the \u201cbusiness\u201d provides \u201cmedical services.\u201d<\/p>\n

Remember too that the phaseout law looks at taxable income. Accordingly, if someone saves, say, $20,000 into a 401(k) and tallies up $30,000 of Schedule A \u201citemized deductions,\u201d those deductions create space.<\/p>\n

With $50,000 of tax deductions, a single taxpayer doesn\u2019t start losing the 199A deduction at $163,300 of business income. And a married taxpayer doesn\u2019t start losing the 199A deduction with $326,600 of business income. Rather, they can make $50,000 more than this amount and still<\/em> take the full deduction.<\/p>\n

The deduction, by the way, equals the lesser of 20% of the qualified business income or 20% of the taxable income taxed at ordinary tax rates. So, deductions that drive down the taxable income may effect the 199A deduction.<\/p>\n

And while I’m on this subject, can I give you another example? Suppose some physician earns exactly $300,000 more than the threshold ($326,600 in 2020). So, $626,600.<\/p>\n

If this taxpayer saves $50,000 into a pension, accumulates $50,000 in itemized deductions, and books $200,000 of losses from a spouse\u2019s business or investments, the tax return shows $326,600 of taxable income and the return includes a generous 199A deduction. (The 199A deduction in this case probably equals 20% of the 326,600.)<\/p>\n

Non-Medical-Services Income Separated and Tracked<\/h3>\n

The second way for a physician to get a 199A deduction? If the practice sells services or\u00a0 products that don\u2019t actually count as medical services, possibly (probably?) the physician can treat that activity as a separate trade or business. And then, as long as she or he separates the books and financial records, that should mean a 199A deduction.<\/p>\n

This gambit amounts to a bookkeeping strategy. And the specifics depend on the non-medical-services a physician provides. But teaching, research, writing all count as \u201cnon-medical\u201d and so if separated into different trades or businesses and then separately accounted for, the business owner probably gets a 199A deduction.<\/p>\n

And then in some cases other services and products should produce 199A deductions too. Some eye doctors probably sell glasses. Some physicians sell health related products. A number of physicians \u201cblog.\u201d<\/p>\n

You see the recipe. Reorganize your activities into two trades or businesses, one that lacks eligibility because it’s an SSTB and one that doesn’t. Then, take the 199A deduction on the non-SSTB income.<\/p>\n

By the way, this a second trade or business with \u201cseparable financial records and books\u201d approach isn\u2019t specific to physicians. So the bookkeeping and related rules described in another blog post apply: Final Section 199A Regulation: Separate vs. Separable.<\/a><\/p>\n

Recategorizing the Income as Qualified Rather than Disqualified<\/h3>\n

And then possibly<\/em> a third way exists for placing a Section 199A deduction onto a self-employed physician\u2019s tax return. And this third way? It requires looking at what a physician actually does to determine whether tax law<\/em><\/strong> considers that work \u201cmedical services.\u201d But this gets complicated, so we need to go into the weeds here.<\/p>\n

Peek back at the 199A regulation I quoted earlier\u2026 You can see that the final regulations disqualify<\/em> income a physician earns from \u201cthe provision of medical services.\u201d Unfortunately, the regulations don\u2019t define the term \u201cmedical services.\u201d And this bit of sobering reality. The Internal Revenue Code doesn\u2019t define the term \u201cmedical services\u201d either.<\/p>\n

But it turns out that the IRS has developed a definition of medical services which they use for other sections of the Code. And you might want to use the same definition for 199A.<\/p>\n

Medical Services Defined<\/h3>\n

That definition? A \u201cmedical service\u201d is something defined as an allowable medical care “itemized” deduction under code section 213(d).<\/p>\n

In a nutshell, Section 213(d) provides that medical care consists of services for the diagnosis, cure, mitigation, treatment, or prevention of disease, including services for the purpose of affecting any structure or function of the body.<\/p>\n

Not surprising, not everything \u201cmedical-y\u201d creates a Section 213(d) medical deduction. Which means not everything \u201cmedical-y\u201d counts as a medical service\u2014at least for purposes of some parts of the tax law.<\/p>\n

A first example… In applying Section 448\u2019s rules of when someone provides medical services, the IRS says \u201clook at Section 213(d).\u201d (See Technical Advice Memorandum 9222004<\/a>.) Note that Section 448 carries more weight than you might at first think when looking at Section 199A. The key bit of phrasing about what is a specified service trade or business comes from Section 448. Further, Congress approvingly references Section 448’s regulations when talking about how Section 199A should work in its committee report.<\/a><\/p>\n

A second example… In determining when a physician\u2019s salary rises to a level that triggers a Section 4960 excise tax because she or he isn’t providing medical services, the IRS\u00a0 again says, \u201clook at Section 213(d).” (See IRS Notice 2019-09<\/a>. ) Note that Section 4960 doesn’t connect closely to Section 199A. But it matters (maybe<\/em>) that Congress added Section 4960 to the Internal Revenue Code at the same time as it added Section 199A. It would seem odd to use different definitions for a key term flowing out of the same legislation.<\/p>\n

Cosmetic Surgery For Example\u2026<\/h2>\n

Just to save casual readers from slogging through Section 213(d), here is the big example of this: Cosmetic surgery.<\/p>\n

Specifically, here\u2019s that blurb with the relevant bit of statute highlighted that says \u201chey cosmetic surgery and anything like cosmetic surgery? Yeah, they don\u2019t count as medical deductions\u2026 sorry.\u201d<\/p>\n

(9)<\/strong>Cosmetic surgery.\u2014<\/strong><\/p>\n

(A)<\/strong>In general.\u2014<\/p>\n

The term \u201cmedical care\u201d does not include\u00a0cosmetic surgery\u00a0or other similar procedures,<\/strong> unless the surgery or procedure is necessary to ameliorate a deformity arising from, or directly related to, a congenital abnormality, a personal injury resulting from an accident or trauma, or disfiguring disease.<\/p>\n

(B)<\/strong>Cosmetic surgery defined.\u2014<\/p>\n

For purposes of this paragraph, the term \u201ccosmetic surgery\u201d means any procedure which is directed at improving the patient\u2019s appearance and does not meaningfully promote the proper function of the body or prevent or treat illness or disease.<\/p><\/blockquote>\n

Therefore, a physician who provides cosmetic surgery or cosmetic procedures isn\u2019t necessarily providing what tax law considers a \u201cmedical service.\u201d That means the physician arguably gets the Section 199A deduction.<\/p>\n

And there are other examples where the failure to achieve a Section 213(d) deduction creates or arguably creates a Section 199A deduction, too. Fertility treatments for same sex parents, for example. Surrogacy costs for some women.<\/p>\n

Closing Comments<\/h2>\n

Time to end this discussion. I\u2019ve chattered on way too long.<\/p>\n

But let me leave you with this thought. Most \u201cbusiness owning\u201d physicians can get the Section 199A onto their tax returns. Many (most?) physicians report taxable incomes below the phase-out limits for example. And even those with higher incomes can push down their taxable incomes with deductions.<\/p>\n

Surely a few physicians can do their bookkeeping in a way that creates books and financial records that separately report on qualified business income earned along side or inside a medical practice.<\/p>\n

And then beyond that? Sure. A few physicians may be able to sidestep “specified service trade or business” status by using the IRS\u2019s definitions of \u201cmedical services.\u201d<\/p>\n","protected":false},"excerpt":{"rendered":"

This week, I talk about physician 199A deductions. More specifically, I talk about how many physicians who own part or all of their medical services practices can take the Section 199A deduction. Yes, I know. The law and the regulations lead you to conclude otherwise. But many physicians can use the 199A deduction. And for […]<\/p>\n","protected":false},"author":1,"featured_media":9753,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_genesis_hide_title":false,"_genesis_hide_breadcrumbs":false,"_genesis_hide_singular_image":false,"_genesis_hide_footer_widgets":false,"_genesis_custom_body_class":"","_genesis_custom_post_class":"","_genesis_layout":"","footnotes":""},"categories":[6,17,38],"tags":[],"class_list":{"0":"post-9751","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-business-taxes","8":"category-corporate-taxation","9":"category-section-199a","10":"entry"},"yoast_head":"\nPhysician 199A Deductions Can Work (if You Know Rules) - Evergreen Small Business<\/title>\n<meta name=\"description\" content=\"Physicians may be able to take the 20% Section 199A deduction uif they understand the 199A formula and the IRS's definition of "medical services."\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/evergreensmallbusiness.com\/physician-199a-deductions-can-work-if-you-know-rules\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Physician 199A Deductions Can Work (if You Know Rules)\" \/>\n<meta property=\"og:description\" content=\"Physicians may be able to take the 20% Section 199A deduction uif they understand the 199A formula and the IRS's definition of "medical services."\" \/>\n<meta property=\"og:url\" content=\"https:\/\/evergreensmallbusiness.com\/physician-199a-deductions-can-work-if-you-know-rules\/\" \/>\n<meta property=\"og:site_name\" content=\"Evergreen Small Business\" \/>\n<meta property=\"article:published_time\" content=\"2020-06-22T12:56:03+00:00\" \/>\n<meta property=\"article:modified_time\" content=\"2022-09-29T16:35:56+00:00\" \/>\n<meta property=\"og:image\" content=\"https:\/\/evergreensmallbusiness.com\/wp-content\/uploads\/2020\/06\/iStock-940167676.jpg\" \/>\n\t<meta property=\"og:image:width\" content=\"724\" \/>\n\t<meta property=\"og:image:height\" content=\"483\" \/>\n\t<meta property=\"og:image:type\" content=\"image\/jpeg\" \/>\n<meta name=\"author\" content=\"Stephen Nelson CPA\" \/>\n<meta name=\"twitter:card\" content=\"summary_large_image\" \/>\n<meta name=\"twitter:creator\" content=\"@SeattleCPA\" \/>\n<meta name=\"twitter:site\" content=\"@SeattleCPA\" \/>\n<meta name=\"twitter:label1\" content=\"Written by\" \/>\n\t<meta name=\"twitter:data1\" content=\"Stephen Nelson CPA\" \/>\n\t<meta name=\"twitter:label2\" content=\"Est. reading time\" \/>\n\t<meta name=\"twitter:data2\" content=\"9 minutes\" \/>\n<script type=\"application\/ld+json\" class=\"yoast-schema-graph\">{\"@context\":\"https:\\\/\\\/schema.org\",\"@graph\":[{\"@type\":\"Article\",\"@id\":\"https:\\\/\\\/evergreensmallbusiness.com\\\/physician-199a-deductions-can-work-if-you-know-rules\\\/#article\",\"isPartOf\":{\"@id\":\"https:\\\/\\\/evergreensmallbusiness.com\\\/physician-199a-deductions-can-work-if-you-know-rules\\\/\"},\"author\":{\"name\":\"Stephen Nelson CPA\",\"@id\":\"https:\\\/\\\/evergreensmallbusiness.com\\\/#\\\/schema\\\/person\\\/81bbd61b04df6d67d261eaa871e65e36\"},\"headline\":\"Physician 199A Deductions Can Work (if You Know Rules)\",\"datePublished\":\"2020-06-22T12:56:03+00:00\",\"dateModified\":\"2022-09-29T16:35:56+00:00\",\"mainEntityOfPage\":{\"@id\":\"https:\\\/\\\/evergreensmallbusiness.com\\\/physician-199a-deductions-can-work-if-you-know-rules\\\/\"},\"wordCount\":1901,\"commentCount\":11,\"image\":{\"@id\":\"https:\\\/\\\/evergreensmallbusiness.com\\\/physician-199a-deductions-can-work-if-you-know-rules\\\/#primaryimage\"},\"thumbnailUrl\":\"https:\\\/\\\/evergreensmallbusiness.com\\\/wp-content\\\/uploads\\\/2020\\\/06\\\/iStock-940167676.jpg\",\"articleSection\":[\"business taxes\",\"Corporate taxation\",\"Section 199A\"],\"inLanguage\":\"en\",\"potentialAction\":[{\"@type\":\"CommentAction\",\"name\":\"Comment\",\"target\":[\"https:\\\/\\\/evergreensmallbusiness.com\\\/physician-199a-deductions-can-work-if-you-know-rules\\\/#respond\"]}]},{\"@type\":\"WebPage\",\"@id\":\"https:\\\/\\\/evergreensmallbusiness.com\\\/physician-199a-deductions-can-work-if-you-know-rules\\\/\",\"url\":\"https:\\\/\\\/evergreensmallbusiness.com\\\/physician-199a-deductions-can-work-if-you-know-rules\\\/\",\"name\":\"Physician 199A Deductions Can Work (if You Know Rules) - 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