Bifurcating a specified trade/business for 199 purposes

Had a client (sole prop law practice) ask an interesting question:

We hosted a tax seminar last week. Other attorney offices are treating their non-legal staff as qualifying for the deduction through some analysis under the computations specified under the 199 statute. Can you provide an analysis of our non-legal staff (secretary, office manager, financial manager, office admin, IT admin and two runners) to determine the deduction/credit we might qualify for?

Wanted to get the groups thoughts on this. It seems like she is wanting to bifurcate the business into separate "lines" in order to qualify for the 199 deduction. Will this strategy work? I've talked to some practitioners about doing something similar for medical practices that sell products (ie: setting up separate entities for those doc's that sell contacts, glasses, dental implants, etc so that these lines would qualify for the QBID) but haven't heard of doing so for a dedicated service business like legal or accounting.

Hmm. Depending on the state, could this be an employment agency and would that create additional burdens?

Wanted to get the groups thoughts on this. It seems like she is wanting to bifurcate the business into separate "lines" in order to qualify for the 199 deduction.

Premature needs to await IRS guidance. 199A(e)(1)(A) is applied at partner or shareholder level, so seems unlikely one could split a single partnership or S corp or Schedule C into multiple partnerhsips,s corps or Schedule C trades or business. That said see WSJ article 4-3-18 "Crack and Pack: How companies are mastering the new tax code" for a law firm splitting up its lawyers from staff.

I agree with WEISSEA -- wait for IRS guidance. It’s likely that when the IRS issues guidance, they will define a “qualified trade or business” for sec. 199A similar to the passive activity grouping regulations (1.469-4(c)). Under those regs, one or more businesses may be grouped into a single activity if the activities of the businesses constitute an “appropriate economic unit” or if they satisfy a "facts and circumstances" test. That guidance may prevent a law firm, or other service-type business, from doing exactly what you're suggesting.

I did my post tax season unwinding in Palm Springs this year. Great golf. One day I paired up with a tax attorney/CPA from Boston and we discussed this very subject. He agreed that this "loophole" would be closed much in the manner dave829 suggested and he felt it was way too premature to start trying to reorganize around 199A.

One of the reasons I'm putting off CPE on this until very late in the year.

Good idea, HowardS. Perhaps the end of 2018 will be as much fun as the end of 2017 was.

Thanks and agreed. I think it's too early to tell. Feels a lot like the melodramatic Tangible Property Reg's with the mass filing of the 3115 before any guidance was given.

I did look at the WSJ article and what they describe is exactly what my client is asking.