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Consulting question

Technical topics regarding tax preparation.
#1
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My client is a high end Interior Designer. Most of her income is from the sale of hard goods - furniture, fabric, artwork, etc. She puts together a design plan, works with architects, contractors and the client to achieve the final goal. Her services are not available on a standalone basis, in other words, you can't go into her office and ask for ideas on how to make your space look great, and walk out the door with a plan in hand and a bill. Which I believe is an important point in the definition of a consultant according to what I've read.

Because of the nature of the beast, some of her revenue is from consulting, and we are working on ways to keep that within the boundaries of the 10% safe harbor so she can retain her ability to utilize the QBID on her personal return. She has a line item on her financials called Time Billing which is used to track time spent on a project by everyone in the office. When I reviewed the activity, much of what is booked there is of an administrative nature and is attributable to her staff. My thought is that there should be a separate category to identify actual consulting time spent, and that its use would be limited to the principal whose is the only person actually consulting with the client. We are wondering if that would hold up in an audit if the question of consulting time arose. The staff people rarely if ever meet with or "consult" with clients.

One example of a possible conflict we discussed would be time charged for an internal office meeting. An employee meets with the principal to discuss some aspect of the project. She books her time and so does the principal. My thought is that the intent of the meeting on the part of the employee is to apprise the principal of her findings, which would be administrative. For the principal the intent is to become knowledgeable so she is able to consult and advise her client on what needs to be done, which would make her time consulting. Would the argument of "intent" hold up to an auditor?

Are there better ways to document and book the consulting part of this?
 

#2
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I'm just bumping this to the top. Several people seem to have read this post, which I appreciate and I know it's kind of long, but if anyone can add something to the discussion of whether or not the intent of meetings would be considered in a "facts and circumstances" discussion with an auditor, or if anyone has some idea we could utilize to ensure that only the time of the principal would be considered to be consulting, it would be much appreciated. QBID for this client is about $45,000, so losing it would have a substantial affect on the client's personal tax return.
 

#3
Nilodop  
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I'll put my toe in the water, but it's guessing on my part.

My first reaction is that consultants almost all have staff that do their grunt work, some administrative, some research, whatever, but the thrust is in support of the consulting and, I believe, is part of consulting for QBI purposes. My point of reference is, e.g., the big consulting firms like Cap Gemini, Accenture, SAP and others.

However, here's a really long-shot idea, for which I have no support, but I also haven't looked for any. ... some of her revenue is from consulting, and we are working on ways to keep that within the boundaries of the 10% safe harbor .... Maybe, if it's that small, it's really no more consulting than, say, a truck manufacturer or dealer who spends lots of time on a big order helping the customer (think UPS, FedEx, USPS) decide which model makes the most sense to buy. They don't bill for the time (I assume), but it's certainly built into the selling price.

So, does this She has a line item on her financials called Time Billing which is used to track time spent on a project by everyone in the office. mean that the client/customer gets a line item for consulting on their invoice, and if so, can the amount just be built into the hard asset sale price? And then the cost would be treated as selling expense?
 

#4
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I am with Nilodop. There is an example in the 199A regs. regarding a software consulting/licensing/sales company. It comes to the conclusion that the consulting is basically a part of them selling/licensing the software and not an SSTB. This seems to be very similar to the interior designer if most of her income is from the sale of furniture items. In a CPE I attended last year, I recall something being said about not billing separately for the consulting. Have the consulting cost built into the price of the furniture and let the invoice show the sale of the hard goods.
 

#5
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I'm a little surprised by this. The interior designers I have worked with, unless they simply did not directly sell any tangible items, never billed separately for their time. The invoices only ever reflected the hard goods they sold, which we also knew were heavily marked up to cover their time in meeting with clients and designing the spaces. The broad definition of 199A final regs for consulting, however, makes it seem very difficult to make a claim that none of the time spent by the interior designer and staff would NOT fall under consulting, as they are clearly working to solve problems and achieve goals for their clients. My thought is in an audit, and until we have additional guidance to rely on, the IRS would say it is impossible to not have consulting as a component of an interior design firm, regardless of whether or not they accept walk-ins. That then begs the question of what is the actual value of consulting time vs. retail value of goods, and how can they be adjusted to keep consulting under 10%. No doubt the IRS would consider what like-type companies do. What I mean by this is if value of consulting time is below market, the IRS is not going to accept it for purposes of maintaining QBI as an SSTB.

Also, given final regs were not even issued until this past January, I would not place much weight on CPE theories of how to handle such a situation that were not devised AFTER the final regs were issued. I know Art Werner had some suggestions on it in an updated course, but cannot recall what was said.
 

#6
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Per the regs:
(vii) Meaning of services performed in the field of consulting. For purposes of
section 199A(d)(2) and paragraph (b)(1)(vi) of this section only, the performance
of services in the field of consulting means the provision of professional advice
and counsel to clients to assist the client in achieving goals and solving problems.
Consulting includes providing advice and counsel regarding advocacy with the
intention of influencing decisions made by a government or governmental agency
and all attempts to influence legislators and other government officials on behalf
of a client by lobbyists and other similar professionals performing services in their
capacity as such. The performance of services in the field of consulting does not
include the performance of services other than advice and counsel, such as sales
or economically similar services or the provision of training and educational
courses. For purposes of the preceding sentence, the determination of whether a
person's services are sales or economically similar services will be based on all
the facts and circumstances of that person's business. Such facts and
circumstances include, for example, the manner in which the taxpayer is
compensated for the services provided. Performance of services in the field of
consulting does not include the performance of consulting services embedded in,
or ancillary to, the sale of goods or performance of services on behalf of a trade or
business that is otherwise not an SSTB (such as typical services provided by a
building contractor) if there is no separate payment for the consulting services.

Note the last sentence above.
 

#7
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Thanks so much for the feed back. I have read the regs restated by Seaside and I read the example of the software company that was provided. I just checked to see how Time Billing is presented on an invoice. She will have an invoice that is a Time Billing Invoice and it lists the time of each employee who has worked on the project and what was done, from following up on PO's to E-mailing someone, Research, Installation time, Design Services, and data entry. There is no line item for "Consulting" specifically, the closest is "Design Services". which in some cases is e-mailing someone.

The regs state: "The performance of services in the field of consulting does not include the performance of services other than advice and counsel, such as sales or economically similar services....the determination of whether a person's services are sales or economically similar services will be based on all the facts and circumstances of that person's business". That's the phrase that leads me to think there should be an item specifically for "Consulting", because much like the computer software example, most of what I see in "Time Billing" is what it takes for them to sell their product. Actually consulting with a client, as it's defined, is primarily the realm of the principal.

Right now their revenue is $2,093,425, and "Time Billing" accounts for $278,325 which includes the time spent by everyone including the principal. These numbers and ratios change throughout the year, but at the end of 2018 Time Billing accounted for about 11% or 12% of total revenue, so it's very close to the 10% safe harbor, it just seems there must be a way to make a change that will conserve the use of the QBI especially if the regs can be interpreted as I did in the above paragraph.
 


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