Real estate has long been considered one of the most profitable and secure investments, and a popular way to enter this market is through real estate brokerage. A real estate broker is a professional who serves as an intermediary between buyers and sellers of real estate properties. They assist in the process of buying, selling, and leasing properties, and earn a commission for their services. However, with the recent changes in tax laws, many real estate brokers are wondering whether they qualify as a specified service business (SSB) under the new tax code. In this article, we will examine the definition of an SSB, the tax implications for real estate brokers, and how HedgeStone Business Advisors can assist real estate brokers in navigating these changes.
What is a Specified Service Business?
In 2017, the Tax Cuts and Jobs Act (TCJA) was signed into law, bringing significant changes to the tax code. One of the changes introduced by the TCJA was the introduction of the qualified business income (QBI) deduction. This deduction allows eligible taxpayers to deduct up to 20% of their qualified business income from their taxable income. However, the QBI deduction is subject to certain limitations, one of which is the limitation on specified service businesses (SSBs).
According to the IRS, a specified service business is 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 the business is the reputation or skill of one or more of its employees or owners. If a business is considered an SSB, the QBI deduction may be limited or completely phased out, depending on the taxpayer’s income.
Are Real Estate Brokers Considered SSBs?
The IRS has specifically included brokerage services as an SSB. However, the definition of brokerage services is somewhat ambiguous, leaving room for interpretation. According to the IRS, brokerage services are any services that involve arranging transactions between a buyer and a seller for a commission or fee. This definition would seem to include real estate brokerage services.
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However, there is some debate over whether real estate brokerage services should be considered an SSB. One argument is that real estate brokers are not merely arranging transactions between buyers and sellers, but are actively engaged in buying and selling real estate themselves. In this case, the income earned by real estate brokers would not be considered income from an SSB, but rather income from a trade or business that is not subject to the SSB limitations.
On the other hand, some argue that the definition of an SSB is broad enough to include real estate brokerage services. Real estate brokers do, after all, earn a commission or fee for arranging transactions between buyers and sellers, which would seem to meet the definition of brokerage services. Ultimately, the determination of whether real estate brokers are considered an SSB will depend on the facts and circumstances of each individual case.
Tax Implications for Real Estate Brokers
If real estate brokers are considered an SSB, their QBI deduction may be limited or completely phased out, depending on their taxable income. For taxpayers with taxable income above a certain threshold, the QBI deduction is subject to a wage and capital limit. This means that the amount of the deduction is limited to the lesser of 20% of the taxpayer’s QBI or the greater of 50% of the W-2 wages paid by the business or 25% of the W-2 wages paid plus 2.5% of the unadjusted basis of qualified property.
For real estate brokers, the W-2 wages paid by the business may be relatively low, as many brokers work as independent contractors and do not receive W-2 wages. In this case, the QBI deduction would be limited to 2.5% of the unadjusted basis of qualified property, which may be significantly lower than the 20% deduction allowed for other businesses.
It is worth noting that the limitations on the QBI deduction for SSBs only apply to taxpayers with taxable income above certain thresholds. For single taxpayers in 2021, the threshold is $164,900, and for married taxpayers filing jointly, the threshold is $329,800. Taxpayers with taxable income below these thresholds are not subject to the SSB limitations and may be able to claim the full 20% QBI deduction.
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How HedgeStone Business Advisors Can Help
Navigating the complex tax laws surrounding real estate brokerage can be challenging, and it is important for brokers to have access to expert advice and guidance. HedgeStone Business Advisors is a team of experienced professionals who specialize in assisting buyers and sellers of businesses, including real estate brokerage businesses. They can provide guidance on tax planning and strategy, as well as assistance with buying or selling a real estate brokerage business.
HedgeStone’s team includes in-house attorneys, accountants, and marketers, with over 150 combined years of business sales experience. They have a successful track record of facilitating over $4 billion in business mergers and acquisitions, and are equipped to handle businesses of all sizes, from small, main street businesses to multi-billion dollar international brands.
For real estate brokers, HedgeStone can provide assistance with valuing and selling their brokerage business, as well as guidance on tax planning and strategy. They can help brokers navigate the complex tax laws surrounding real estate brokerage and ensure that they are taking full advantage of all available tax deductions and credits.
In addition, HedgeStone is always looking to train talented and motivated people to become professional and successful business brokers. They offer comprehensive training and support, as well as the opportunity to earn huge commissions in a new career. If you are interested in joining HedgeStone’s team of dedicated professionals, call them today at (561) 593-3711 for a free consultation.
In conclusion, the question of whether real estate brokers are considered an SSB is somewhat ambiguous and depends on the facts and circumstances of each individual case. If real estate brokers are considered an SSB, their QBI deduction may be limited or completely phased out, depending on their taxable income. However, there are strategies that real estate brokers can use to minimize the impact of these limitations, such as maximizing W-2 wages or investing in qualified property.
To navigate these complex tax laws, it is important for real estate brokers to have access to expert advice and guidance. HedgeStone Business Advisors is a team of experienced professionals who specialize in assisting buyers and sellers of businesses, including real estate brokerage businesses. They can provide guidance on tax planning and strategy, as well as assistance with buying or selling a real estate brokerage business. With HedgeStone’s help, real estate brokers can navigate these changes and ensure that they are taking full advantage of all available tax deductions and credits.
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