It is possible to challenge / dispute the IRS’s determination regarding the eligibility of your business.
For example, in a ruling letter issued on May 22, 2014, Ruling 201436001, the IRS examined whether a corporation which provides products and services primarily in connection with the pharmaceutical industry, helping to commercialize experimental drugs, meets the “qualified trade or business” criteria.
The IRS noted,
“the thrust of Section 1202(e)(3) is that businesses are not qualified trades or businesses if they offer value to customers primarily in the form of services, whether those services are the providing of hotel rooms, for example, or in the form of individual expertise (law firm partners).”
Further, the IRS noted that this particular company
“is not in the business of offering service in the form of individual expertise. Instead, the Company’s activities involve the deployment of specific manufacturing assets and intellectual property assets to create value for customers.”
The IRS determined that the Company “does not perform services in the health industry within the meaning of Section 1202(e)(3)” and is therefore engaged in a qualified trade or business.
Another case (Private Letter Ruling 201717010) involved a company that provides health testing services and laboratory services, using a proprietary product and tools. The IRS reviewed this case and ruled that the company is engaged in a qualified trade or business under §1202(e)(3), suggesting that there are healthcare-related businesses that could still qualify as Qualified Small Businesses.
The IRS noted:
“Although Company’s laboratory reports provide valuable information to healthcare providers, Company does not provide health care professionals with diagnosis or treatment recommendations for treating a healthcare professional’s patients nor is Company aware of the health care provider’s diagnosis or treatment of the healthcare provider’s patients. In addition, the skills that Company’s employees have are unique to the work they perform for the Company and are not useful to other employers.”
In evaluating if a business may qualify it may help to start by asking whether the company’s customers ultimately receive a product or service. If the ultimate product is a service, is the provision of the service attributable to the skills and/or reputation of certain employees, or more so through the company’s intangible or tangible assets.
While there is no one answer to the question “what service businesses do or do not qualify for QSBS,” various cases offer guidance to consider. As these cases demonstrate, the ambiguity of the tax code is not necessarily as unpleasant as one might think because it provides individuals an opportunity to provide an argument to their reasoning.
This article does not constitute legal or tax advice. Please consult with your legal or tax advisor with respect to your particular circumstance.
This article does not constitute legal or tax advice. Please consult with your legal or tax advisor with respect to your particular circumstance.
