Rodgers & Company

Many specified service businesses (SSB) are labor intensive, but may not necessarily acquire a great deal of property. With depreciation limited to some office furniture and computers, these businesses can generate substantial profits, often employ a great number of people, and spend substantial amounts on human capital.

The language in Section 199A (Qualified Business Deduction) leaves the door open to the possibility of creating an employee leasing company, and leasing back your employees in order to reduce some of your tax burden. These leasing companies are commonly known as Professional Employer Organizations (PEO). The employees are leased with a mark up to cover costs plus a profit to the PEO in order to justify the risks associated with the employment arrangement. These businesses have existed for years for a variety of reasons, including mitigating legal issues arising from employment matters, outsourcing payroll, and employee benefits.

By creating a PEO, profits are shifted out of the SSB to the PEO. Income from the SSB is reduced, perhaps solving income phase out limitations. Not to mention, PEO’s greatly reduce the administrative headaches (by using a outsourcing service company) for the service business, particularly in a multi-state business environment.

In the past, our firm has tended to shy away from this approach because the administrative costs were too high for most small businesses. Under the new tax law, more than likely, a substantial portion of the cost can be offset by tax savings under new Section 199A deduction. We are currently taking a hard look at each of our service businesses now by reviewing them on a case by case basis.

If we can assist you with your business, please contact me at 765-561-3445 for a free consultation.