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Editorial 10 MIN READ

The PLLC, revisited: what TCJA did to licensed trades

Eighteen months on, the form most states force on doctors and lawyers now sits on the wrong side of the new 20% deduction

The Editors
Staff, Incorporator.org
10 min read Updated
Contents 7 sections
  1. What §199A actually says
  2. The SSTB exclusion, read in plain English
  3. The compound, laid out numerically
  4. State law has not moved, and is not going to
  5. What a licensed professional should actually do in 2018
  6. The quiet part
  7. Sources

he Tax Cuts and Jobs Act created a 20% deduction for pass-through business income and, in the same section, excluded most of the professions that state law forces into a PLLC from claiming it. A cardiologist, a litigator, and a CPA who were told at formation they could not use a regular LLC are now told at filing they cannot use the headline pass-through break either. That is the compound the licensed trades walked into on January 1.

This is a follow-up to our August 2016 piece on the PLLC for licensed trades, rewritten eighteen months later with the Public Law 115-97 code on the statute books and no final regulations yet in hand.

What §199A actually says

Section 199A, added by Public Law 115-97 on December 22, 2017, gives individual owners of a qualified trade or business a deduction equal to the lesser of twenty percent of qualified business income or twenty percent of taxable income reduced by net capital gain. The deduction runs through 2025 and then sunsets. It is an individual-level deduction, not an entity-level rate, and it flows to partners, S-corp shareholders, and single-member LLC owners on their Form 1040s.

The deduction is capped, once taxable income crosses a threshold, by a wage-and-property test: for a given qualified trade or business, the deduction cannot exceed the greater of (i) fifty percent of the W-2 wages paid by that trade or business or (ii) twenty-five percent of those wages plus 2.5% of the unadjusted basis of qualified tangible property. The threshold in 2018 is $157,500 of taxable income for single filers and $315,000 for joint filers, per § 199A(e)(2), with an inflation adjustment afterward.

Below the threshold, the wage-and-property cap does not apply and neither does the next piece, which is the one that matters here.

The SSTB exclusion, read in plain English

Subsection (d)(2) carves out a category called a "specified service trade or business." Section 199A incorporates the list by cross- reference to § 1202(e)(3)(A), with one edit. The SSTB list therefore covers 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 such trade or business is the reputation or skill of 1 or more of its employees or owners." Section 199A expressly drops engineering and architecture from the 1202 list, so those two professions are not SSTBs for the deduction's purposes.

Owners of an SSTB lose the deduction on that income once taxable income clears the threshold. The cutout is not instant. Above $157,500 single or $315,000 joint the deduction phases out over the next $50,000 single or $100,000 joint, so a fully-phased-out SSTB is one whose owner's total taxable income is $207,500 single or $415,000 joint. Inside the phase-in range, the owner gets a fraction of the deduction; outside it, zero on the SSTB piece.

Look at the SSTB list next to the list of professions that most states require to organize as PLLCs or professional corporations, and the overlap is almost total. Health, law, and accounting are on both lists. Performing-arts and athletics businesses are on the SSTB list without a matching PLLC mandate. Consulting and financial services are SSTBs but are usually allowed in a regular LLC. The clean cases on both sides, the professions that state law forces into a professional entity and Congress then excluded from the deduction, are medicine, dentistry, law, accounting, and the various health-adjacent licensed fields (psychology, optometry, pharmacy, podiatry, physical therapy). Those are the ones that carry the compound.

Engineering and architecture sit on the other side of the same line. State law in New York and several others still forces them into a PLLC, but they remain outside the SSTB definition, so their owners keep the 20% deduction even past the threshold, subject to the ordinary wage- and-property cap.

The compound, laid out numerically

Take a two-partner law firm in New York, organized as a PLLC under Limited Liability Company Law Article 12 because § 1203 did not leave them a choice. Each partner takes $400,000 of qualified business income through to the personal return. Before TCJA, the income was taxed at the partner's ordinary rate and that was the end of the federal question. Under § 199A, the law firm is an SSTB, each partner is well above the $315,000 joint threshold at the individual level (assume married filing jointly with a second income), and once taxable income clears $415,000 the §199A deduction on the firm income goes to zero. A partner in an engineering PLLC filing next door, with identical income and identical state-law formation mandate, keeps the deduction subject only to the wage and property tests.

The dollar gap is straightforward. On $400,000 of SSTB income that fully phases out, the foregone deduction is $80,000; at a 2018 top marginal rate around 37%, that is roughly $29,600 a year of additional federal tax per partner, relative to a non-SSTB pass-through with the same income. The California version, where the firm must be a professional corporation rather than a PLLC and the shareholder draws a salary, carries the same §199A math on the flow-through side and a separate federal-rate question on the C-corp side.

Whether the C-corp side helps or hurts is where TCJA is genuinely ambiguous for professionals. Before TCJA, a qualified personal service corporation under IRC § 11(b)(2) paid a flat 35% federal rate on any C-corp income regardless of bracket, a penalty the Code imposed specifically to stop professionals from sheltering in C-corp form. TCJA struck the separate PSC rate when it rewrote § 11(b). The PSC now pays the same flat 21% as any other C corporation. That is the largest affirmative change the law made for the licensed trades: a PC that retains earnings for genuine corporate purposes pays less than half the federal rate it paid in 2017. The deduction at the individual level is gone for the SSTBs, and the entity-level rate for the corporate form they were historically pushed into is now twenty-one percent.

That does not mean a doctor or lawyer should sprint into a C-corp conversion. The 21% rate applies only to retained earnings; every dollar paid out as salary is ordinary income to the professional, and every dollar paid out as a dividend is taxed again at the shareholder level, with the qualified-dividend rate capping around 23.8% once the net investment income tax is counted. For a practice that distributes substantially all its earnings every year, the integrated rate on the C-corp stack is still higher than the integrated rate on the pass- through stack even without a §199A deduction. The C-corp math starts working only when there is a genuine reason to retain capital inside the entity, which for most single-location professional practices is not the normal case.

State law has not moved, and is not going to

The federal change is the §199A/§11(b) pair. State entity law, which did the original shoving, is where the PLLC mandate lives, and none of it has moved because of TCJA. California Corporations Code § 17701.04 still states that "nothing in this title shall be construed to permit a domestic or foreign limited liability company to render professional services, as defined in subdivision (a) of Section 13401 and in Section 13401.3, in this state." The Moscone-Knox Professional Corporation Act (Cal. Corp. Code §§ 13400 to 13410) continues to route medical, legal, dental, and most health-adjacent practices into a professional corporation under California's General Corporation Law. California did not adopt a PLLC statute in 2016 or 2017, and there is no bill moving through Sacramento in the 2017 to 2018 session that would create one.

New York's Limited Liability Company Law § 1203 still requires members of a PLLC rendering a profession in medicine, dentistry, veterinary medicine, engineering, architecture, land surveying, or landscape architecture to be individually licensed to practice that profession in New York, and BCL § 1503 carries the parallel requirement for professional service corporations. The PLLC form is the only LLC the Department of State will accept for a practicing New York physician, and that has not changed.

Texas requires an entity's organizational filing for a licensed profession to be approved by the profession's regulatory authority. North Carolina, Tennessee, and most of the Southeast and Mid-Atlantic sit in the same posture they sat in when we wrote the first PLLC piece in August 2016. The state-law side of the compound is stable: if you practice medicine in New York, you are in a PLLC whether or not the federal side punishes pass-through income.

What a licensed professional should actually do in 2018

The first step is to know which side of the SSTB line the practice falls on. Health, law, accounting, and actuarial science are named statutorily. The "reputation or skill" catch-all is the piece to watch; its contours will not be clear until Treasury proposes regulations, and as of this April no proposed regulations on § 199A have been published. A professional whose income is built around a specific named fee-for- service practice (physician, lawyer, CPA) is inside the SSTB perimeter. A professional whose income is built around a product the practice sells (optical frames in an optometry clinic, devices in an audiology practice, product lines in a veterinary clinic) will have a harder SSTB question that regulations will need to answer.

The second step is to know where the owner's taxable income sits relative to $157,500 or $315,000. Below threshold, none of this matters and the professional takes the full twenty percent regardless of SSTB status. At threshold, the planning opens up: a spouse's wage income, a retirement plan contribution, a deferred-compensation election, or a year-end charitable gift can keep taxable income under $315,000 and preserve the deduction on the practice income. A year that crosses $415,000 joint is a year with zero §199A on SSTB income, full stop.

The third step is to separate the practice from any non-SSTB trade or business the owner also runs. Rental real estate, a non-professional holding company, and a licensing or royalty stream are not SSTBs and are not disqualified by the owner's day job. Planning that historically ran through a single operating PLLC for simplicity may now be worth running through a two-entity stack, with the SSTB practice separate from the non-SSTB real estate, so that the wage-and-property cap on the non-SSTB piece is computed on its own books.

The fourth step is to wait on Treasury. Proposed regulations under § 199A are expected this year, and the catch-all "principal asset is reputation or skill" language is the piece most in need of clarity before anyone reorganizes. A physician who holds a minority stake in a non-SSTB medical-device company through a separate LLC does not want to learn that the Treasury reads the catch-all broadly enough to pull the device company in through common ownership. Conservative advice in April 2018 is to plan the income-side levers now (threshold management, retirement contributions, year-end timing) and defer any structural reorganization until the rules are drafted.

The quiet part

The §199A design was described during the December 2017 conference markup as a parity fix: the corporate rate was dropping to 21%, and pass-through owners deserved something comparable. The conferees then wrote out of that parity most of the professions that cannot be corporations in the first place, because their state licensing boards require an entity form (PLLC or PC) whose federal treatment now depends on where it falls on a list Congress drew from an unrelated small-business-stock exclusion in § 1202. The small-business-stock exclusion in § 1202, which came into this conversation only because § 199A(d)(2) cross-references it, was never itself available to professional-corporation stock either. The licensed trades sit outside the 20% pass-through deduction and outside the QSBS exclusion, and inside a PLLC or PC mandate the state wrote forty years before either of those federal provisions existed.

The obvious fix, letting SSTB income qualify up to a W-2-wage-capped amount the way non-SSTB pass-throughs do, was discussed in the conference room and did not survive. The fix that did survive, the 21% rate for personal service corporations, helps only the narrow set of practices for which retaining earnings inside a C-corp makes integrated-rate sense. For the ordinary two-partner law firm or three- doctor practice distributing its earnings every year, the net of TCJA is a federal rate cut elsewhere in the economy and a full-price bill at home.

Sources

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