Many owners of professional practices, including medical offices, law firms, accounting firms, and consulting businesses, may qualify for the Qualified Business Income (QBI) deduction. However, because these businesses are classified as Specified Service Trades or Businesses (SSTBs), the deduction may be reduced or eliminated once taxable income exceeds certain IRS thresholds.

One tax-planning strategy some businesses explore is establishing a Managed Service Organization (MSO).

What Is an MSO?

A Managed Service Organization (MSO) is a separate business entity that provides administrative and operational support services to a professional practice.

These services may include:

• Billing and collections
• Human resources
• Information technology
• Marketing
• Payroll
• Office administration

Rather than providing professional services directly, the MSO manages the day-to-day business operations that support the practice.

How Can an MSO Help?

Instead of operating everything through one business, certain professional practices separate their operations into two entities:

The Professional Practice

• Provides professional services to clients or patients.

The MSO

• Provides administrative and management services to the practice.

The practice pays the MSO for these services. In certain situations, income earned by the MSO may qualify for the Qualified Business Income deduction, even when income earned by the professional practice is subject to SSTB limitations.

Whether this strategy is beneficial depends on your business structure, income, and individual tax situation.

Important IRS Considerations

Because these structures receive IRS scrutiny, they must be established and maintained correctly.

Generally, an MSO should:

• Operate as a legitimate, independent business
• Charge management fees that reflect fair market value
• Provide administrative services only, not professional or clinical services
• Maintain proper documentation and accounting records

Simply creating another entity does not automatically create additional tax benefits.

Is an MSO Right for Your Business?

An MSO can be an effective planning strategy for some professional practices, but it is not the right solution for every business.

Careful planning is essential to determine whether this structure aligns with your operational needs and tax objectives.

How PSA CPA Can Help

PSA CPA works with professional practices throughout the D.C., Maryland, and Virginia region to evaluate entity structures and identify tax planning opportunities.

If you are wondering whether an MSO could help maximize your Qualified Business Income deduction, our team can review your current structure and discuss whether this strategy may be appropriate for your business.

Contact Us: (301) 879-0600

Email Us: contact@psacpa.com

Disclaimer: This article is for informational purposes only and does not constitute legal or tax advice.