According to IRC Sec. 1202(e) (3) (A), A Specified service trade or business refers to a trade or business to which any of the following points mentioned below apply:
- It includes the performance of services (except architects, bankers, property managers, real estate brokers, and engineers) in various fields such as performing arts, actuarial sciences, law, health, accounting, athletics, consulting, brokerage services, and financial services.
- This type of service-based business entirely depends upon the skill and reputation of its business owners or employees.
- Investing, investment management, trading, or dealing in commodities, securities, and partnership interests are all a part of these businesses.
If an owner is having a specified service trade or business (SSTB):
Based on the total taxable income of the business, it can be determined whether the business will get a full 20% deduction, a limited deduction, or no deduction at all.
Introduced in 2018, Section 199A of the IRC (Internal Revenue Code) offers a 20% deduction of domestic qualified business income from a partnership, sole proprietorship, or S corporation to non-corporate taxpayers, i.e., trusts, individuals, and estates.
However, SSTBs are not included in this provision if the taxable income of the non-corporate taxpayer exceeds $415,000 for married taxpayers and $207,500 for all others.
In proposed regulations for IRC §199A released on August 8, the IRS and U.S. Department of the Treasury define an SSTB as any trade or business involved in the performance of services in any of the following categories.
|Defined as an SSTB||Not defined as an SSTB|
|Health||All the healthcare services offered directly to the patients by physicians, psychologists, nurses, dentists, pharmacists, veterinarians, and other healthcare professionals offering services directly to the recipient.||Health clubs and health spas, manufacturing, testing, and sale of medical devices and pharmaceuticals.|
|Law||In addition to lawyers, paralegals, mediators, legal arbitrators, and other similar professionals are included.||Printer services, stenography services, and delivery services that do not demand specific skills pertinent to the field of law.|
|Athletics||Services performed by people who participate in athletic competitions, such as team managers, coaches, and athletes in sports like skiing, golf, tennis, bowling, martial arts, boxing, snowboarding, hockey, soccer, football, basketball, baseball, billiards, and racing.||Services that do not demand unique skills in athletic competition, such as the operation and upkeep of the facilities, tools, or equipment used in athletic events. In addition to this, services performed by people who broadcast and disseminate information regarding an athletic event to the public through audio or video is not included.|
|Trading||Services performed by commodities trading, partnership interests, or securities trading are included.||Any farmer or manufacturer engaged in hedging transactions.|
|Dealing||Services comprising of dealing in commodities, securities, or partnership interests, such as purchasing and selling of securities and commodities regularly to customers in the ordinary course of business.||A taxpayer originating loans regularly in the ordinary course of a business or trade of making loans but engaging in no more than negligible loan sales is not included.
|Accounting||In addition to accountants, return preparers, enrolled agents, financial auditors, and other similar professionals are included.||No list is provided by the IRS.|
|Actuarial Science||Services offered by individuals known as actuaries or other similar professionals are included.||Mathematicians, statisticians, and analysts, not involved in analyzing, assessing, or controlling the financial cost of the uncertainty of events or any type of risk.
|Brokerage services||As defined in Section 475 ( c) (2), Services performed as brokerage services such as a person arranges transactions between a seller and a buyer concerning the securities for a commission or a fee. Services offered by stockbrokers and other related professionals are included.
|· Services offered by insurance brokers and agents and real estate brokers and agents are not included.|
|Financial services||Individuals offering financial services directly to the customers. For instance, advising the clients regarding their finances, wealth management, development of wealth transition plans, development of retirement or pension plans, and other similar services related to mergers, acquisitions, restructurings, dispositions, valuations, raising capital by acting as an underwriter or agent. All the services offered by retirement advisors, wealth planners, investment bankers, financial advisors, other similar professionals are also included.
|Banking is not included.|
|Investment management||Services comprising of investing, as well as, investment management including the fee receipt for providing investing, investment management services, or asset management. In addition to this, advice related to buying and selling of investments is included.
|Real property management is not included.|
|Performing Arts||Services performed by individuals involved in creating performing arts, such as singers, actors, directors, entertainers, musicians, and other similar professionals.||Services that do not demand the unique skill of performing arts such as the operation and upkeep of the facilities, tools, or equipment used in performing arts. In addition to this, services performed by people who broadcast and disseminate information regarding a performing arts event to the public through audio or video is not included.|
|Consulting||Services offering counseling and professional advice to the clients to assist them in solving problems and achieving goals. Also, counseling and advice regarding advocacy with the intent of influencing decisions made by a government or governmental agency. Further, all attempts to influence other government officials and legislators on behalf of a client by lobbyists and other related professionals.
|Services performed not involving counsel and advice, such as sales or similar services economically or offering training and educational courses. Also, the performance of consulting services related to the performance of a service or sale of a good on behalf of a business or trade that is not an SSTB if a separate payment for consulting services is not there.
Example: D is owning the business of licensing software to the customers. D starts discussing and evaluating the needs of his customer regarding computer software purchases. D advises all his customers regarding computer software products he holds licenses for. D gets a flat and fixed price from his license. After the customer purchases the software, D assists the customer in the implementation of the software. D is involved in the business or trade of licensing software. His business is not considered an SSTB in the consulting field.
Threshold amounts for an SSTB:
An SSTB income can be treated as QBI only if the taxpayer’s taxable income before the QBI deduction does not exceed the annual threshold (as on 2018- $315,000 for MFJ and $157,500 for the rest). The amount of SSTB income that is considered QBI phases out if SSTB tax income exceeds the threshold limit by $100,000 (for MFJ) and $50,000 (for the rest).
So, taxpayers having a taxable income of $415,000 or more (for MFJ) and for all others as $207,500, cannot claim any SSTB income as QBI.
Businesses not considered as SSTB:
Definitely, there are many self-employed business houses and single-owners that are not considered to be SSTBs. A few of them are listed below:
- Rideshare services
- Real estate and property management
- Childcare and eldercare
- Restaurants and food trucks
- Notary services
- Grooming (pets, skin, hair, nails, etc)