Taxpayers can include income from certain service businesses when calculating the deduction under IRC §199A.
This 20% business deduction is also known as the “qualified business income deduction” or QBID. It is available to individuals, trusts and estates.
For a service business to qualify for the QBID, it must meet the definition of a “specified service trade or business” (SSTB).
This post covers when a service business falls within the requirements of an SSTB.
Income Included in the §199A Deduction Determination
- a “qualified trade or business”;
- a specified service trade or business; or
A “qualified trade or business” is any trade or business except:
- the business of being an employee; or
- an SSTB.
A taxpayer can include income from a qualified trade or business when determining their deduction under §199A.
However, income from an SSTB can be included only by taxpayers whose income does not exceed a threshold amount of taxable income set for each tax year.
What is a Specified Service Trade or Business?
Under §199A, a taxpayer has an SSTB if the principal asset of their trade or business is the reputation or skill of one or more of its employee or owners.
A treasury regulation provides a list of SSTBs, called “listed SSTBs.” These include:
- health services,
- law services,
- accounting services,
- actual science services,
- performing arts services,
- consulting services,
- athletics services,
- financial services,
- brokerage services,
- investing and investment management services,
- trading services, and
- dealers in securities, partnership interests, or commodities.
The §199A Deduction: Examples of Service Businesses that are SSTBs
Treasury and the IRS provide guidance on what constitutes an SSTB.
For example, dealing in securities is an SSTB when the taxpayer regularly buys securities from and sells securities to customers in the ordinary course of a trade or business.
For a better understanding of how to apply facts and services to listed SSTB categories, this post goes through some examples from the Treasury regulation.
Health Service Businesses
Health services under §199A include medical services provided by:
- physical therapists,
- psychologists, and other
- similar healthcare professionals.
The services provided must be directly related to a medical services field.
Example: Health Services
Sarah is a board-certified pharmacist who contracts as an independent contractor with X Medical Facility (XMF).
XMF is a small medical facility in a rural area. It employs one pharmacist full time and contracts with Sarah when its needs an additional pharmacist.
When working as a pharmacist at XMF, Sarah engages in many tasks. She receives and reviews orders from doctors who provide care at XMF, making recommendations to them on dosing and alternatives. For patients, she fills prescriptions, gives inoculations, and checks for drug interactions.
The services that Sarah performs at XMF are health services under §199A.
Sarah’s income from her contract with XMF is income from an SSTB.
Consulting Service Businesses
Consulting services means providing professional advice and counsel to clients to help them achieve goals and solve problems.
It also includes lobbyists who advocate and influence government and legislative decision-making.
Sales, training, and education are not consulting services.
Example: Consulting Services
David is in the business of helps companies streamline their personnel structures.
David studies their client’s organization and structure and compares it to peers in its industry. David then recommends and advises their client regarding possible changes in the client’s personnel structure, including the use of temporary workers.
David’s compensation and fees are not affected by whether the client hires temporary workers.
David provides consulting services within the meaning of §199A.
Income he earns from the consulting business is income from an SSTB.
Service Businesses Based on Reputation or Skill of Employee or Owner
An SSTB includes a trade or business whose principal asset is the reputation or skill of one or more of its employees or owners.
Such a trade or business receives income for:
- endorsing products or services;
- the use of an individual’s image, likeness, name, signature, voice, trademark, or any other symbols associated with the individual’s identity; or
- for appearances at an event or on radio, television, or other media format.
Example: Services Based on Skill and/or Reputation
Laura is a well-known chef who owns and runs a restaurant business. She is the sole member of a limited liability company that owns multiple restaurants.
In addition, Laura receives an endorsement fee of $500,000 for the use of her name on a line of cooking utensils and cookware. She is able to endorse products due to the value of her skill and reputation as a chef.
Laura’s income from the business of being a chef and owning restaurants is not income from an SSTB.
However, Laura is also in the trade or business of receiving endorsement income due to her skill and reputation.
Laura’s income from the business resulting in the endorsement fee is income from an SSTB.
Phase-in for the Exclusion of Income from SSTBs
Income from a specified service trade or business (SSTB) is not qualified business income (QBI) under IRC §199A for higher-income taxpayers.
When taxable income exceeds a threshold amount, the SSTB income exclusion is phased in until taxable income reaches a ceiling amount. The IRS sets different thresholds based on the type of taxpayer:
- head of household;
- married filing jointly and
- married filing separately.
For tax years that begin in 2020, the threshold amounts and phase ceilings are:
- for single and head of household returns, $163,300 and $213,300;
- for married filing separate returns, $163,300 and $213,300; and
- for married filing joint returns, $326,600 and $426,600.
Service Businesses as SSTBs
Is your service business, or your client’s service business, an SSTB?
You may find the answer in the definition or examples provided in the Treasury regulation.
However, some taxpayers will have business models that don’t squarely fall within the definitions and examples provided in the regulation.
A taxpayer can request a letter ruling if the guidance is not clear for a taxpayer’s business model.
By Lisa Lopata, J.D.