8586 / What is a “specified service trade or business” (SSTB) and how does SSTB classification impact a pass-through entity’s tax treatment under the 2017 tax reform legislation?

A “specified service trade or business” (SSTB) is a trade or business involving the performance of services in the fields of health, law, consulting, athletics, financial services, brokerage services or any trade or business where the principal asset of the business is the reputation or skill of one or more employees or workers, or one which involves the performance of services consisting of investing and investment management trading or dealing in securities, partnership interests or commodities. If an entity is classified as a SSTB, it may be wholly or partially unable to take advantage of the QBI deduction depending upon whether the taxpayer’s income for the year exceeds the relevant threshold amounts (see Q ).¹

The regulations provide that all SSTBs specifically listed in Section 199A are subject to the legislation’s limitations on the 20 percent QBI deduction, but the regulations also go on to further define each of these categories. For example, with respect to “law”, lawyers, paralegals, arbitrators and mediators are specifically included in the SSTB category. However, other services related to law, such as printing, stenography and delivery services, are specifically excluded from the SSTB category.²

“Health” includes doctors, nurses, dentists, pharmacists, veterinarians, physical therapists, psychologists and “similar healthcare professionals that provide services directly to patients”, but excludes from SSTB categorization individuals that provide services that would improve the health of an individual, such as those who work in spas, health clubs, or who are involved in research, testing or sales of pharmaceuticals or medical devices.³ The following additional rules apply with respect to specified fields:

Accounting. Accountants, enrolled agents, return preparers, financial auditors and similar professionals are SSTBs.

Actuarial Science. Actuaries and similar professionals are SSTBs. Analysts, economists, mathematicians, and statisticians who are not engaged in analyzing or assessing financial costs of risk or uncertainty are excluded.

Performing Arts. Individuals who participate in creating performing arts, such as actors, singers, musicians, entertainers, directors, and similar professionals are included. Services that do not require skills unique to creating the arts are not SSTBs (e.g., maintaining equipment or facilities, or broadcasting audio or video).

Consulting. The regulations define the field as providing professional advice and counsel to assist the client in achieving goals and solving problems. Lobbyists are specifically included, salespeople and those providing training and education are excluded. Ancillary services that are not qualified as SSTB (e.g., a building contractor) are not included as long as there is no separate fee for the consulting.

Athletics. Athletes, coaches, team managers are SSTBs. Broadcasters and those who maintain equipment are not SSTBs.

Financial Services. Financial advisors, investment bankers, wealth planners and retirement advisors are included. SSTBs include the businesses that provide advice on M&A transactions or valuation.

Brokerage Services. The definition of SSTB includes services where a person arranges transactions in securities. Real estate agents and brokers are specifically excluded. So are insurance agents and brokers, except perhaps to the extent they provide financial services and those financial services are not incidental to the sale of policies.

Investment Management. Direct management of real property is excluded. The definition of SSTB includes businesses involving the receipt of fees for providing investing, asset management, or investment management services, including providing advice with respect to buying and selling investments.

Trading. This category involves trading in securities, commodities or partnership interests based on all the facts and circumstances. Taxpayers engaging in hedging transactions as part of a separate business (e.g., manufacturers or farmers) are not engaged in the business of trading commodities.⁴

A primary concern with respect to this definition related to the interpretation of the catch-all phrase “any trade or business where the principal asset of the business is the reputation or skill of one or more employees or workers” contained in the IRC Section 199A definition. Under the regulations, a business falls under this umbrella category if the trade or business consists of any of the following:

(1)  a trade or business in which a person receives fees, compensation, or other income for endorsing products or services,

(2)  a trade or business in which a person licenses or receives fees, compensation or other income for the use of an individual’s image, likeness, name, signature, voice, trademark, or any other symbols associated with the individual’s identity,

(3)  receipt of fees, compensation, or other income for appearing at an event or on radio, television, or another media format.⁵