What does Specified Service Trade or Business (SSTB) mean?
In 2018, the Internal Revenue Service re-wrote existing tax law to include a new provision: The Specified Service Trade or Business (SSTB). But what exactly is a Specified Service Trade or Business? What or who qualifies as an SSTB?
Here we give you the rundown on all things Specified Service Trade or Business so you can see if you qualify and then make the appropriate tax moves to ensure you’re taking advantage of the deductions available to you while keeping your business’s bottom line as healthy as possible.
Defining an SSTB
The IRS defines an SSTB as a trade or business where “the principal asset is the reputation or skill of one or more of its employees or owners.” The SSTB must be a pass-through entity and can be in the form of a sole proprietorship, partnership, LLC, trust, estate, or S corporation. According to Internal Revenue Code (IRC) Section 199A, the pass-through entity is eligible to receive a 20 percent deduction on its business income deriving from a trade or performance of services. Pretty cool, right? The 199A deduction—also known as the Tax Cuts and Jobs Act (TCJA)—can thus be an instrumental tool for a business’s short-term and long-term financial success.
What business types qualify as SSTB?
The only real stipulations to determining if your business will qualify as an SSTB are its income tax amount and the type of business you’re running since there can be ambiguity around the kinds of trades and services that fit the IRS’s requirements.
Suppose you run a holistic spa focusing on improving circulation within the body. According to IRS regulations, your holistic spa business will qualify as an SSTB, right? Wrong. Despite your business being tangentially related to healthcare—a holistic spa is not seen as a qualifying occupation within the health category, which instead includes doctors, nurses, other physicians, and other medical specialists within the fields of health. The following is a list of service trades and business categories that the IRS has deemed worthy of the SSTB designation:
- Performing Arts: Fairly wide in scope, the performing arts category includes singers, actors, filmmakers, musicians, singers, and other entertainers who earn income from performing services.
- Health: Encompasses only medical services that are provided directly to patients from individuals such as doctors, nurses, dentists, and veterinarians.
- Trading: This category is for those involved in trading partnership interests, commodities, or securities and the services related to those transactions.
- Law: The legal category includes paralegals, lawyers, legal mediators and arbitrators, and those who provide similar professional legal services.
- Investment Management: This category is specifically for those who provide investment and asset management services and who take fees for providing those services. The investment management category does not include the management of real property.
- Accounting: As its name suggests, the accounting category is for accountants, financial auditors, enrolled agents, and others who perform similar accounting services.
- Brokerage Services: For stockbrokers and similar professionals who arrange securities transactions between buyers and sellers for a fee or commission. It’s important to note his category does not include real estate agents.
- Actuarial Science: Limited to actuaries and those in similar professions.
- Financial Services: Primarily for those providing financial advice in the form of wealth management, raising capital, the buying and selling of assets, and retirement plan services. Occupationally, the financial services category also includes investment bankers, financial advisors, and wealth planners.
- Consulting: Acceptable occupations under the consulting category can be a bit more ambiguous than the other SSTB categories because the definition of consulting services can be very broad in its interpretation. Providing counsel or advice to clients to help achieve the client’s goals and solve the client’s problems is the guideline. The guideline includes consultants who influence public policy and government but excludes sales, training, and education courses.
- Athletics: Relates to professional athletes, team managers, and coaches for sports like soccer, football, basketball, baseball, hockey, boxing, tennis, bowling, golf, racing, and billiards.
If you’re unsure if your business qualifies as an SSTB, be sure to consult the IRS website or contact an IRS representative for clarity. You can also contact a tax professional well-versed in income tax law for additional insights into what category your trade or services would fall under.
Does my business qualify for the SSTB QBI?
There are a few specific restrictions pertaining to taxable income that will help determine if your business qualifies for the SSTB QBI (Qualified Business Income deduction). As of the 2019 tax year, the threshold income is $160,700 for those filing their tax return as an individual and is $321,400 for those who are married filing their tax returns jointly. If your income falls below the threshold amounts, you can take the 20% deduction, regardless if your company operates as an SSTB. It’s important to note interest income, some dividends, and capital gains are not included in the IRS’s definition of “income,” which is limited to only items included in taxable income.
If your taxable income is above the threshold for your specific filing status, but below $210,700 (for a single filer taxpayer) or $421,400 (for married joint filers), you may be eligible for a partial QBI deduction. After you reach the second threshold income amount, you will not be able to claim the QBI deduction if you operate as an SSTB. If you operate as a non-SSTB, your deduction will be a percentage of your employee’s wages listed on their collective W-2 wages.
Having a solid understanding of the de minimis rule is imperative to maximize your deduction amount. Greatly impacting the amount of your business’s QBI deduction amount is the percentage of work completed that can be classified as SSTB work. If the receipts from your business total over 10% SSTB work, your organization will be treated as an SSTB even if your core business would not classify as an SSTB.
Similarly, if a business has 50% or more common ownership with another business it provides services or property to, the services will count as an SSTB. It’s recommended you hire a business accountant or another business tax professional to ensure you’re receiving the maximum discount available on your taxes while adhering to the latest tax laws and regulations.
How else can I save money for my small business?
In addition to hiring a business accountant who can help maximize tax return deductions, there are two other popular ways business owners can save money for their companies. The first is to consult with a business manager who can help you determine what percentage of your company’s invoices should come from SSTB work. If even a small percentage of your company’s income is generated through SSTB work, you may no longer be eligible for the QBI deduction. So, it’s beneficial for you to have conversations with—or even hire—business management professionals who can advise you on the best methods for generating income tax cuts for your business.
The other strategy for helping save your small business money is to purchase business insurance. Purchasing business insurance is a fantastic way to mitigate unforeseen circumstances—like potential lawsuits—by providing you with protection against suits filed by unhappy clients. Business insurance can also help cover extreme out-of-pocket expenses in the event one of your employees is injured on the job and can provide relief in the event a natural disaster strikes that somehow negatively impacts your income flow. Securing business insurance can also provide financial peace of mind to business owners if they become incapacitated and can no longer provide their breadwinning services to their clients.
When it comes to choosing the type of business insurance that best fits your business, you’ll want to walk through your operation from front to back to have a comprehensive view of all the moving parts. There is a wide range of insurance that can help meet the needs of your specific business, so you should consult your business account to see what policies are most applicable to your organization.
For all of your business insurance needs, check out Huckleberry. While you’re busy focusing on the growth and expansion of your entrepreneurial endeavors, let Huckleberry work hard for you behind the scenes by providing you with the confidence that your company is protected from life’s unexpected events.
Huckleberry can provide you with an insurance quote within minutes, so in less time than it takes to learn the definition of SSTB, you can snag business insurance policies that will have you and your business covered from whatever’s thrown your way.