What is a Specified Service Trade or Business (SSTB)?

08/27/2018|John R. Dundon II, EA|199A, SSTB, TCJA

When not riding my mountain bike in the Rocky Mountains, I tend to hang out with tax nerds … pretty much all the time, to the extent that tax nerds hang out. At one of our most recent meetups (think band camp without the instruments), we had a lot of fun indulging in freshly picked peaches & poking holes in the bizarrely nuanced albeit new ‘concept’ (if you will) of what a Specified Service Trade or Business (SSTB) is ‘proposed to be’ according to our esteemed ‘rule-writers’ from the US Treasury.

Worth noting is that there were a lot of smart people in the room, many of whom spent their entire adult lives reading and writing about (and applying) the US Tax Code/Regulations.

We all generally agreed that no business wants to be deemed an SSTB (as the acronym alone sounds like a disease) and that, as a result, there will be all sorts of skulduggery rearing its ugly head in the not-too-distant future from US Taxpayers and perhaps our beloved federal government alike.

Nevertheless, after many hours of banter, we ALL left with more questions than answers about SSTBs. While we continue to drill down into a common understanding of these troubled proposed regulations, everyone reading this post is urged to provide their opinions DIRECTLY to the US Treasury.

I’ve included information on how to render your opinion correctly at this post’s end. Please feel free to contact me directly, and I will see that your opinion is heard.

The bottom line is this: If you were inconvenienced by the reporting and regulatory environment governing ObamaCare, prepare yourself for some serious head-scratching.

As per proposed US Treasury Regulation 107892-18 (released August 8^th, 2018) governing IRC 199A ““ Qualified Business Income under the newly enacted Tax Cut & Jobs Act by our esteemed 115^th Congress, US taxpayers are now expected to accordingly report ownership of Specified Service Trades or Businesses (SSTB).

Keep in mind that if you own an SSTB, that business does not qualify for the new 20% business deduction unless you, as the owner, meet exceptions to the general rules.

So what on God’s green Earth IS a Specified Service Trade or Business (SSTB)?

It is best to back into this by first addressing what it is NOT. Those industries that are specifically excluded from being deemed a Specified Service Trade or Business (SSTB) include:

real estate brokers;
property managers;
architects;
engineers and
bankers.

If you own, passively or otherwise, a business in any of the above industries, you are clearly organized and have paid your Washington lobbyists well.

I just wanted to let you know that you are excused from reading further.

Trade or Business

Before drilling down into what a Specified Service Trade or Business (SSTB) is, paying homage to the ubiquitous tax concept of trade or business is in order. The proposed regulations assert that deductions are available only concerning activities rising to the level of a trade or business.

What does this mean?

The Code uses several different ‘standards’ to define income for tax purposes.
The Proposed Regulations governing IRC 199A provide that each activity must satisfy IRC Section 162’s trade or business parameters. These generally require a business activity to be conducted regularly and continually with the primary purpose of making a profit.
This standard could prove problematic for professionals engaging in rental real estate for reasons I will post about at another time.

If your activity does not rise to the threshold of IRC 162 as a trade or business, you are also excused from reading further.

Specified Service Trade or Business (SSTB)

An SSTB, as we presently understand, is defined as any trade or business involving the performance of services in the fields of:

Health
Law
Accounting
actuarial science
performing arts
consulting
athletics
financial services
brokerage services
any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees or owners
any trade or business that involves:
- investing and investment management
- trading
- dealing in securities (as defined in section 475(c)(2)),
- dealing in partnership interests or commodities

The following guidelines of SSTBs originate from the proposed 199A regulations.

Health – Proposed §1.199A-5(b)(2)(ii)
- Performance of services in the health field means providing medical services by physicians, pharmacists, nurses, dentists, veterinarians, physical therapists, psychologists, and other similar healthcare professionals who provide medical services directly to a patient.
- This does not include the provision of services not directly related to a medical field, even though the services may purportedly relate to the service recipient’s health.
- The performance of services in the field of health does not include the operation of health clubs or health spas that provide physical exercise or conditioning to their customers, payment processing, or research, testing, and manufacture and sales of pharmaceuticals or medical devices.
- So what about?
  - Adult daycare that provides attention but does not administer medication?
  - Non-emergency medical (aka wheelchair facilitated) transportation to a medical appointment?
  - Medical transcription or billing services?
  - Radiologist who reads screens from afar and has no patient interaction?
2. Law – Proposed §1.199A-5(b)(2)(iii)
- Performance of services in the law field means providing services by lawyers, paralegals, legal arbitrators, mediators, and similar professionals…
- This does not include the provision of services that do not require skills unique to the field of law, including:
  - printers
  - delivery services
  - stenography services
- So what about?
  - Trustees?
  - Administrators?
  - Personal Representatives?
3. Accounting – Proposed §1.199A-5(b)(2)(iv)
- Performance of services in the accounting field means providing services by accountants, enrolled agents, return preparers, financial auditors, and similar professionals in their capacity.
- This is not limited to services requiring state licensure (CPA).
- The aim of proposed §1.199A-5(b)(2)(iv) is to capture the common understanding of accounting, which includes tax return and bookkeeping services, even though the provision of such services may not require the same education, training, or mastery of accounting principles as a CPA.
- The field of accounting does not include payment processing and billing analysis.
- So what about?
  - Payroll Services Providers?
  - Accounts payable or Billing Services?
Actuarial science – Proposed §1.199A-5(b)(2)(v)
- Performance of services in the field of actuarial science means the provision of services by actuaries and similar professionals in their capacity as such.
- This does not include the provision of services by analysts, economists, mathematicians, and statisticians not engaged in analyzing or assessing the financial costs of risk or uncertainty of events.
Performing arts – Proposed §1.199A-5(b)(2)(vi)
- Performance of services in the field of the performing arts means the performance of services by individuals who participate in the creation of performing arts, such as actors, singers, musicians, entertainers, directors, and similar professionals performing services in their capacity as such.
- The performance of services in the field of the performing arts does not include:
  - the provision of services by persons who broadcast or otherwise disseminate video or audio of performing arts to the public.
  - services that do not require skills unique to creating performing arts, such as maintaining and operating equipment or facilities for use in the performing arts.
- So what about?
  - Managers?
  - Producers?
  - DJs?
    - Playing their mash-ups?
    - Playing other artists’ songs?
Consulting – Proposed §1.199A-5(b)(2)(vii)
- Performance of services in the consulting field means providing professional advice and counsel to clients to assist the client in achieving goals and solving problems.
- Consulting includes providing advice and counsel regarding advocacy to influence decisions made by a government or governmental agency and all attempts to influence legislators and other government officials on behalf of a client by lobbyists and other similar professionals performing services in their capacity as such.
- This does not include the performance of services other than advice and counsel.
- It is common for businesses to provide consulting services in connection with customers’ purchase of goods.
- Examples from the proposed regulation:
  - a company that sells computers may provide customers with consulting services relating to the setup, operation, and repair of the computers
  - A contractor who remodels homes may provide consulting before remodeling a kitchen.
- Proposed §1.199A-5(c) provides a de minimis rule, under which a trade or business is not an SSTB if less than 10 percent of the gross receipts (5 percent if the gross receipts are greater than $25 million) of the trade or business are attributable to the performance of services in a specified service activity.
  - What if you hit 11% under $25M gross receipts?
  - Does ALL business become ineligible?
  - This de minimis rule may not provide sufficient relief for certain trades or businesses that provide ancillary consulting services.
- A trade or business that sells or manufactures goods and also happens to provide ancillary consulting services to facilitate the sale of those goods (not separately purchased or billed) is not a consulting trade or business.
- Accordingly, proposed §1.199A-5(b)(2)(vii) provides that the field of consulting does not include consulting that is embedded in, or ancillary to, the sale of goods if there is no separate payment for the consulting services.
- So What about?
  - Trainers or educators?
  - Business coaches?
  - Mentors & motivators?
Athletics – Proposed §1.199A-5(b)(2)(viii)
- The field of athletics is not listed in section 448(d)(2), and there is little guidance on its meaning as used in section 1202(e)(3)(A).
- However, athletics has been deemed to be most similar to the field of performing arts.
- Performance of services in the field of athletics means the performances of services by individuals who participate in athletic competition, such as athletes, coaches, and team managers in sports such as baseball, basketball, football, soccer, hockey, martial arts, boxing, bowling, tennis, golf, skiing, snowboarding, track and field billiards, and racing.
- This does not include providing services that do not require skills unique to athletic competition, such as the maintenance and operation of equipment or facilities for use in athletic events.
- Similarly, the performance of services in athletics does not include broadcasters or otherwise disseminators of video or audio.
- So What about?
  - Referees?
  - Umpires?
  - Professional gamers?
Financial services- proposed §1.199A-5(b)(2)(ix)
- Because IRC 1202(e)(3)(A) includes the term financial services and banking is separately listed in section 1202(e)(3)(B) proposed §1.199A-5(b)(2)(ix) limits the definition of financial services to services typically performed by financial advisors and investment bankers including:
  - managing wealth
  - advising clients concerning finance
  - developing retirement plans
  - developing wealth transition plans
  - advisory and other similar services regarding:
    - valuations
    - mergers
    - acquisitions
    - dispositions
    - restructurings (including in Title 11 or similar cases),
  - raising financial capital by:
    - underwriting, or
    - acting as the client’s agent in issuing securities and similar services.
- This includes services provided by:
  - financial advisors
  - investment bankers
  - wealth planners
  - retirement advisors
  - other similar professionals
- This does not include taking deposits or making loans (AKA BANKS)!
Brokerage services – Proposed §1.199A-5(b)(2)(x)
- Brokerage services include services in which a person arranges transactions between a buyer and a seller concerning securities as defined in section 475(c)(2). for a commission or fee.
- This includes services provided by stock brokers and other similar professionals.
- This does not include services provided by:
  - real estate agents and brokers
  - insurance agents and brokers.
Any trade or business where the principal asset of such trade or business is the reputation or skill of 1 or more of its employees or owners – Proposed §1.199A-5(b)(2)(xiv)
- The idea of reputation or skill must be interpreted in a manner that is measurably objective and administrable and is limited to:
  - Receiving income for endorsing products or services, including your distributive share of income or distributions from an RPE for which you provide endorsement services.
  - Licensing or receiving income for the use of your image, likeness, name, signature, voice, trademark, or any other symbols associated with your identity, including your distributive share of income or distributions from an RPE to which you contribute the rights to use your image
  - Receiving appearance fees or income including but not limited to:
    - reality performers performing as themselves on television, social media, or other forums
    - radio, television, and other media hosts
    - video game players.
SSTBs described in 199A(d)(2)(B)
- SSTB also includes any trade or business that involves:
  - investing and investment management
  - trading
  - dealing in securities (as defined in section 475(c)(2))
  - dealing in partnership interests or commodities (as defined in section 475(e)(2)).
- 1202(e)(3)(A) or section 448(d)(2) have scarce regulations in these regards. Section 475(c)(2), however provides a detailed list of interests treated as securities, including:
  - stock in a corporation
  - ownership interests in widely held or publicly traded partnerships or trusts
  - notes
  - bonds
  - debentures
  - other evidences of indebtedness
  - interest rate, currency, or equity notional principal contracts
  - evidence of an interest in, or derivative financial instruments in any of the preceding securities or any currency, including:
    - option contracts
    - forward contracts
    - short positions
    - any similar financial instruments; and
    - certain hedges concerning any such securities
- Section 475(e)(2) provides a similarly detailed list of property treated as a commodity, including:
  - any commodity that is actively traded (within the meaning of section 1092(d)(1)) or
  - any notional principal contract concerning any such commodity
  - evidence of an interest in, or derivative financial instruments in any of the preceding commodities
  - certain hedges concerning any such commodities
- Investing and investment management – Proposed §1.199A-5(b)(2)(xi)
  - Performance of services that consist of investing and investment management means a trade or business that earns fees for investment, asset management services, or investment management services, including providing advice concerning buying and selling investments.
  - The performance of services that consist of investing and investment management would include a trade or business that receives:
    - a commission
    - a flat fee
    - a fee calculated as a percentage of assets under management.
  - The performance of investing and investment management services does not include directly managing real property.
- Trading – Proposed §1.199A-5(b)(2)(xii)
  - Performance of services that consist of trading means a trade or business of trading in securities, commodities, or partnership interests. The relevant facts and circumstances determine whether a person is a trader.
  - Factors considered relevant to determining whether a person is a trader include the source and type of profit generally sought from engaging in the activity, regardless of whether the activity is provided on customers’ behalf or for a taxpayer’s account.
  - See:
    - Endicott v. Commissioner, T.C. Memo 2013-199
    - Nelson v. Commissioner, T.C. Memo 2013-259
    - King v. Commissioner, 89 T.C. 445 (1987).
- Dealing in securities, partnership interests, and commodities ““ Proposed §1.199A-5(b)(2)(xiii)
  - Performance of services that consist of dealing in securities (as defined in section 475(c)(2)) means regularly purchasing securities from and selling securities to customers in the ordinary course of a trade or business or regularly offering to enter into, assume, offset, assign, or otherwise terminate positions in securities with customers in the ordinary course of a trade or business.
  - Loan originators who make negligible sales of the loans are not dealing in securities for purposes of section 199A(d)(2).
  - The performance of services that consist of dealing in partnership interests means regularly purchasing partnership interests from and selling partnership interests to customers in the ordinary course of a trade or business or regularly offering to enter into, assume, offset, assign, or otherwise terminate positions in partnership interests with customers in the ordinary course of a trade or business.”
  - The performance of services that consist of dealing in commodities (as defined in section 475(e)(2)) means regularly purchasing commodities from and selling commodities to customers in the ordinary course of a trade or business or regularly offering to enter into, assume, offset, assign, or otherwise terminate positions in commodities with customers in the ordinary course of a trade or business.

Non-abuse measures – proposed §1.199A-5(c)(2)

SSTB includes any trade or business with 50 percent or more common ownership (directly or indirectly) that provides 80 percent or more of its property or services to an SSTB.
If a trade or business has 50 percent or more common ownership with an SSTB, to the extent that the trade or business provides property or services to the commonly owned SSTB, the portion of the property or services provided to the SSTB will be treated as income from an SSTB (meaning the income will be treated as income from an SSTB).

Example from the proposed regulation

A dentist owns a dental practice and an office building. She rents half the building to the dental practice and half to unrelated persons. Under proposed §1.199A-5(c)(2), renting half of the building to the dental practice will be treated as an SSTB.

General Rules

To claim the deduction under Section 199A, a trade or business must be a qualified trade or business, which includes all trades or businesses except:

a Specified Service Trade or Business (SSTB)
The trade or business of performing services as an employee.

If you own a business (or two), you know that you really do not want to be a deemed SSTB. But it is not all bad, as you will see from the general rules and subsequent exceptions to those rules.

Unless an exception applies, if a trade or business is an SSTB, it does not have Qualified Business Income (QBI) for deduction purposes.
If a pass-through entity (partnership or S Corporation) provides an SSTB, none of the income from that trade or business flowing to the entity’s owner is QBI REGARDLESS of whether you participate in the activity or are a passive investor. None of the W-2 wages or UBIA of qualified property will be considered for purposes of section 199A either.

Example from the proposed regulation:

Athletics is defined as an SSTB, if a partnership owns a professional sports team, the partner’s distributive shares of income from the partnership athletics trade or business are not QBI, regardless of whether the partners participate in the partnership’s trade or business

“¦unless the partner’s income on their income tax forms is below the defined SSTB threshold of $315,00 when filing status is MFJ ($157,500 for all others).

Exceptions to the General Rules

Individuals with taxable income below the threshold ($315,000 MFJ & $157,500 for all others) are not subject to a restriction on SSTBs.
If an individual or trust has taxable income below the threshold amount, it can receive the deduction under section 199A, even if the trade or business is an SSTB.
The exclusion of QBI, W-2 wages, and UBIA of qualified property from the computation of the section 199A deduction is subject to a phase-in for individuals with taxable income within the phase-in range.
The application of this phase-in is determined at the individual, trust, or estate level, which may not be where the trade or business operates.
If a partnership or an S corporation operates an SSTB, applying the threshold does not depend on the partnership or S corporation’s taxable income but rather on the individual partner or shareholder claiming the section 199A deduction.
A Relevant Pass-through Entity (RPE) conducting an SSTB may not know whether any of its equity owners’ taxable income is below the threshold of $315,00 when filing status is MFJ ($157,500 for all others).
- However, the RPE is best positioned to determine whether its trade or business is an SSTB.
- Reporting rules under proposed §1.199A-6(b)(3)(B) require each RPE to determine whether it conducts an SSTB and disclose that information to its partners, shareholders, or owners.
With respect to each trade or business, once it is determined that it is an SSTB, it remains an SSTB and cannot be aggregated with other trades or businesses.
In the case of a trade or business conducted by an individual, such as a sole proprietorship, disregarded entity, or grantor trust, the individual determines whether the company is an SSTB.
There is a de minimis rule under which a trade or business is not an SSTB merely because it provides some specified service activity.
- Proposed §1.199A-5(c)(1) provides that a trade or business (determined before the application of the aggregation rules in proposed §1.199A-4) is not an SSTB if:
  - the trade or business has gross receipts of $25 million or less (in a taxable year), and
  - less than 10 percent of the gross receipts of the trade or business is attributable to the performance of services in an SSTB.
- For trades or businesses with gross receipts greater than $25 million (in a taxable year), a trade or business is not an SSTB if less than 5 percent of the gross receipts of the trade or business are attributable to the performance of services in an SSTB.

Three salient points about SSTBs listed in section 199A(d)(2)(A) as it relates to 448 & 1202

Section 1202(e)(3)(A) also includes any trade or business where the principal asset of such trade or business is the reputation or skill of 1 or more of its employees. Section 199A(d)(2)(A) modifies this clause by adding the words or owners to the end, to read as follows: any trade or business where the principal asset of such trade or business is the reputation or skill of 1 or more of its employees or owners.
Case law under section 448 provides that whether a service is performed in a qualifying field under section 448(d)(2) is decided by examining all relevant legislative intent and is not controlled by state licensing laws.
- Kraatz & Craig Surveying Inc., v. Commissioner, 134 T.C. 167 (2010).
- States often vary in what they require regarding licensure or certification.
- Federal tax law should not treat similarly situated taxpayers differently based on one particular state’s decision that a specific type of business requires a license or certification.
Proposed §1.199A-5(b) does not adopt a bright-line licensing rule to determine whether a trade or business is within a particular field for purposes of section 199A.
- This creates peril and consternation for taxpayers
- This also creates an opportunity for tax professionals

If you’ve made it this far into this long post on SSTB, thank you! Now, make your comments heard. You have a voice and a pen! Send your comments to: