The concept of a Specified Service Trade or Business (SSTB) is important for individuals and entities to understand, particularly in the context of tax regulations. This term became more prominent with the introduction of the Tax Cuts and Jobs Act (TCJA) in the United States. Understanding whether a business qualifies as an SSTB can have significant implications for tax deductions and overall financial planning.
What is a specified service trade or business? A specified service trade or business is defined by the Internal Revenue Service (IRS) as any trade or business involving the performance of services in certain fields, including health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, and any trade or business where the principal asset is the reputation or skill of one or more of its employees or owners. Additionally, it includes businesses involving investing and investment management, trading, or dealing in securities, partnership interests, or commodities.
The significance of being classified as an SSTB lies in the limitations it places on the Qualified Business Income (QBI) deduction. Under the TCJA, taxpayers can generally deduct up to 20% of their QBI from a qualified trade or business, including those operated through a partnership, S corporation, or sole proprietorship. However, this deduction is subject to certain limitations and phase-outs, particularly for those in SSTBs, depending on their taxable income levels.
Fields Included in SSTB
The fields specifically mentioned by the IRS as SSTBs are quite broad. For example, health services include medical services provided by doctors, nurses, dentists, and other healthcare professionals. Legal services encompass the work done by lawyers, paralegals, and other legal professionals. Accounting services cover the work of accountants, auditors, and tax professionals.
Other fields like performing arts include actors, musicians, and entertainers. Consulting services can encompass a wide range of advisory services provided by experts in various industries. Athletics services include professional athletes and coaches. Financial services cover a broad range of activities including financial planning, investment advice, and brokerage services.
Implications for Taxpayers
For taxpayers engaged in an SSTB, understanding the implications of this classification is crucial for effective tax planning. If a taxpayer’s taxable income exceeds a certain threshold, the QBI deduction may be limited or completely phased out. For 2021, the threshold was $164,900 for single filers and $329,800 for married couples filing jointly. These thresholds are adjusted annually for inflation.
Taxpayers whose income exceeds these thresholds may need to explore other tax planning strategies to minimize their tax liability. This could include restructuring their business operations, investing in retirement plans, or engaging in other tax-advantaged activities.
Additionally, businesses that are on the borderline of being classified as an SSTB should carefully consider how they present their activities. Proper documentation and a clear understanding of the IRS guidelines can help in accurately determining whether a business qualifies as an SSTB.
In conclusion, the classification of a business as a specified service trade or business has significant implications for tax planning and the ability to claim the QBI deduction. Understanding the specific fields included in SSTBs and the associated income thresholds is essential for taxpayers to effectively manage their tax obligations.