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Specified Service Trade or Business (SSTB) Definitions
By Jason Watson, CPA
Posted Tuesday, October 19, 2021
Specified service trades or businesses is the bane of the Section 199A existence in so many ways. Let’s start off with the definitions-
- Traditional service professions such as doctors, attorneys, accountants, actuaries and consultants.
- Performing artists who perform on stage or in a studio.
- Paid athletes.
- Anyone who works in the financial services or brokerage industry.
- And now the hammer… “any trade or business where the principal asset is the reputation or skill” of the owner. Why didn’t they just start with this since everything else would have been moot. Oh well…
Interestingly, removed from the traditional service profession are engineers and architects. But an engineer operating a business based on his or her reputation or skill might still be a specified service trade or business. In other words, reputation or skill might trump the fact that engineers and architects were purposely left off the list. Every consultant is suddenly going to reclassify themselves as an engineer; software consultant is now a software engineer. Watson Business Engineers has a nice ring to it. Hmm….
The above terms were in the original Section 199A tax code. On August 8, 2018, the IRS published proposed regulations to help better explain the Section 199A Qualified Business Income Deduction including anti-abuse rules (yes, we are always gaming the system… just like in the backyard with cops and robbers). On January 18, 2019, the IRS published final Section 199A regulations. Here is a link to review the Section 199A Final Regulations-
One of the areas that was addressed was SSTBs which is the acronym for specified service trade or business. This becomes super important if you find your taxable household income exceeding the top of the 24% marginal tax bracket. Here is the dirty baker’s dozen, the unlucky 13-
This encompasses all the people you think it would. Does not include health club operators but it does include physical and massage therapists. So, if you are a traveling nurse providing home health care, you are considered an SSTB. But, this same nurse buys and operates a nursing home, he or she would not be deemed an SSTB.
We have consulted with clients who are practicing doctors, but they also sell personal property (like prosthetics). Now what? You are able to split up SSTB activities (being a doctor) and non-SSTB activities (selling medical devices), but rules are tricky and are beyond the scope of this book. Pharmacists also sell stuff; drugs and other “retail” items that are used for administration of health but they are wholly snagged in the health specified service trade or business.
Veterinarians wanted it both ways. At parties, we are doctors. At the IRS office, we are just animal lovers making a buck. All kidding aside, veterinarians argued that pets are retail property and are not patients in the truest sense. The Treasury Department and the IRS relied on Revenue Ruling 91-30 from 1991, and other nuggets of code and case law to “to continue the long-standing treatment of veterinary services as the performance of services in the field of health for purposes of section 199A and these final regulations.” (Final Regs, pages 80-81).
Not just attorneys, but also mediators, arbiters and paralegals.
Not just CPAs, but any tax return preparer, enrolled agent (EA), financial auditor, forensic accountant, business valuator and bookkeeper. This designation does not necessarily rise and fall on credentials, such as CPA or EA. It would be nice if the regulations called out all Colorado Springs CPAs as a) pretty cool and b) exempt from Section 199A limits because of their coolness, but it doesn’t. Our request was denied with prejudice.
Does not include analysts, economists, mathematicians and statisticians. Thank goodness, but then again how many mathematicians make over $326,600 (end of the 24% marginal tax bracket for 2020)? We want that job! Hats off to John Nash and his game theory mathematics however. Watch War Games again for some flashbacks; “Shall we play a game?”
Includes who you think it would include plus directors, writers, singers and musicians, but does not include those people or businesses supporting the performing arts such as make-up technicians, camera operators, maintenance personnel and other specialists. What does a key grip do anyway?
Writers argued that writing does not require a unique skill, which is true if you recall that last bad movie you watched. The Treasury Department and the IRS said No with “to the extent that a writer is paid for written material, such as a song or screenplay, that is integral to the creation of the performing arts, the writer is performing services in the field of performing arts.” (Final Regs, page 84).
Here is an example from Section 199A’s final regulations–
Gordon Lightfoot, a singer and songwriter, writes and records a song while driving on a highway. Gordon is paid a mechanical royalty when the song is licensed or streamed. Gordon is also paid a performance royalty when the recorded song is played publicly. Gordon is engaged in the performance of services in an SSTB in the field of performing arts within the meaning of section 199A(d)(2) or paragraphs (b)(1)(v) and (b)(2)(vi) of this section. The royalties that Gordon receives for the song are not eligible for a deduction under section 199A. (Final Regs, page 229)
Here is the verbiage right from the Final Regulation 1.199A; the performance of services in the field of consulting means the provision of professional advice and “counsel to clients to assist the client in achieving goals and solving problems.” Note the words advice and counsel.
If you can honestly say you don’t offer direct advice or counsel, then you are not a consultant as it relates to specified service trades or businesses. The word consultant is watered down in life.
Also, consulting services in connection with a sale or delivery of goods does not count either. A great example is a building contractor who is offering all kinds of advice and counsel to the client in an attempt to achieving goals and solving problems. Since this advice is inextricably embedded and is ancillary to the construction of a building, it is not considered consulting.
What is the lesson here? If you think you are a consultant, spend some time thinking about exactly what you do. A person might consider themselves a software consultant, but in reality they are more of a software developer since they do not provide advice or counsel. Rather they do their thing, and sell apps for $1.99 making millions.
Here is an example from Section 199A’s final regulations-
Bill Gates is in the business of licensing software to customers. Bill discusses and evaluates the customer’s software needs with the customer. Bill advises the customer on the particular software products it licenses. Bill is paid a flat price for the software license. After the customer licenses the software, Bill helps to implement the software (in real life, Paul Allen would have). Bill is engaged in the trade or business of licensing software and not engaged in an SSTB in the field of consulting within the meaning of section 199A(d)(2) or paragraphs (b)(1)(vi) and (b)(2)(vii) of this section. (Final Regs, page 231)
Some states or regulatory agencies require certain professions to bill separately for consulting services. Those separate billings might be considered an SSTB.
Sure. Got it. But be careful since it also includes coaches and team managers.
All the usual suspects but the preamble to the proposed regulations states that banking services such as taking deposits and lending money are not considered financial services. This makes sense since taking deposits and lending money is a retail activity in several ways, where advice and counsel (not those words again) specific to a client is a financial service.
What about insurance agents? Here is a blurb from the Section 199A final regulations-
The Treasury Department and the IRS decline to categorically exclude services provided by insurance agents from the definition of financial services as financial services such as managing wealth, advising clients with respect to finances, and the provision of advisory and other similar services that can be provided by insurance agents. However, the Treasury Department and the IRS note that the provision of these services to the extent that they are ancillary to the commission-based sale of an insurance policy will generally not be considered the provision of financial services for purposes of section 199A.
Anyone who facilitates a transaction for a commission or a fee. Slow down though! The proposed regulations specifically say brokerage services do not include services provided by real estate agents and brokers, or insurance agents and brokers. Help someone sell their business, you are a specified service trade or business. Help someone sell their house, not so much. Gotta love a good lobby.
Investing and Investment Management Services
Again, the usual suspects. Does not include property management however. You can see why the Proposed Regs 1.199A had to mention this since technically property managers are managing investments although the investments are houses.
Trading Services and Dealing in Securities
Trading securities, eleven. Dealing Securities, twelve. Got it.
Reputation or Skill
This is the hammer. Unlucky number 13! The direct verbiage reads, “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.” This will be heavily litigated and shaped over time. This will also be the catch-all if the IRS challenges your trade or business to deem it a SSTB.
A bit of caution here. Business owners are proud, and for good reasons. As such they think their reputation or skill is the primary source of revenue. Perhaps. Perhaps not. We like to use the example of Dr. James Andrews; he is the go-to guy for the NFL on all knee injuries. Certainly his reputation or skill is known all over the country, and people ask for him by name.
The Section 199A final regulations summarize the reputation or skill issue fairly well-
If Congressional intent was to exclude all service businesses, Congress clearly could have drafted such a rule. Accordingly, the final regulations retain the proposed rule limiting the meaning of the reputation or skill clause to fact patterns in which an individual or RPE (relevant pass-thru entity) is engaged in the trade or business of receiving income from endorsements, the licensing of an individual’s likeness or features, and appearance fees. (Final Regs, page 98)
Here is an example from Section 199A’s final regulations-
Gordon Ramsay is a well-known chef and the sole owner of multiple restaurants each of which is owned in a disregarded entity. Due to Gordon’s skill and reputation as a chef, Gordon receives an endorsement fee of $500,000 for the use of his name on a line of cooking utensils and cookware. Gordon is in the trade or business of being a chef and owning restaurants and such trade or business is not an SSTB. However, Gordon is also in the trade or business of receiving endorsement income. Gordon’s trade or business consisting of the receipt of the endorsement fee for Gordon’s skill and/or reputation is an SSTB within the meaning of section 199A(d)(2) or paragraphs (b)(1)(xiii) and (b)(2)(xiv) of this section. (Final Regs, page 232)
Specified Service Trade or Business Summary
Sit on the ledge, sure, but don’t jump off a bridge just yet. The specified service trade or business problem only comes up when your taxable income exceeds the limits. So, a financial advisor making $150,000 might still enjoy the Section 199A deduction. Please read this again! We have been stuck in a handful of debates with clients about the specified service trade or business designation just to find out they make $100,000 as a household.
Where does WCG land on all this? Quite simple. In matters where it is unclear, like the software consultant who could argue he or she is a software developer, our firm will present both sides of the argument to you. At the end of it all, you decide. Secretly we would rather error on the side of client advocacy in cases where it is not clear. Ultimately it remains your decision (again, in matters where it is unclear or very subjective).
Jason Watson, CPA, is a Senior Partner of WCG, Inc., a boutique yet progressive tax and
consultation firm located in Colorado and South Dakota serving clients worldwide.
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