Orlando Harmon
Insurance brokers and real estate agents may qualify as non-SSTBs, depending on whether their income is primarily from commissions or advisory services. SSTB status depends on two main factors: the nature of the business and the income level of the owners. The IRS defines an SSTB business as any trade or business that performs services in fields where the principal asset is the reputation or skill of one or more employees or owners. This classification applies to businesses offering specialized professional services, not those mainly selling products or non-specialized services. The QBI deduction is a lucrative 20% tax deduction on business income, and misclassifying an SSTB as a non-SSTB can lead to significant risks.
| Characteristics | Values |
|---|---|
| Definition | A specified service trade or business (SSTB) is a business category defined by the IRS. |
| Qualification | Businesses qualify as SSTBs if they primarily earn income from specialized services where the skill and reputation of owners or employees are the main business assets. |
| Examples | Accounting, legal, health, actuarial science, performing arts, consulting, athletics, financial services, investing and investment management, trading, dealing in certain assets. |
| Exclusions | Real estate agents and brokers, insurance agents and brokers, banking services such as taking deposits and lending money, architecture and engineering. |
| Implications | SSTB status affects eligibility for the qualified business income (QBI) deduction. |
| Considerations | Businesses should review the IRS rules, break down revenue by activity type, monitor owner income levels, and consult tax professionals to ensure compliance and reduce audit risk. |
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What You'll Learn
- Insurance brokers may qualify as non-SSTBs if their income is primarily from commissions
- Insurance brokers are included in the definition of investing and investment management
- Hybrid insurance producers may qualify for the 199A QBI deduction if they split out their business lines
- Misclassifying an SSTB as a non-SSTB can lead to the IRS disallowing previously claimed QBI deductions
- Businesses with minimal SSTB activity can avoid SSTB classification under the de minimis rule
Insurance brokers may qualify as non-SSTBs if their income is primarily from commissions
The classification of a business as a specified service trade or business (SSTB) is determined by the Internal Revenue Service (IRS). According to the IRS, SSTBs are businesses that primarily earn income from specialized services where the skill and reputation of owners or employees are the main business assets. This classification applies to businesses offering specialized professional services, not those mainly selling products or non-specialized services.
Insurance brokers and real estate agents may qualify as non-SSTBs if their income is primarily from commissions rather than advisory services. This is because their income is not tied to the skill or reputation of the owner or employees. However, it is important to note that this classification can change if the business model or income levels change, so it is necessary to reassess each year.
The distinction between SSTBs and non-SSTBs is significant for tax purposes. Businesses that qualify as SSTBs may be eligible for a 20% tax deduction on qualified business income (QBI) under Section 199A of the Internal Revenue Code. This deduction is available to sole proprietorships, partnerships, and S corporations, among other business structures. However, misclassifying an SSTB as a non-SSTB can result in significant penalties if discovered by the IRS during an audit.
To stay compliant and reduce the risk of an audit, businesses should carefully review the IRS rules and regulations regarding SSTB classifications. This includes breaking down revenue by activity type and documenting the percentage of income derived from SSTB versus non-SSTB services. Additionally, monitoring owner income levels is important to anticipate QBI deduction phase-outs and determining whether the business qualifies as a small business under the taxable income threshold.
In conclusion, insurance brokers may qualify as non-SSTBs if their income is primarily from commissions. However, this classification is complex and dependent on various factors, including the business model, income levels, and regulatory changes. Businesses should consult with tax professionals and carefully assess their specific circumstances to ensure accurate classification and compliance with tax regulations.
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Insurance brokers are included in the definition of investing and investment management
Insurance brokers are not considered a specified service trade or business (SSTB). This is because they are not involved in the performance of services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, investing and investment management, trading, or dealing in certain assets.
However, insurance brokers who are also registered investment advisors (RIAs) or brokers, or registered representatives, may be considered SSTBs. This is because they are providing financial services such as managing wealth, advising clients with respect to finances, and providing advisory and other similar services.
The strategy of separating out QBI-eligible insurance business from non-QBI-eligible brokerage commissions and advisory fees can be complicated. This is because, according to recent proposed regulations on the QBI deduction, a single business with multiple business lines and total revenues under $25 million is considered an SSTB if more than 10% of its income comes from investment-related activities.
Therefore, insurance brokers who provide investment advisory services as a significant part of their business may be considered SSTBs. This could affect their ability to claim the QBI deduction, which is a 20% deduction on qualified business income for owners of sole proprietorships, partnerships, and S corporations.
In conclusion, while insurance brokers who only provide insurance services are not considered SSTBs, those who also provide investment advisory services may be classified as such, depending on the proportion of their income derived from these activities.
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Hybrid insurance producers may qualify for the 199A QBI deduction if they split out their business lines
The Section 199A Qualified Business Income (QBI) deduction is a provision of the Tax Cuts and Jobs Act, which allows eligible taxpayers to deduct up to 20% of their QBI. This includes income from partnerships, S corporations, sole proprietorships, and certain trusts. However, it does not apply to specified service trades or businesses (SSTB), which are businesses involving fields like health, law, accounting, consulting, and financial services.
Insurance agents and brokers are typically excluded from the SSTB definition, and therefore can qualify for the QBI deduction. However, hybrid insurance producers, who are also registered investment advisors (RIAs) or brokers, may face complications. This is because the IRS considers single businesses with multiple business lines and total revenues under $25 million as SSTBs if more than 10% of their income results from investment-related activities.
To address this, hybrid insurance producers can potentially split out their business lines and run multiple businesses, with one brokerage/RIA business and one insurance business. This strategy allows them to separate QBI-eligible insurance business from non-QBI-eligible brokerage commissions and advisory fees. However, it adds complexity and may increase the risk of IRS audits, as the business owner might be tempted to attribute expenses to the non-QBI-eligible business while maximizing income from the QBI-eligible insurance business.
While splitting business lines may help preserve the QBI deduction, it is important to carefully consider the additional complications and potential audit risks. The benefits of the QBI deduction need to be weighed against these factors to determine if it is worth the effort and potential risks involved.
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Misclassifying an SSTB as a non-SSTB can lead to the IRS disallowing previously claimed QBI deductions
The US government allows a 20% deduction on qualified business income (QBI) for owners of sole proprietorships, partnerships, and S corporations (and some trusts and estates). This is also called the Section 199A deduction. However, this deduction does not apply to specified service trades or businesses (SSTB). SSTBs are businesses involving the performance of services in fields like health, law, accounting, athletics, financial services, and
Insurance brokers are not included in the SSTB definition. However, hybrid insurance producers, or insurance producers who are also RIAs, brokers, or registered representatives, can preserve the QBI deduction. They can do this by splitting their business lines, though this might not be worth it due to the complexity of the process.
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Businesses with minimal SSTB activity can avoid SSTB classification under the de minimis rule
The de minimis rule is a provision that allows businesses with minimal involvement in specified service trades or businesses (SSTB) to avoid being classified as an SSTB. This rule is particularly relevant for businesses with a mix of SSTB and non-SSTB activities, where the gross receipts from the SSTB component fall below a certain threshold.
The rule stipulates that if a business's gross receipts are $25 million or less and less than 10% of its income comes from SSTB services, it is not considered an SSTB. For businesses with gross receipts exceeding $25 million, the threshold lowers to 5%. This means that even if a business has some SSTB activities, it can still avoid being classified as an SSTB as long as its income from SSTB services is minimal relative to its total income.
The de minimis rule is applied separately for each taxable year, allowing businesses to reassess their SSTB status annually. This flexibility is crucial as a business's SSTB status can fluctuate over time due to changes in its business model or income levels.
For example, consider a business with $3 million in gross revenue, of which $120,000 is from SSTB-related activities. Since the SSTB-related revenue is only 4% of the total income, the business would not be considered an SSTB under the de minimis rule.
It is important to note that the de minimis rule does not apply to all businesses. Businesses in certain fields, such as health, law, accounting, and consulting, are explicitly included in the SSTB definition, regardless of their income levels. Additionally, misclassifying an SSTB as a non-SSTB can carry significant risks, including disallowance of previously claimed QBI deductions, back taxes, accuracy-related penalties, and increased tax liability.
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Frequently asked questions
SSTB stands for Specified Service Trade or Business. It is a business category defined by the IRS. SSTBs primarily earn income from specialized services where the skill and reputation of owners or employees are the main business assets.
Insurance brokers may qualify as non-SSTBs depending on whether their income is primarily from commissions or advisory services. Hybrid-Insurance Producers might still be able to qualify for the 199A QBI Deduction if they split out their business lines.
Businesses that qualify as SSTBs include those in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, investing and investment management, trading, and dealing in certain assets.
Being classified as an SSTB impacts a business's taxes. SSTBs do not qualify for the Qualified Business Income (QBI) deduction, which affords owners of sole proprietorships, partnerships, and S corporations a lucrative 20% deduction on their qualified business income.
