Orlando Harmon
The classification of a business as a Specified Service Trade or Business (SSTB) is important for tax purposes, particularly for small business owners who want to maximize their tax deductions. While insurance agents were initially considered to be included in the SSTB definition, recent updates to the tax laws have excluded them. This means that insurance agents and brokers are not considered SSTBs and can benefit from the QBI deduction.
| Characteristics | Values |
|---|---|
| Specified Service Trade or Business (SSTB) classification designated by | The Internal Revenue Service (IRS) |
| Services excluded from SSTB | Brokerage services provided by insurance agents and brokers |
| Services included in SSTB | Managing wealth, advising clients with respect to finances, developing retirement plans, developing wealth transition plans, etc. |
| Businesses classified as SSTB | Principal asset of the business must be the reputation or skill of the owner |
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What You'll Learn
Insurance agents are not classified as SSTBs
Insurance agents are not classified as Specified Service Trade or Businesses (SSTB). This is because the SSTB definition includes businesses in the financial services industry, particularly financial services, brokerage services, and businesses that involve "the performance of services that consist of investing and investment management, trading, or dealing in securities".
However, insurance agents are specifically excluded from this list, as they are treated as being in the business of selling their company's products rather than their personal services. This means that insurance agents are not considered SSTBs and can qualify for the QBI deduction.
The QBI deduction, or Qualified Business Income tax deduction, is a 20% tax deduction that applies to pass-through income. It is important for small business owners to understand how the IRS classifies their business to maximize their tax deductions. If a business is classified as an SSTB, it must have a threshold income requirement and the principal asset of the business must be the reputation or skill of the owner.
There are strategies for businesses with mixed income from SSTB and non-SSTB sources to maximize their QBI deduction. For example, if a business has gross receipts of $25 million or less, and less than 10% of gross receipts are from an SSTB, the activity is not treated as an SSTB. Consulting with business managers and accountants can help business owners determine the best methods for generating income tax cuts and maximizing their QBI deduction.
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SSTB stands for specified service trade or business
The SSTB classification impacts the amount of Qualified Business Income (QBI) deduction a business can claim. The QBI deduction is a tax benefit that allows eligible businesses to deduct up to 20% of their business income. For the 2019 tax year, the threshold income for claiming the QBI deduction is $160,700 for individuals and $321,400 for married couples filing jointly. If a business's income is below these thresholds, they can take the 20% deduction, regardless of whether they operate as an SSTB.
However, if a business's income is above the threshold for their specific filing status but below $210,700 for single filers or $421,400 for married joint filers, they may only be eligible for a partial QBI deduction. If a business's income exceeds the second threshold, they will not be able to claim the QBI deduction if they operate as an SSTB.
It is important to note that certain businesses are excluded from the SSTB definition, such as real estate agents, brokers, and insurance agents. Additionally, the SSTB classification only applies to pass-through entities, including sole proprietorships, partnerships, LLCs, trusts, estates, and S corporations.
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SSTBs are defined by the Internal Revenue Service (IRS)
The Internal Revenue Service (IRS) designates a specified service trade or business (SSTB) classification. According to the IRS, an SSTB is a trade or business where "the principal asset is the reputation or skill of one or more of its employees or owners". The IRS specifies SSTBs as providing services in health, law, performing arts, accounting, actuarial science, and consulting services, among many others.
SSTBs are generally not qualified trades or businesses. However, all or part of an SSTB may be a qualified trade or business if the taxable income is at or below the threshold or within the phase-in range. The threshold income for the 2019 tax year is $160,700 for individuals and $321,400 for married couples filing jointly. If the income falls below the threshold, a 20% deduction can be taken, regardless of whether the company is an SSTB.
The IRS has provided a list of service trades and business categories that qualify as SSTBs. These include:
- Performing Arts: This category includes singers, actors, filmmakers, musicians, and other entertainers who earn income from performing services.
- Health: This category includes medical services provided directly to patients by doctors, nurses, dentists, and veterinarians.
- Consulting: This category can be ambiguous as the definition of consulting services can be interpreted broadly. It includes providing counsel or advice to clients to help them achieve their goals and solve their problems. It includes consultants who influence public policy and government but excludes sales, training, and education courses.
It is important to note that some businesses may be a combination of SSTB and non-SSTB. In such cases, the de minimis rule may apply, and the entire entity may be subject to SSTB rules if the total receipts are more than $25 million, with 5% of those receipts from an SSTB. The IRS has also excluded some professions from the SSTB definition, such as architecture, engineering, and certain financial services occupations. Insurance agents and brokers are also excluded from the SSTB definition.
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Businesses must qualify as an SSTB for the QBI tax deduction
The Qualified Business Income (QBI) deduction, also known as Section 199A of the Internal Revenue Code, was established by the 2017 Tax Cuts and Jobs Act (TCJA). It allows eligible self-employed individuals and small business owners to deduct up to 20% of their QBI. This includes owners of sole proprietorships, partnerships, S corporations, and some trusts and estates.
A business must be classified as a Specified Service Trade or Business (SSTB) to qualify for the QBI tax deduction. SSTBs are defined by the Internal Revenue Service (IRS) as businesses where the principal asset is the reputation or skill of the owner or employee. This includes fields such as health, law, accounting, athletics, and financial services. Notably, real estate and insurance agents are excluded from the SSTB definition and are therefore not eligible for the QBI deduction.
To determine if a business qualifies for the QBI deduction, several factors must be considered. Firstly, it must be established if the business is an SSTB. If it is, the total taxable income must be assessed to determine if the business can claim the full 20% deduction, a limited deduction, or no deduction. If the taxpayer's income is below the threshold, they are eligible for the 20% deduction regardless of whether their business is an SSTB. Additionally, if a business has a mix of income from an SSTB and a non-SSTB, and the gross receipts from the SSTB are below a certain threshold, the business may still be eligible for the QBI deduction.
It is important to note that the QBI deduction is subject to change and may expire on December 31, 2025, unless extended by Congress. Understanding how the IRS classifies a business can help maximize tax deductions, and tax professionals can advise on this matter.
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Examples of SSTBs include accounting, consulting, and financial services
The Internal Revenue Service (IRS) designates a specified service trade or business (SSTB) classification. SSTBs are defined by the IRS as businesses where the "principal asset is the reputation or skill of one or more of its employees or owners". This definition is further clarified by the Internal Revenue Code (IRC) Section 199A, which states that SSTBs are eligible for a 20% deduction on business income.
SSTBs encompass a range of industries, including health, law, performing arts, accounting, actuarial science, consulting, and financial services. Examples of SSTBs within these sectors include:
Accounting
- Accountants
- Financial auditors
- Enrolled agents
- Bookkeepers
- Certified Public Accountants (CPAs)
- Tax preparers
Consulting
- Lobbyists
- Business consultants
- Management consultants
- Personnel consultants
Financial Services
- Investment bankers
- Wealth managers
- Financial advisors
- Wealth planners
- Money managers
It is important to note that the SSTB classification can be complex and ambiguous. While consultants are specifically mentioned in the IRS's definition, the consulting category is broad in its interpretation and may not always apply. For example, salespeople who provide training courses on a product are excluded. Additionally, insurance agents and brokers are typically excluded from the SSTB definition.
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Frequently asked questions
No, insurance agents are specifically excluded from the definition of brokerage services and are therefore not classified as an SSTB.
SSTB stands for specified service trade or business. This classification is designated by the Internal Revenue Service (IRS).
Brokerage services include any services where a person arranges transactions between a buyer and a seller with respect to securities for a commission or fee.
