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Section 199A Defining Terms

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Last updated: 24 Nov, 2018
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By Jason Watson ()
Posted November 23, 2018

Pass-through entities and structures include-

  • Sole proprietorships (no entity, Schedule C).

  • Real estate investors (no entity, Schedule E).

  • Multi-member LLCs (Form 1065).

  • Trusts and estates, REITs and qualified cooperatives.

Specified Service Trade or Business (SSTB) is strictly defined as-

  • 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). Here is a link to review the Proposed Regulations 1.199A-


One of the areas that was addressed was SSTBs which is the acronym for specified service trade or business. Here is the dirty baker’s dozen, the unlucky 13-

Not just doctors, but anyone in the provision of medical services directly to a patient. 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? In theory we would carve out the retail component and use some sort of proration, but additional guidance is needed.

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.

Actuarial Science
Does not include analysts, economists, mathematicians and statisticians. Thank goodness, but then again how many mathematicians make over $315,000? We want that job! Hats off to John Nash and his game theory mathematics however.

Performing Arts
Includes who you think it would include, but does not include those people or businesses supporting the performing arts such as directors, make-up technicians, camera operators, maintenance personnel and other specialists. What does a key grip do anyway?

Here is the verbiage right from the Proposed 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 connected 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.

Sure. Got it. But be careful since it also includes coaches and team managers.

Financial Services
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.

Brokerage Services
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.

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 the Watson CPA Group 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).

Additionally, the SSTB designation is a direct response to what the IRS and Congress consider disguised W-2 compensation. Their position is that a doctor running an S Corp as an independent surgeon to a hospital is simply a disguised W-2, and as such all his or her income should be subjected to Social Security (up to the limits) and Medicare taxes.

Historically most personal services were performed by employees but the trend is now more independent contractors. In addition, to prevent W-2 converted to 1099 contractor abuse in the future in light of the wonderful Section 199A deduction, Congress created the SSTB designation. Simply, the tax code doesn’t want more employees to be converted to contractors.

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