Pass-through entities and structures include-
Specified Service Trade or Business (SSTB) is strictly defined as-
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-
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.
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.
Investing and Investment Management Services
Trading Services and Dealing in Securities
Reputation or Skill
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.
Taxpayer's Comprehensive Guide to LLCs and S Corps : 2019 Edition