What Is an SSTB and How Does It Affect the QBI Deduction?

The Qualified Business Income (QBI) deduction offers a tax benefit for many owners of pass-through businesses. This deduction allows eligible individuals, trusts, and estates to reduce their taxable income by a percentage of their qualified business earnings. However, certain types of businesses, known as Specified Service Trade or Businesses (SSTBs), face limitations on this deduction as their income levels increase.

Understanding the Qualified Business Income Deduction

The QBI deduction enables eligible owners of sole proprietorships, partnerships, and S corporations to deduct up to 20% of their qualified business income. This provision provides tax relief for pass-through entities, which do not pay corporate income tax directly.

Qualified business income (QBI) represents the net amount of qualified items of income, gain, deduction, and loss from a qualified trade or business. Items like capital gains or losses, certain dividends, interest income, and wages earned as an employee are generally excluded from QBI. The deduction also includes 20% of qualified real estate investment trust (REIT) dividends and qualified publicly traded partnership (PTP) income.

The overall QBI deduction is limited to the lesser of 20% of the taxpayer’s QBI (plus REIT/PTP income) or 20% of the taxpayer’s taxable income, reduced by net capital gains. This taxable income limitation ensures the deduction does not exceed a certain percentage of the taxpayer’s total income.

Defining a Specified Service Trade or Business

A Specified Service Trade or Business (SSTB) is a category of business that faces specific limitations on the QBI deduction. An SSTB involves the performance of services in certain enumerated fields or where the principal asset is the reputation or skill of its employees or owners. This classification directly impacts eligibility for the full QBI deduction.

Tax regulations list several service fields that automatically qualify as an SSTB. These include health, encompassing services provided by doctors, nurses, dentists, and veterinarians. Law services, such as those provided by lawyers and paralegals, are SSTBs. Other enumerated services include accounting, actuarial science, performing arts (e.g., actors, musicians), consulting (providing advice and counsel), athletics (e.g., professional athletes, coaches), financial services (e.g., financial advisors, brokers), investing and investment management, and trading in securities, commodities, or partnership interests.

Beyond these specific fields, an SSTB also includes any trade or business where the principal asset is the reputation or skill of one or more of its employees or owners. This “reputation or skill” clause is broadly interpreted to capture income derived from endorsements, the use of an individual’s image or likeness, or appearances at events or on media. For instance, a famous chef’s income from endorsing cookware due to their reputation would fall under this clause, even if their restaurant business itself is not an SSTB.

Engineering and architecture services are explicitly excluded from the definition of an SSTB. Businesses primarily engaged in these fields are not subject to the same QBI deduction limitations as other specified service businesses, regardless of income.

Impact of SSTB Status on QBI Deduction

Being classified as an SSTB influences a taxpayer’s ability to claim the full QBI deduction. The impact is determined by specific income thresholds, which are adjusted annually for inflation. For the 2025 tax year, the QBI deduction for SSTBs begins to phase out if taxable income exceeds $197,300 for single filers or $394,600 for those filing jointly.

If a taxpayer’s taxable income, calculated before the QBI deduction, falls below these lower thresholds, the SSTB designation is largely irrelevant. In such cases, the business is treated similarly to any other qualified business, allowing for the full 20% QBI deduction.

However, if taxable income falls within the phase-out range, the QBI deduction for an SSTB is gradually reduced. For 2025, this range is between $197,300 and $247,300 for single filers and between $394,600 and $494,600 for joint filers. Within this range, the deduction becomes subject to limitations based on the W-2 wages paid by the business and the unadjusted basis of qualified property (UBIA).

Once a taxpayer’s taxable income exceeds the upper threshold of the phase-out range ($247,300 for single filers or $494,600 for joint filers in 2025), no QBI deduction is allowed for income derived from an SSTB. This limitation aims to prevent high-income service professionals from unduly benefiting from the deduction.

Identifying Your Business as an SSTB

Determining whether a business qualifies as an SSTB requires a review of its primary activities and revenue streams. Business owners should compare the services they offer against the enumerated list of specified service fields provided in tax regulations.

The “reputation or skill” clause also requires consideration, as it captures income related to endorsements, use of an individual’s identity, or appearances. If a portion of a business’s income is derived from these activities, it may be classified as an SSTB, even if its core operations are not on the enumerated list. A business owner receiving substantial fees for product endorsements due to their personal brand would likely fall under this clause.

The determination can be complex, especially for businesses with diverse service offerings or those that might straddle different categories. The income thresholds for the QBI deduction change annually, requiring regular reassessment. Because of these complexities and tax implications, consulting with a qualified tax professional, such as a Certified Public Accountant (CPA) or tax attorney, is recommended for an accurate assessment and tax planning.