What Is an SSTB for the QBI Deduction?

The Qualified Business Income (QBI) deduction, established under Internal Revenue Code Section 199A, offers a significant tax benefit for many self-employed individuals and small business owners. This deduction allows eligible taxpayers to reduce their taxable income by up to 20% of their qualified business income. However, its application is not universal, particularly for businesses categorized as a Specified Service Trade or Business (SSTB). Understanding the SSTB classification is crucial, as it significantly impacts the availability and amount of the QBI deduction.

Understanding the QBI Deduction

The Qualified Business Income (QBI) deduction, also known as the Section 199A deduction, was introduced by the 2017 Tax Cuts and Jobs Act. This provision provides tax relief for owners of pass-through entities, allowing them to deduct a portion of their business income. Eligible taxpayers include owners of sole proprietorships, partnerships, S corporations, and certain trusts and estates.

The deduction permits an eligible taxpayer to deduct up to 20% of their qualified business income. This amount is subject to overall limitations based on the taxpayer’s taxable income, as well as limitations related to W-2 wages paid by the business and the unadjusted basis immediately after acquisition (UBIA) of qualified property. Qualified Business Income refers to the net amount of qualified items of income, gain, deduction, and loss from a qualified trade or business conducted within the United States. This includes income reported on Schedule C, E, or F, but excludes certain investment income, guaranteed payments to partners, and reasonable compensation paid to S corporation shareholders.

Identifying a Specified Service Trade or Business

A Specified Service Trade or Business (SSTB) is a classification defined by IRS regulations that can limit or eliminate the QBI deduction for certain service-based businesses. An SSTB involves the performance of services in specific fields or where the principal asset of the business is the reputation or skill of its owners or employees. This classification is distinct from the business’s legal structure, meaning a sole proprietorship, partnership, or S corporation can all be an SSTB. The IRS explicitly lists several fields that constitute an SSTB:

• Health services (medical, dental, veterinary care)
• Legal services (lawyers, paralegals, mediators)
• Accounting and actuarial science services
• Performing arts (actors, musicians, entertainers)
• Consulting services
• Athletics (professional athletes, coaches, team managers)
• Financial services (financial planners, investment managers, brokers)
• Investing and investment management, trading, and dealing in securities, commodities, or partnership interests

A broader “catch-all” category for an SSTB includes any trade or business where the principal asset is the reputation or skill of one or more of its employees or owners. This provision targets income derived from endorsements, the use of an individual’s image or likeness, or income from appearances in media. It focuses on instances where income is directly tied to a person’s celebrity or public recognition, not broadly to all businesses employing skilled individuals.

A de minimis rule provides an exception for businesses that might otherwise be considered SSTBs due to a small portion of their gross receipts. If a trade or business has gross receipts of $25 million or less, it is not treated as an SSTB if less than 10% of its gross receipts are from specified services. For businesses with gross receipts exceeding $25 million, the threshold for specified service receipts is lower, at less than 5%. This rule prevents an entire business from being tainted as an SSTB if only a minor part of its operations involves specified services.

How SSTB Status Affects Your QBI Deduction

The classification of a business as an SSTB impacts the Qualified Business Income (QBI) deduction, particularly for taxpayers with higher taxable incomes. The IRS establishes annual income thresholds, adjusted periodically for inflation, that determine the extent to which an SSTB’s income qualifies for the deduction.

For the 2024 tax year, if a taxpayer’s taxable income is below $191,950 for single filers or $383,900 for those married filing jointly, an SSTB can claim the full QBI deduction. In this income range, the SSTB classification does not limit the deduction, and the taxpayer can take 20% of their QBI, subject to the overall taxable income limitation.

When a taxpayer’s taxable income falls within the phase-out range, the QBI deduction for an SSTB is gradually reduced. For 2024, this range is between $191,950 and $241,950 for single filers, and between $383,900 and $483,900 for married filing jointly. Within this phase-out, the QBI deduction for an SSTB is limited, and the W-2 wage and unadjusted basis immediately after acquisition (UBIA) of qualified property limitations begin to apply. The deduction is calculated by applying an applicable percentage to the QBI, W-2 wages, and UBIA, reducing the allowable deduction as income approaches the upper threshold of the phase-out range.

If a taxpayer’s taxable income exceeds the upper threshold of the phase-out range, no QBI deduction is allowed for income derived from an SSTB. For 2024, this means single filers with taxable income above $241,950 and married filers with taxable income above $483,900 will not receive any QBI deduction from an SSTB. At this income level, all QBI, W-2 wages, and UBIA from the SSTB are excluded from the QBI deduction calculation.