A specified service trade or business, or SSTB, is the class of trade or business that section 199A of the Internal Revenue Code carves out of the definition of a qualified trade or business. The term means any trade or business described in section 1202(e)(3)(A), applied without regard to the words “engineering, architecture”, or one that would be so described if the term “employees or owners” were substituted for “employees” (26 U.S.C. 199A(d)(2)(A)). With those two words struck out and owners read in, that list covers health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, and any trade or business whose principal asset is the reputation or skill of one or more of its employees or owners (26 U.S.C. 1202(e)(3)(A)). The term also picks up any business performing services that consist of investing and investment management, trading, or dealing in securities, partnership interests or commodities (26 U.S.C. 199A(d)(2)(B)).
Three Fields Where the Regulation Departs From the Ordinary Word
The statute supplies the list of fields. The regulation supplies what each field on it means, and classification is decided on those definitions rather than on how the field name reads in ordinary use (eCFR, section 1.199A-5(b)). Three of them are worth reading closely, because the regulatory meaning and the everyday word come apart.
Consulting is the field that catches businesses that never describe themselves as consultants, and the regulation draws its edges carefully. It means the provision of professional advice and counsel to clients to assist the client in achieving goals and solving problems, and it includes providing advice and counsel regarding advocacy with the intention of influencing decisions made by a government or governmental agency, together with attempts by lobbyists and similar professionals to influence legislators and other government officials on behalf of a client. It does not include the performance of services other than advice and counsel, such as sales or the provision of training and educational courses. It also does not include consulting embedded in, or ancillary to, the sale of goods or the performance of services by a business that is otherwise not an SSTB, where there is no separate payment for the consulting. Services within the fields of architecture and engineering are not treated as consulting services (eCFR, section 1.199A-5(b)(2)(vii)).
The brokerage services field is narrower than the everyday word. It covers arranging transactions between a buyer and a seller with respect to securities for a commission or fee, including the work of stock brokers and similar professionals, and it does not include services provided by real estate agents and brokers, or by insurance agents and brokers (eCFR, section 1.199A-5(b)(2)(x)).
The financial services field draws its own boundary. It covers managing wealth, advising clients on finances, developing retirement and wealth transition plans, advisory work on valuations, mergers, acquisitions and restructurings, and raising financial capital. Solely for purposes of section 199A it does not include taking deposits or making loans, though it does include arranging lending transactions between a lender and a borrower (eCFR, section 1.199A-5(b)(2)(ix)).
Reputation or Skill Is Narrower Than It Sounds
The catch-all at the end of the list reads far wider than it operates. Taken at face value, a business whose principal asset is the reputation or skill of its employees or owners would sweep in nearly every professional practice. The regulation does not read it that way.
For purposes of section 199A the term reaches only a trade or business that consists of receiving fees, compensation or other income for endorsing products or services, of licensing or receiving income for the use of an individual’s image, likeness, name, signature, voice, trademark or other symbols associated with that individual’s identity, or of receiving income for appearing at an event or on radio, television or another media format (eCFR, section 1.199A-5(b)(2)(xiv)). Income of that kind includes the receipt of a partnership interest or of S corporation stock, together with the distributive share or income that comes with it.
The regulation’s own illustration shows the split inside one taxpayer’s affairs. A well-known chef who owns restaurants is in the trade or business of being a chef and owning restaurants, and that business is not an SSTB, while the same chef’s separate trade or business of receiving an endorsement fee for the use of the chef’s name on a line of cooking utensils and cookware is an SSTB (eCFR, section 1.199A-5(b)(3)(xv)).
The De Minimis Rule
A modest amount of specified service revenue inside a larger business does not make the whole business an SSTB. De minimis here means an amount small enough to be disregarded, and the regulation fixes it with a bright line. For a trade or business with gross receipts of $25 million or less for the taxable year, the business is not an SSTB if less than 10 percent of its gross receipts are attributable to the performance of services in a field described in paragraph (b) of the regulation, and any activity incident to the actual performance of services in that field counts toward the test (eCFR, section 1.199A-5(c)(1)(i)).
Past that size the test tightens. For a trade or business with gross receipts of greater than $25 million for the taxable year, the same rule applies with 5 percent substituted for 10 percent each place it appears (eCFR, section 1.199A-5(c)(1)(ii)).
Failing the test is all or nothing within a single trade or business. Where one trade or business with $2 million of gross receipts takes $250,000 of that from landscape design consulting, which is above the 10 percent line that applies at its size, the entirety of that trade or business is an SSTB, not the consulting slice alone (eCFR, section 1.199A-5(c)(1)(iii)(A)).
A related rule closes the obvious workaround of splitting the service work into a sister company. Where a trade or business provides property or services to an SSTB and there is 50 percent or more common ownership of the two, the portion of that business consisting of the property or services it provides to the commonly owned SSTB is treated as a separate SSTB with respect to the related parties (eCFR, section 1.199A-5(c)(2)(i)).
What Being an SSTB Does to the Deduction
Being an SSTB is a classification of the business, not an automatic loss of the deduction. Taxable income decides which of three outcomes applies. Below the threshold amount the SSTB limitation does not apply at all. Inside the phase-in range, the band of taxable income between the threshold amount and a fixed dollar amount above it, only an applicable percentage of the SSTB’s items is taken into account. Above that range, no qualified business income, W-2 wages or unadjusted basis immediately after acquisition of qualified property from the SSTB may be taken into account, even where the item comes from an activity that is not itself a specified service activity (eCFR, section 1.199A-5(a)(2)).
That last outcome reaches past the business itself. It applies to an individual who owns the business indirectly through a passthrough entity, whether or not the owner is passive and whether or not the owner performed any specified service (eCFR, section 1.199A-5(a)(2)).
The statute states the exception directly. Where taxable income for the year sits below the top of that phase-in range, a specified service trade or business does not fail to be treated as a qualified trade or business on that ground, and only the applicable percentage of its qualified items, its W-2 wages and its qualified property is taken into account (26 U.S.C. 199A(d)(3)). The threshold amount, the current dollar figures, the applicable percentage arithmetic, the wage and property limitation and the form that carries the result are set out in QBI deduction.
Why a CPA Firm Is an SSTB
Accounting is named in the section 1202 list and it survives the strike-out of engineering and architecture, so a CPA or EA practice is itself a specified service trade or business (26 U.S.C. 199A(d)(2)(A)). The regulation defines the field by the work rather than by the credential: the performance of services in the field of accounting means the provision of services by individuals such as accountants, enrolled agents, return preparers, financial auditors, and similar professionals performing services in their capacity as such (eCFR, section 1.199A-5(b)(2)(iv)). A bookkeeping or tax preparation practice with no CPA anywhere in it lands in the same place.
So the question comes up twice in one practice, once on the partners’ own returns and again on any client whose own pass-through entity carries on a trade or business in a listed field.
What an SSTB Is Not
An SSTB is not simply a business that sells services rather than products. Each field on the list carries its own regulatory definition, and plenty of service work sits outside all of them, including architecture and engineering, the work of real estate and insurance agents and brokers, and taking deposits or making loans (eCFR, section 1.199A-5(b)(2)).
It is also not the same exclusion as the one for employees, though the two sit side by side. A qualified trade or business means any trade or business other than a specified service trade or business or the trade or business of performing services as an employee (26 U.S.C. 199A(d)(1)). The first turns on what field the business is in, the second on how the person is paid: wages and other income earned in the capacity of an employee are not income from a trade or business for section 199A purposes at all (eCFR, section 1.199A-5(d)(1)).
Common Questions
Work the regulation in its own order rather than reasoning from the field names. Start with the listed fields and ask whether the business performs services in one of them as the regulation defines that field. If it does not, test the reputation or skill catch-all against its three narrow categories rather than against the plain words. If only part of the revenue comes from a listed field, run the de minimis test on gross receipts. If the business supplies property or services to a commonly owned SSTB, check the related-party rule as well (eCFR, section 1.199A-5).
The answer is a list rather than a case. A law practice, a medical or dental practice, an accounting or tax practice, an actuarial firm, a consulting firm, a securities brokerage, a wealth advisory practice, and the trade or business of a performer or an athlete are all specified service trades or businesses, because those fields are named (26 U.S.C. 1202(e)(3)(A)). Outside the named fields the classification turns on the narrow endorsement, licensing and appearance categories, which is why the regulation’s bicycle sales and repair business, whose owner and employees have acquired substantial skill and reputation in the field, is not an SSTB (eCFR, section 1.199A-5(b)(3)(xiv)).
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