The Specified Service Trade or Business (SSTB) designation is a critical factor in determining eligibility for the Qualified Business Income (QBI) deduction introduced by the 2017 Tax Cuts and Jobs Act (TCJA). This deduction allows many owners of pass-through businesses—such as sole proprietorships, partnerships, and S corporations—to deduct up to 20% of their qualified business income, lowering their taxable income.
Understanding SSTB
The IRS defines an SSTB as a business where the main asset is the skill or reputation of one or more employees or owners. Common SSTB categories include:
- Health services (doctors, dentists, nurses)
- Legal services (lawyers, legal consultants)
- Accounting and auditing
- Consulting (business and management)
- Financial services (investment advisors, brokers)
- Performing arts (musicians, actors)
- Athletics (athletes, coaches)
Some businesses in these areas may not qualify as SSTBs due to IRS exceptions and gray areas—such as engineering and architecture, which are explicitly excluded.
How SSTB Status Impacts the QBI Deduction
The key effect of SSTB classification lies in subjecting businesses to income thresholds that limit the QBI deduction:
- Below threshold: Full 20% QBI deduction allowed.
- Within phase-out range: The QBI deduction is gradually reduced.
- Above phase-out range: No QBI deduction allowed for SSTB income.
For 2023, the income thresholds are:
| Filing Status | Threshold Start | Threshold End (Phase-Out) |
|---|---|---|
| Single or Head of Household | $182,100 | $232,100 |
| Married Filing Jointly | $364,200 | $464,200 |
Real Example
Maria, a solo lawyer filing as single, earns $190,000 in 2023. Since her income is in the phase-out range, her QBI deduction on her legal income is reduced, not the full 20%. If her income grows beyond $232,100 that year, she would receive no QBI deduction on that income.
Who Should Care About SSTB?
- Service professionals in SSTB-designated fields.
- Owners of pass-through entities.
- High earners facing deduction phase-outs.
- Entrepreneurs with businesses having both SSTB and non-SSTB activities.
Planning Strategies
- Monitor taxable income to maximize deductions below thresholds.
- Consider business restructuring or income timing.
- Maintain detailed records separating SSTB income from other income.
- Consult a tax professional, especially for mixed businesses.
Common Misunderstandings
- Not all service businesses are SSTBs—engineering and architecture are notable exclusions.
- SSTB status affects only the QBI deduction, not your overall tax liability.
- Other tax credits and deductions may still be available even if the QBI deduction is limited.
Additional Resources
- For IRS guidance on the QBI deduction, see IRS Qualified Business Income Deduction.
- Learn more about computing QBI deductions on Form 8995 – Qualified Business Income Deduction (QBI) Simplified Computation.
Understanding SSTB rules is essential for service-based business owners aiming to optimize their tax deductions. Staying informed and consulting tax experts can help navigate these complexities to maximize tax benefits under current IRS regulations.