This article aims to shed light on what SSTB means and why it’s critical for businesses to understand. From its implications on tax deductions to its impact on overall business strategy, an SSTB classification can profoundly influence a company’s bottom line.
Whether you’re a seasoned business owner or just starting, gaining clarity on SSTBs can provide valuable insights. So, let’s dive in and unravel the mystery behind Specified Service Trade or Business.
What is a Specified Service Trade or Business
Diving deeper into Specified Service Trade or Business (SSTB) brings clarity. Let’s dive into its definition, characteristics and implications for tax deductions.
Definition and OverviewSpecified Service Trade or Business (SSTB) refers to a classification in the Tax Cuts and Jobs Act of 2017. According to Internal Revenue Service (IRS), it includes any trade or business performing services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, and any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees or owners. The classification is essential because it impacts tax deductions for businesses.Key CharacteristicsThere are certain unique characteristics that set SSTBs apart. These include:Nature of Services: As per IRS, SSTBs relate to a set of specific professional fields, such as health, law and consulting. For instance, a medical practitioner’s practice classifies as an SSTB.Impact on Tax Deductions: Businesses classified as SSTBs face specific limitations when it comes to tax deductions. The Qualified Business Income (QBI) deduction can be restricted if a taxpayer’s income from an SSTB exceeds a certain threshold.Based on Reputation and Skill: The principal asset clause defines that any business where the reputation or skill of one or more employees is the main asset, it is classified as an SSTB. For example, an award-winning architecture firm’s reputational value can classify it as an SSTB.Therefore, having an understanding of SSTBs is critical in shaping a business strategy and managing potential tax liabilities. The SSA’s intention with defining and identifying SSTBs is to prevent service businesses from taking undue advantage of the tax deductions available to trades or businesses.
Understanding Specified Service Trade or Business
Note: The Internal Revenue Service (IRS) should be referenced as the authority on SSTB definitions and notations.
The relevance of Specified Service Trade or Business (SSTB) in tax regulations becomes evident when assessing its role in Qualified Business Income deductions and the ensuing impact on various professions.
Role in Qualified Business Income Deduction
SSTBs play a pivotal role in determining Qualified Business Income (QBI) deductions. Primarily, SSTBs exist beyond the reach of this attractive tax benefit. Businesses classified as SSTBs lose access to the QBI deduction if their taxable income exceeds a certain threshold—$426,600 for married filing jointly and $213,300 for other filers in the tax year 2021, for instances. High-income earners get pinched particularly hard, completely losing access to this beneficial deduction if found to operate in an SSTB.
The implementation of SSTBs affects various professions disproportionately. Businesses operating in sectors like health, law, consulting, where reputation or skill forms the primary asset, fall directly under the SSTB category. These businesses, once their income surpasses the set threshold, face limitations on availing QBI deductions. This distinctive impact of SSTB classifications intricately shapes the financial strategies of businesses operating in these sectors and challenges them to engage with tax regulators proactively.
Primarily, SSTBs intersect heavily with the health and law sectors. In the realm of health services, medical professionals such as doctors, dentists, physical therapists, and psychologists represent typical SSTBs. These individuals’ services directly impact human health, putting them squarely in the SSTB category.