Specified Service Trade or Business (SSTB)

A specified service trade or business (SSTB) is a trade or business described in Internal Revenue Code section 199A(d)(2): one performing services in health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services or brokerage services, one whose principal asset is the reputation or skill of its employees or owners, or one whose services consist of investing and investment management, trading, or dealing in securities, partnership interests or commodities. Its job in section 199A is to limit the qualified business income deduction. Section 199A(d)(1)(A) leaves an SSTB out of the businesses that produce the deduction, and section 199A(d)(3) relaxes that exclusion for an owner whose taxable income is below the top of a phase-in range. The statute's heading for that relief uses the shorter "specified service businesses", and Treasury's regulations and the IRS forms abbreviate the full term as SSTB.

The list is borrowed from another section, with two edits. Section 199A(d)(2)(A) takes the service fields from section 1202(e)(3)(A), part of the list of businesses barred from the qualified small business stock exclusion, and applies it "without regard to the words 'engineering, architecture,'" so an engineering or architecture firm is not an SSTB, and Treasury Regulation section 1.199A-5(b)(2)(vii) adds that services in those two fields are not treated as consulting either. The second edit substitutes "employees or owners" for "employees" in the reputation-or-skill clause. Section 199A takes only subparagraph (A), so the other businesses section 1202(e)(3) bars, such as banking, insurance, farming, and hotels and restaurants, are not SSTBs. Section 199A(d)(2)(B) then adds investing and investment management, trading, and dealing in securities, partnership interests or commodities.

The regulations draw the edge of each field. Treasury Regulation section 1.199A-5(b)(2) defines every field "for purposes of section 199A(d)(2)" only. Health means medical services by physicians, pharmacists, nurses, dentists, veterinarians, physical therapists, psychologists and similar professionals, and it does not include running a health club or spa, payment processing, or researching, testing, making or selling drugs and medical devices. Law leaves out services that need no legal skill, such as printing, delivery and stenography. Accounting includes enrolled agents and return preparers as well as accountants and auditors. Consulting is professional advice and counsel, lobbying included, but not sales, training and educational courses, or advice built into the sale of goods or into a non-SSTB's services when there is no separate payment for it. Financial services covers managing wealth, advising clients on their finances, developing retirement and wealth transition plans, and advisory and underwriting work on deals; it excludes taking deposits and making loans but includes arranging a loan between a lender and a borrower. Brokerage services means arranging securities trades for a commission or fee, and the regulation expressly excludes real estate agents and brokers and insurance agents and brokers. Investing and investment management means earning fees for investment or asset management advice, and does not include directly managing real property.

The reputation-or-skill clause is three kinds of income, not a description of skilled work. Read on its own, "any trade or business where the principal asset of such trade or business is the reputation or skill of 1 or more of its employees" could sweep in almost any business built on expertise. Section 1.199A-5(b)(2)(xiv) limits it to income for endorsing products or services, income for the use of an individual's image, likeness, name, signature, voice, trademark or other symbols of identity, and fees for appearing at an event or on radio, television or another media format. The regulation's own examples show the line: a bicycle sales and repair shop whose staff have substantial skill and reputation is not an SSTB, while a well-known chef's restaurants are not an SSTB but the chef's endorsement fee for a cookware line is a separate one. These field definitions apply only for section 199A and for a provision that expressly refers to section 199A(d), so they do not narrow the same words in section 1202.

The phase-in, in one formula. Under section 199A(d)(3), an owner whose taxable income is below the threshold amount plus $75,000 ($150,000 on a joint return) does not lose the SSTB outright. Instead only the applicable percentage of its income, gain, deduction and loss, its W-2 wages and its qualified property is counted. The applicable percentage is 100 percent minus the ratio of taxable income above the threshold to $75,000 ($150,000 joint), and not below zero. Taxable income here is figured before the qualified business income deduction itself. For 2026 the threshold is $201,750 for most filers, $403,500 on a joint return and $201,775 filing separately, and the top of the range is $276,750, $553,500 and $276,775. The $75,000 width is statutory and was $50,000 ($100,000 joint) before the 2025 tax law widened it for taxable years beginning after December 31, 2025, so a 2025 return still uses the narrower range. Above the range, section 1.199A-5(a)(2) provides that "no qualified business income (QBI), W-2 wages, or unadjusted basis immediately after acquisition (UBIA) of qualified property from the SSTB may be taken into account" by an individual whose taxable income exceeds the phase-in range. Because the wages are scaled by the same percentage, paying more wages does not keep a deduction alive once the percentage reaches zero.

The minimum deduction does not reach it. From 2026, section 199A(i) sets a deduction of at least $400 for a taxpayer with at least $1,000 of qualified business income from "active qualified trades or businesses," those in which the taxpayer materially participates. Above the range an SSTB is not a qualified trade or business at all, so its income does not count toward that test, and inside the range only the applicable percentage of its income counts.

Rules that keep the label from being restructured away. The limit applies to every individual owner of a partnership or S corporation that is an SSTB, including a passive owner who performs none of the services. Under section 1.199A-5(c)(2), a business that provides property or services to an SSTB with 50 percent or more common ownership is treated as a separate SSTB for that portion, which is why a law firm that moves its office building into a sister partnership owned by the same partners finds the rent treated as SSTB income too. Section 1.199A-4(b)(1)(iv) bars an SSTB from being aggregated with other businesses. And the de minimis rule at section 1.199A-5(c)(1) is a cliff: a business with gross receipts of $25 million or less is not an SSTB if less than 10 percent of those receipts come from a listed field (5 percent above $25 million), and once the share reaches the limit the entirety of the business is an SSTB. The regulation's example is a landscaping supplier with $2 million of receipts, $250,000 of them from separately billed design advice; at 12.5 percent, the whole business is an SSTB. A separate trade or business is tested on its own receipts: in the regulation's other example, a dog food line with its own books, invoices and employees is not an SSTB even though the veterinary clinic beside it is one.

Two neighboring rules use the same machinery differently. Section 199A(d)(1)(B) separately excludes "the trade or business of performing services as an employee," at every income level, and section 1.199A-5(d)(3) presumes for three years, unless rebutted, that a former employee now doing substantially the same work for the same employer as a contractor is still an employee. And the tips deduction, section 224(d)(2)(B), uses the SSTB definition to exclude tips received in an SSTB at every income level, testing an employee's tips against the employer's business. For now the IRS does not enforce that exclusion against a worker in an occupation that customarily and regularly received tips: under Notice 2025-69, until January 1 of the first calendar year after final regulations on which businesses are specified for the tips deduction, such a worker is treated as receiving tips outside an SSTB.

The test runs one trade or business at a time.

1. Identify the business and what it is paid for, using the field definitions in Treasury Regulation section 1.199A-5(b)(2).
2. Check the reputation-or-skill clause only for endorsement, licensing and appearance income, which can be a separate SSTB inside an otherwise ordinary business.
3. Apply the de minimis test: under 10 percent of gross receipts from listed fields (5 percent above $25 million) and the business is not an SSTB.
4. Compare taxable income before the deduction to the threshold and to the top of the phase-in range.
5. Scale the business's figures by the applicable percentage, then run the usual qualified business income deduction rules on the scaled amounts. Inside the range, each $7,500 of taxable income above the threshold removes another 10 percentage points, or each $15,000 on a joint return.

Take an example. Odette is single and runs a management consulting practice as a sole proprietor, which the regulation treats as consulting. Her qualified business income for the year is $200,000. She pays two employees $120,000 of W-2 wages between them, the practice owns no qualified property, and she has no capital gain.

If her taxable income before the deduction is $30,000 above the threshold, the applicable percentage is 100 percent minus $30,000 divided by $75,000, which is 100 minus 40, or 60 percent. Only 60 percent of her qualified business income counts, which is $120,000, and 60 percent of her wages, which is $72,000. Twenty percent of $120,000 is $24,000. The wage limit, half of $72,000, is $36,000, more than $24,000, so it takes nothing away, and her taxable income is high enough that the overall cap of 20 percent of taxable income does not bind. Her deduction is $24,000. Had the same practice been an engineering firm, all $200,000 would count and the deduction would be $40,000, so at this income the label costs her $16,000 of deduction.

If a stronger year puts her taxable income $80,000 above the threshold, past the $75,000 width of the range, the applicable percentage is zero. None of the practice's income, wages or property counts, the deduction from it is zero, and the $400 minimum does not apply because the practice is not an active qualified trade or business that year. Hiring more staff would not change that, and neither would a higher salary if she operated as an S corporation, because none of the practice's wages count either.

Pros

• Below the threshold the label has no effect, so most owners in a listed field never feel it.
• The reputation-or-skill clause covers only endorsement, licensing and appearance income, so a skilled trade such as a repair shop or a restaurant is not caught by it.
• Engineering and architecture are outside the definition, and real estate and insurance agents and brokers are outside the brokerage field.
• A business whose listed-field receipts stay under the de minimis share is not an SSTB at all.
• The phase-in range is $75,000 wide ($150,000 joint) from 2026, half again as wide as before.

Cons

• It bites as income rises, which is when the deduction would be worth most, and above the top of the range the business produces no deduction.
• The de minimis rule is a cliff. Reaching 10 percent of receipts from a listed field (5 percent above $25 million) turns the entire business into an SSTB.
• Passive owners are caught along with the people doing the work.
• An SSTB cannot be aggregated with other businesses, and moving property or services into a commonly owned sister business does not escape it.
• Several fields turn on facts and circumstances, such as whether a service is consulting or sales, and the regulation's examples do not settle every case.