Is Rental Real Estate A Specified Service Trade Or Business

27 Aug What is a Specified Service Merchandise or Concern (SSTB)?

Posted at 00:00h in 199A, SSTB, TCJA

When not riding my mount bike in the Rocky Mountains I tend to hang out with tax nerds … pretty much all the fourth dimension, to the extent that tax nerds actually 'hang out' that is.  At one of our nearly recent 'meetups' (call back band camp without the instruments) nosotros had a lot of fun indulging in freshly picked peaches & poking holes in the bizarrely nuanced albeit new 'concept' (if you volition) of what a Specified Service Trade or Business (SSTB)  is 'proposed to be' co-ordinate to our esteemed 'dominion-writers' from the US Treasury.

Worth noting is that there were a LOT of smart people in the room, many of whom spent their entire adult lives reading and writing most (as well as applying) the The states Revenue enhancement Code/Regulations.

We all more often than not agreed that no business organisation wants to be deemed a SSTB (as the acronym lonely sounds like a illness) and that as a result at that place will be all sorts of skulduggery rearing its ugly caput in the not likewise distant futurity from United states Taxpayers and perhaps our beloved federal government alike.

Nevertheless after many hours of banter we ALL left with more questions than answers about SSTBs. Whilst we keep drilling downward into a common understanding of these troubled proposed regulations, anybody reading this post is urged to provide their opinions Directly to the Us Treasury.

Information on how to properly render your opinion is at the end of this postal service. You can besides contact me straight and I volition run into to information technology that your opinion is heard.

Lesser line is this. If you lot were inconvenienced at all by the reporting and regulatory surround governing ObamaCare… set yourself for some serious caput scratching.

Equally per proposed US Treasury Regulation 107892-eighteen (released August viii^th 2018) governing IRC 199A – Qualified Business organization Income under the newly enacted Revenue enhancement Cut & Jobs Act by our esteemed 115^th Congress, US taxpayers are now expected to accordingly report ownership of Specified Service Trades or Businesses (SSTB) .

Keep in heed if you lot own an SSTB – that business does not qualify for the new xx% business organization deduction unless you lot every bit the possessor encounter exceptions to the general rules.

So what on God'south green Globe IS a Specified Service Trade or Business (SSTB)?

Maybe information technology is all-time to back into this by commencement addressing what it is NOT .  Those industries that are specifically excluded from being deemed a Specified Service Trade or Business organisation (SSTB) include:

• real estate brokers;
• belongings managers;
• architects;
• engineers and
• bankers.

If you ain, passively or otherwise, a concern in any of the above industries you lot conspicuously are organized and paid your Washington lobbyists well.

You lot are excused from reading further.

Trade or Business concern

Before drilling down into what a Specified Service Trade or Business concern (SSTB) really is, paying homage to the ubiquitous tax concept of 'trade or business' seems to be in social club. The proposed regulations affirm that deductions are available merely with respect to activities rising to the level of a " trade or business ."

What does this mean?

• The Code uses several unlike 'standards' to define income for tax purposes.
• The Proposed Regulations governing IRC 199A provide that each activity must satisfy IRC'south Section 162's merchandise or business parameters, which mostly requires a business activity to be conducted "regularly and continually" with the main purpose of making a profit.
• This standard could prove problematic for professionals engaging in rental real estate for reasons that I volition post virtually at another time.

If your activity does not rise to the threshold of IRC 162 as a 'merchandise or business organisation' you too are excused from reading farther.

Specified Service Trade or Business (SSTB)

An SSTB equally nosotros presently understand is divers as any trade or concern involving the performance of services in the fields of:

• Health
• Police force
• Bookkeeping
• actuarial science
• performing arts
• consulting
• athletics
• financial services
• brokerage services
• any trade or business where the master asset of such merchandise or business is the reputation or skill of one or more of its employees or owners
• any merchandise or concern that involves:
  • investing and investment management
  • trading
  • dealing in securities (equally defined in section 475(c)(two)),
  • dealing in partnership interests, or commodities

The following guidelines of SSTB'southward originate from the proposed 199A regulations

• Health – Proposed §i.199A-5(b)(2)(ii)
  • "Operation of services in the field of health means the provision of medical services past physicians, pharmacists, nurses, dentists, veterinarians, physical therapists, psychologists, and other similar healthcare professionals who provide medical services directly to a patient."
  • This does not include the provision of services not directly related to a medical field, even though the services may purportedly chronicle to the health of the service recipient.
  • "The performance of services in the field of health does not include the operation of health clubs or health spas that provide physical exercise or conditioning to their customers, payment processing, or research, testing, and industry and/or sales of pharmaceuticals or medical devices."
  • So… what about…?
    • Developed solar day care that provides attention but does not administer medication?
    • Non-emergency medical (aka wheelchair facilitated) transportation to a medical appointment?
    • Medical transcription or billing services?
    • Radiologist who reads screens from afar and has no patient interaction?
• 2. Police force – Proposed §1.199A-5(b)(2)(three)
  • "Performance of services in the field of law means the provision of services by lawyers, paralegals, legal arbitrators, mediators, and similar professionals…"
  • This does non include the provision of services that do non require skills unique to the field of police force including:
    • printers
    • delivery services
    • stenography services
  • So… what about…?
    • Trustees?
    • Administrators?
    • Personal Representatives?
• 3. Accounting – Proposed §1.199A-5(b)(ii)(iv)
  • "Performance of services in the field of accounting means the provision of services past accountants, enrolled agents, return preparers, financial auditors, and similar professionals in their capacity as such."
  • This is not limited to services requiring country licensure (CPA).
  • The aim of proposed §1.199A-5(b)(2)(iv) is to capture the mutual understanding of bookkeeping, which includes tax return and bookkeeping services, fifty-fifty though the provision of such services may not crave the same education, training, or mastery of accounting principles every bit a CPA.
  • The field of accounting does not include payment processing and billing analysis.
  • So… what about…?
    • Payroll Services Providers?
    • Accounts payable or Billing Services?
• Actuarial science – Proposed §ane.199A-v(b)(2)(five)
  • "Performance of services in the field of actuarial scientific discipline means the provision of services past actuaries and like professionals in their capacity as such."
  • This does non include the provision of services by analysts, economists, mathematicians, and statisticians not engaged in analyzing or assessing the financial costs of risk or doubt of events.
• Performing arts – Proposed §1.199A-5(b)(2)(6)
  • "Operation of services in the field of the performing arts means the operation of services past individuals who participate in the creation of performing arts, such every bit actors, singers, musicians, entertainers, directors, and similar professionals performing services in their capacity as such."
  • The performance of services in the field of the performing arts does non include:
    • the provision of services by persons who broadcast or otherwise disseminate video or sound of performing arts to the public.
    • services that do not crave skills unique to the cosmos of performing arts, such as the maintenance and operation of equipment or facilities for apply in the performing arts.
  • Then… what about…?
    • Managers?
    • Producers?
    • DJ'due south?
      • Playing their own brew-ups?
      • Playing other artist songs?
• Consulting – Proposed §1.199A-5(b)(2)(vii)
  • "Performance of services in the field of consulting means the provision of professional communication and counsel to clients to assist the client in achieving goals and solving problems."
  • "Consulting includes providing advice and counsel regarding advocacy with the intention of influencing decisions made past a government or governmental agency and all attempts to influence legislators and other government officials on behalf of a client past lobbyists and other like professionals performing services in their capacity equally such."
  • This does non include the operation of services other than advice and counsel.
  • Information technology is common for businesses to provide consulting services in connection with the purchase of goods by customers.
  • Examples from the proposed regulation:
    • a company that sells computers may provide customers with consulting services relating to the setup, operation, and repair of the computers
    • a contractor who remodels homes may provide consulting prior to remodeling a kitchen.
  • Proposed §one.199A-five(c) provides a de minimis rule, under which a trade or business is not an SSTB if less than 10 percentage of the gross receipts (5 percentage if the gross receipts are greater than $25 million) of the merchandise or business organization are attributable to the performance of services in a specified service activity.
    • What if you hit 11% and are under $25M gross receipts?
    • Does ALL business concern get ineligible?
    • This de minimis rule may not provide sufficient relief for certain trades or business that provide ancillary consulting services.
  • A trade or business that sells or manufactures appurtenances, and besides happens to provide ancillary consulting services to facilitate the sale of those appurtenances (not separately purchased or billed), is non a 'consulting' trade or business organization.
  • Appropriately, proposed §1.199A-5(b)(2)(vii) provides that the field of consulting does not include consulting that is embedded in, or coincident to, the sale of goods if there is no split payment for the consulting services.
  • So… What well-nigh…?
    • Trainers or educators?
    • Business coaches?
    • Mentors & motivators?
• Athletics – Proposed §ane.199A-v(b)(2)(viii)
  • The field of athletics is not listed in section 448(d)(2), and there is fiddling guidance on its meaning every bit used in section 1202(due east)(3)(A).
  • However, athletics has been deemed to be most similar to the field of performing arts.
  • "Performance of services in the field of athletics ways the performances of services past individuals who participate in able-bodied competition such as athletes, coaches, and team managers in sports such as baseball, basketball, football game, soccer, hockey, martial arts, boxing, bowling, tennis, golf, skiing, snowboarding, track and field billiards, and racing."
  • This does not include the provision of services that do not require skills unique to athletic contest, such every bit the maintenance and operation of equipment or facilities for use in athletic events.
  • Similarly, the performance of services in the field of athletics does not include broadcasters or otherwise disseminators of video or sound.
  • So… What about…?
    • Referees?
    • Umpires?
    • Professional gamers?
• Financial services- proposed §1.199A-5(b)(2)(ix)
  • Because IRC 1202(e)(3)(A) includes the term fiscal services and banking is separately listed in department 1202(e)(three)(B) proposed §ane.199A-5(b)(ii)(ix) limits the definition of financial services to services typically performed by financial advisors and investment bankers including:
    • managing wealth
    • advising clients with respect to finance
    • developing retirement plans
    • developing wealth transition plans
    • informational and other similar services regarding:
      •  valuations
      • mergers
      • acquisitions
      • dispositions
      • restructurings (including in title 11 or similar cases),
    • raising financial majuscule by:
      • underwriting, or
      • acting as the customer'south amanuensis in the issuance of securities, and similar services.
  • This includes services provided past:
    • fiscal advisors
    • investment bankers
    • wealth planners
    • retirement advisors
    • other similar professionals
  • This does not include taking deposits or making loans (AKA BANKS )!
• Brokerage services – Proposed §1.199A-5(b)(ii)(x)
  • "Brokerage services includes services in which a person arranges transactions between a buyer and a seller with respect to securities equally defined in department 475(c)(2). for a commission or fee. "
  • This includes services provided past stock brokers and other similar professionals.
  • This does non include services provided by:
    • real manor agents and brokers
    • insurance agents and brokers.
• Any trade or business concern where the principal asset of such trade or business is the reputation or skill of 1 or more of its employees or owners – Proposed §ane.199A-5(b)(ii)(xiv)
  • The idea "reputation or skill" must be interpreted in a manner that is measurably objective and administrable and is limited to:
    • Receiving income for endorsing products or services, including your distributive share of income or distributions from an RPE for which yous provide endorsement services.
    • Licensing or receiving income for the utilize of your image, likeness, proper name, signature, voice, trademark, or any other symbols associated with your identity, including your distributive share of income or distributions from an RPE to which you contribute the rights to apply your paradigm
    • Receiving appearance fees or income including but non limited to:
      • reality performers performing every bit themselves on television, social media, or other forums
      • radio, television receiver, and other media hosts
      • video game players.
• SSTBs described in 199A(d)(2)(B)
  • SSTB likewise includes any trade or concern that involves:
    • investing and investment management
    • trading
    • dealing in securities (as defined in section 475(c)(ii))
    • dealing in partnership interests, or commodities (as defined in section 475(e)(2)).
  • 1202(e)(3)(A) or section 448(d)(two) have deficient regulations in these regards. Section 475(c)(two) however provides a detailed list of interests treated as securities including:
    • stock in a corporation
    • ownership interests in widely held or publicly traded partnerships or trusts
    • notes
    • bonds
    • debentures
    • other evidences of indebtedness
    • interest rate, currency, or equity notional main contracts
    • evidences of an interest in, or derivative financial instruments in any of the foregoing securities or any currency, including:
      • option contracts
      • forward contracts
      • short positions
      • any similar fiscal instruments; and
      • certain hedges with respect to any such securities
  • Section 475(e)(2) provides a similarly detailed listing of property treated as a commodity, including:
    • any commodity which is actively traded (inside the meaning of section 1092(d)(i)) or
    • any notional chief contract with respect to whatsoever such commodity
    • evidences of an interest in, or derivative fiscal instruments in whatsoever of the foregoing commodities
    • certain hedges with respect to whatsoever such commodities
  • Investing and investment management – Proposed §i.199A-5(b)(2)(11)
    • "Performance of services that consist of investing and investment management means a trade or business that earns fees for investment, nugget management services, or investment management services including providing advice with respect to buying and selling investments."
    • The performance of services that consist of investing and investment management would include a merchandise or business organization that receives:
      • a commission
      • a flat fee
      • a fee calculated every bit a pct of assets under management.
    • The operation of services of investing and investment direction does not include directly managing real property.
  • Trading – Proposed §1.199A-v(b)(ii)(xii)
    • "Performance of services that consist of trading means a trade or business of trading in securities, bolt, or partnership interests. Whether a person is a trader is determined taking into account the relevant facts and circumstances."
    • Factors that accept been considered relevant to determining whether a person is a trader include the source and type of profit generally sought from engaging in the activeness regardless of whether the activity is being provided on behalf of customers or for a taxpayer's own account.
    • Come across:
      • Endicott five. Commissioner, T.C. Memo 2013-199
      • Nelson v. Commissioner, T.C. Memo 2013-259
      • Male monarch v. Commissioner, 89 T.C. 445 (1987).
  • Dealing in securities, partnership interests, and bolt – Proposed §i.199A-5(b)(2)(xiii)
    • "Performance of services that consist of dealing in securities (as divers in section 475(c)(2)) ways regularly purchasing securities from and selling securities to customers in the ordinary course of a trade or business or regularly offer to enter into, assume, kickoff, assign, or otherwise end positions in securities with customers in the ordinary class of a trade or business concern."
    • Loan originators who brand negligible sales of the loans are not dealing in securities for purposes of section 199A(d)(2).
    • "The operation of services that consist of dealing in partnership interests ways regularly purchasing partnership interests from and selling partnership interests to customers in the ordinary course of a trade or business or regularly offering to enter into, assume, first, assign, or otherwise terminate positions in partnership interests with customers in the ordinary course of a trade or business."
    • "The performance of services that consist of dealing in commodities (as defined in section 475(e)(two)) means regularly purchasing commodities from and selling commodities to customers in the ordinary course of a trade or business or regularly offer to enter into, assume, start, assign, or otherwise terminate positions in commodities with customers in the ordinary course of a trade or business concern."

Non-abuse measures – proposed §1.199A-5(c)(ii)

• SSTB includes any trade or business with 50 percent or more common ownership (directly or indirectly) that provides fourscore pct or more of its property or services to an SSTB.
• If a merchandise or business has l percent or more common ownership with an SSTB, to the extent that the trade or business concern provides property or services to the commonly-owned SSTB, the portion of the property or services provided to the SSTB will exist treated as an SSTB (meaning the income volition be treated every bit income from an SSTB).

Example from the proposed regulation

A dentist owns a dental do and an office building. She rents one-half the edifice to the dental practice and half the edifice to unrelated persons. Nether proposed §1.199A-five(c)(two), the renting of half of the edifice to the dental exercise will be treated as an SSTB.

General Rules

To claim the deduction nether Section 199A, a trade or business must be a "qualified trade or business," which includes all trades or businesses except:

• a Specified Service Trade or Business (SSTB)
• "the trade or business of performing services as an employee."

If y'all own a business concern (or two…) practice know that you actually practise not want to be a deemed SSTB.  But it is non all bad as you will see from the general rules and subsequent 'exceptions' to those rules.

• Unless an exception applies, if a trade or concern is an SSTB, there is no Qualified Business Income (QBI) for deduction purposes.
• If a pass-through entity (partnership or S Corporation) provides an SSTB, none of the income from that trade or business flowing to the possessor of the entity is QBI REGARDLESS of whether you participate in the activity or is a passive investor. None of the W-2 wages or UBIA of qualified belongings will exist considered for purposes of department 199A either.

Example from the proposed regulation:

"Athletics is defined as a SSTB, if a partnership owns a professional sports squad, the partners' distributive shares of income from the partnership's athletics trade or business is not QBI, regardless of whether the partners participate in the partnership's trade or business…"

…unless the partner'southward income on their personal income tax forms is below the defined SSTB threshold of $315,00 when filing status is MFJ ($157,500 for all others).

Exceptions to the Full general Rules

• Individuals with taxable income below the threshold amount ($315,000 MFJ & $157,500 for all others) are non bailiwick to a restriction with respect to SSTBs .
• If an individual or trust has taxable income below the threshold amount, the individual or trust is eligible to receive the deduction nether department 199A even if a trade or concern is an SSTB.
• The exclusion of QBI, W-2 wages, and UBIA of qualified property from the computation of the section 199A deduction is subject area to a phase-in for individuals with taxable income within the phase-in range.
• The application of this phase-in is adamant at the private, trust, or estate level, which may not be where the trade or business organisation operates.
• If a partnership or an Southward corporation operates an SSTB, the application of the threshold does non depend on the partnership or S corporation'due south taxable income but rather, the taxable income of the individual partner or shareholder challenge the section 199A deduction.
• A Relevant Pass-through Entity (RPE) conducting an SSTB may non know whether the taxable income of any of its equity owners is below the threshold corporeality of $315,00 when filing condition is MFJ ($157,500 for all others).
  • Even so, the RPE is best positioned to make the decision as to whether its trade or business is an SSTB.
  • Reporting rules nether proposed §1.199A-6(b)(3)(B) requires each RPE to determine whether it conducts an SSTB and disembalm that data to its partners, shareholders, or owners.
• With respect to each trade or business, once information technology is determined that a trade or business concern is an SSTB, information technology remains an SSTB and cannot be aggregated with other trades or business.
• In the instance of a trade or business conducted by an individual, such as a sole proprietorship, disregarded entity, or grantor trust, the determination of whether the business is an SSTB is made past the individual.
• In that location is a de minimis dominion , under which a trade or concern is not an SSTB simply because information technology provides 'some' specified service activity.
  • Proposed §1.199A-5(c)(1) provides that a merchandise or business organisation (determined before the application of the aggregation rules in proposed §ane.199A-4) is not an SSTB if:
    • the trade or business organization has gross receipts of $25 million or less (in a taxable twelvemonth), and
    • less than 10 percentage of the gross receipts of the merchandise or business is owing to the performance of services in an SSTB.
  • For trades or business organization with gross receipts greater than $25 million (in a taxable yr), a trade or concern is not an SSTB if less than 5 percentage of the gross receipts of the merchandise or concern are attributable to the performance of services in an SSTB.

Three salient points about SSTBs listed in section 199A(d)(ii)(A) as it relates to 448 & 1202

• Department 1202(eastward)(3)(A) too includes "any trade or concern where the master asset of such merchandise or business concern is the reputation or skill of 1 or more of its employees." Section 199A(d)(ii)(A) modifies this clause by adding the words "or owners" to the end, to read every bit follows: "whatever merchandise or business organization where the principal asset of such trade or business organisation is the reputation or skill of 1 or more of its employees or owners ."
• Case police nether section 448 provides that whether a service is performed in a qualifying field under section 448(d)(2) is decided by examining all relevant legislative intent and is not controlled by land licensing laws .
  • Kraatz & Craig Surveying Inc., five. Commissioner, 134 T.C. 167 (2010).
  • States often vary in what they require in terms of licensure or certification.
  • Federal revenue enhancement law should not treat similarly situated taxpayers differently based on one item state's decision that a item business organization type requires a license or certification.
• Proposed §i.199A-five(b) does not prefer a bright-line licensing rule for purposes of determining whether a merchandise or business is inside a certain field for purposes of section 199A.
  • This creates peril and consternation for taxpayers
  • This too creates opportunity for revenue enhancement professionals

If you've fabricated it this far into this very long postal service on SSTB – thanks! Now make your comments heard.  You have a voice and a pen! Send your comments to :

• CC:PA:LPD:PR (REG-107892-18)
• Room 5203
• Internal Revenue Service
• P.O. Box 7604
• Ben Franklin Station
• Washington, D.C., 20044

Submissions may exist delivered via the Federal east-Rulemaking Portal – world wide web.regulations.gov (point IRS and REG-107892- 18).

There will be a public hearing held in the Internal Revenue Service Auditorium at:

1111 Constitution Avenue, NW, Washington, DC on October 16th 2018 @ 10 AM.

Hope to see y'all there!

For further information apropos the proposed regulations:

• Vishal R. Amin, Frank J. Fisher, or Wendy L. Kribell at (202) 317-6850
• Adrienne Thou. Mikolashek at 202-317-5279
• Me – 720-234-1177 JohnRDundon.com/contact

For farther information concerning submissions of comments:

• Regina Johnson at (202) 317-6901

Is Rental Real Estate A Specified Service Trade Or Business,

Source: https://www.johnrdundon.com/what-is-a-specified-service-trade-or-business-sstb/

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