In our last blog, we talked about the basics of the new qualified business interest deduction and what you need to know as a small business owner. In this blog, we are going to dig deeper into the deduction for any business that is considered a Specified Service Trade or Business (SSTB).

For this new law, an SSTB is a trade or business performing services in the following fields:

  • Health
  • Law
  • Accounting
  • Actuarial science
  • Performing arts
  • Consulting
  • Athletics
  • Financial services
  • Brokerage services
  • Or “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.”

That last category sounds like a catch-all for just about every business that provides services. However, the tax regulations for the new provision provide more guidance.  Businesses that otherwise may not be an SSTB will be considered an SSTB if the business:

  • Receives fees, compensation, or other income for endorsing products or services.
  • Licenses or receives fees, compensation or other income for the use of an individual’s image, likeness, name, signature, voice, trademark, or any other symbols associated with the individual’s identity.
  • Receives fees, compensation, or other income for appearing at an event or on radio, television, or another media format.

An example would be a restaurant that would not normally be an SSTB. If, however, the chef is well-known and endorses products for a fee, appears in a TV show for compensation, or allows others to use his likeness or name in exchange for a fee, then his business is an SSTB.

As was mentioned in the last blog, as long as the business owner’s taxable income not including capital gains is less than $315,000 (married filing joint) or $157,500 (all other taxpayers), it doesn’t matter if her business is an SSTB. She is able to take the deduction. On the other hand, if the business owner’s taxable income, not including capital gains, is greater than $415,000 (married filing joint) or $207,500 (all other taxpayers), the QBI deduction is not allowed if her business is an SSTB.

As we discussed in the last blog, the QBI for non-SSTB business owners with taxable income greater than $315,000 (married filing joint) or $157,500 (all other taxpayers) is the lesser of:

  • 20% of taxable income, not including capital gains,
  • 20% of qualified business interest (QBI) income, or
  • The greater of:
    • 50% of W-2 wages or
    • 25% of W-2 wages plus 2.5% of the original cost of assets owned by the business as of the end of the taxable year.

So, what if the SSTB owner’s taxable income, not including capital gains, is greater than $315,000 and less than $415,000 for married filing joint? As the owner’s income gets closer to the upper limit, the allowable deduction reduces until it reaches zero at the upper limit.

Let’s look at an example. Emily is married filing joint and has taxable income, not including capital gains, of $355,000. $150,000 of the taxable income is from Emily’s law firm which is an SSTB. The firm paid $50,000 in wages and owned assets at the end of the year with an original cost of $125,000.

  • The first step is to determine what percentage Emily will need to use to calculate her QBI deduction. Emily’s taxable income is $40,000 greater than the lower limit ($355,000 – $315,000).  She is 40% of the way to the upper limit ($40,000 ÷ $100,000).  Emily will need to reduce each of the calculations by 40%.  In other words, Emily will only be allowed to use 60% of each of the items in the calculation.
    • $213,000 taxable income (60% of $355,000)
    • $90,000 business income (60% of $150,000)
    • $30,000 wages (60% of $50,000)
    • $75,000 assets (60% of $125,000)
  • Emily’s QBI deduction is $15,000 which is the lesser of:
    • $42,600 (20% of $213,000 allowable taxable income),
    • $18,000 (20% of $90,000 allowable business income) or
    • $15,000, the greater of
      • $15,000 (50% of $30,000 allowable wages) or
      • $9,375 [$7,500 (25% of $30,000 allowable wages) plus $1,875 (2.5% of $75,000 allowable assets)]

Is your business an SSTB and are you confused by these new laws? I’m always available to help out! Thank you and I look forward to working with you further to help clarify this and any other tax issues you may be experiencing.


Judith Ackland has more than 26 years of experience in accountancy and financial planning, including seventeen years as a CFO of a diverse business. She started Crystal Financial in 2010 to help a wide array of individuals, families, and business owners better understand their finances and how good financial management could help them achieve their goals. Judith has an MA in Professional Accountancy from the University of Nebraska at Lincoln as well as a Certified Public Accountant Certificate and a Certified Financial Planner designation.

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