It’s Time to End the Blacklisting of SSTBs from Section 199A

By Alan M. Blecher  |  May 12, 2020

The Tax Cuts and Jobs Act of 2017 (TCJA) introduced Section 199A, a provision which provides a federal tax break to owners of certain businesses. Those fortunate to be eligible for this benefit can exclude up to 20% of income from these businesses, resulting in a tax windfall by reducing the maximum federal rate from 37% to an effective rate of 29.6%. Section 199A describes those businesses whose owners are eligible for this favorable treatment in the negative; that is, by listing those that are ineligible. In the vernacular, these are known as “Specified Service Trades or Businesses” (SSTBs):

Any trade or business involving the performance of services in the fields of 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 1 or more of its employees,

Also excluded are certain financial-related businesses.

Owners of SSTBs are eligible for Section 199A treatment only if their income falls below relatively low thresholds. Otherwise, they are out of luck.

Whatever the merits of excluding SSTBs may have been in 2017 when the TCJA was enacted, the COVID-19 pandemic has turned the world upside down. It is time to end the blacklisting of SSTBs from Section 199A.

Why? Well, for starters, SSTBs employ millions of people nationwide. One of the criteria for determining the amount of the Section 199A exclusion is the level of W-2 wages that a business pays.  If CARES Act relief provisions, such as the Payroll Protection Program and the Employee Retention Credit, focus on the ability of businesses to continue to pay their employees and have metrics based on wages paid in these troubled times, why should an SSTB, which pays a sufficient amount of wages, be treated any differently under Section 199A? It is strange to think that SSTBs are excluded just because they provide services instead of making cams and widgets. At the end of the day, SSTBs provide much needed jobs, just as their counterparts in other industries do.  And now more than ever, SSTBs should be rewarded for maintaining their workforces—or at least be afforded the same treatment as other industries.

Certainly, at bare minimum, businesses providing essential services during this pandemic should have the SSTB stigma removed. Essential businesses, such as healthcare and accounting providers, are operating right now during this pandemic and are excluded from the 199A deduction because they are SSTBs. A recent letter sent to congress by the AICPA addressed this point. The letter states, “Expanding the scope of section 199A to include essential businesses and repealing the [SSTB] rules under section 199A will allow more small businesses to benefit from these changes and continue to grow. Alternatively, exclude essential businesses from the SSTB rules, such as healthcare and accounting.”

The pandemic we are experiencing has brought about unprecedented levels of change and challenge for businesses and the individuals they employ. Amending section 199A is just one way to ensure everyone has a fair shake in the future.

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About Alan M. Blecher

Alan M. Blecher, JD, is a Principal at Marks Paneth LLP. Mr. Blecher has considerable experience serving high-income and high-net-worth individuals and their closely held businesses. He focuses especially on partnerships, limited liability companies and S corporations. He has been in public accounting since 1985 and has been involved in tax planning for numerous transactions. These include transactions involving public debt offerings, sales of family businesses and restructurings of distressed entities, among others. Mr. Blecher... READ MORE +


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