Untangling the Tax Issues

SSTB Tax Planning Tips for 2026

For clients operating specified service trades or businesses (SSTBs), the 2026 tax year brings several important tax planning and compliance considerations due to the permanent extension and modification of the Section 199A qualified business income (QBI) deduction under the One Big Beautiful Bill Act (OBBBA). Here are four key issues SSTB clients should keep in mind:

1. Expanded Phase-In Range and Income Thresholds for QBI Deduction

• For 2026, the phase-in range for the QBI deduction has been significantly expanded. The threshold amount is now $403,500 for married filing jointly and $201,750 for all other filers, with the phase-in range extending up to $553,500 (joint) and $276,750 (others).
• SSTBs are generally excluded from the QBI deduction if taxable income exceeds the threshold plus the phase-in range. However, if taxable income is within the phase-in range, a partial deduction is available based on an “applicable percentage” of QBI, W-2 wages, and qualified property.
• Planning implication: SSTB clients should closely monitor their taxable income and consider strategies to remain within or below the phase-in range to maximize the QBI deduction. This may involve managing year-end income, retirement plan contributions, or other deferral strategies.

2. Permanent Minimum QBI Deduction for Active Businesses

• Starting in 2026, there is a new minimum QBI deduction of $400 for taxpayers with at least $1,000 of aggregate qualified business income from active qualified trades or businesses (i.e., those in which the taxpayer materially participates).
• This ensures that even lower-income SSTB owners who are active in their business receive a baseline deduction, provided they meet the material participation standard under Section 469(h).
• Planning implication: SSTB clients should document and maintain evidence of material participation to secure eligibility for the minimum deduction.

3. Compliance with SSTB Classification and De Minimis Rules

• The definition of an SSTB remains broad, covering fields such as health, law, accounting, consulting, financial services, and any business where the principal asset is the reputation or skill of one or more employees or owners.
• However, the de minimis rule provides that if less than 10% (for businesses with $25 million or less in gross receipts) or 5% (for those with more than $25 million) of gross receipts are attributable to SSTB activities, the business is not treated as an SSTB for QBI purposes.
• Planning implication: SSTB clients with mixed activities should carefully track and document the allocation of gross receipts to potentially qualify for the de minimis exception, which could allow the entire business to be treated as a qualified trade or business for QBI purposes.

4. Aggregation and Loss Tracking Requirements

• Aggregation of multiple trades or businesses is permitted for QBI purposes, but none of the aggregated businesses can be an SSTB.
• Losses from SSTBs must be tracked separately, and the applicable percentage limitation (if income is within the phase-in range) must be applied in the year the loss is incurred and carried forward accordingly.
• Planning implication: SSTB clients should ensure proper tracking of losses and understand that aggregation with non-SSTB activities is not allowed for purposes of maximizing the QBI deduction. Accurate recordkeeping is essential for compliance and to avoid IRS challenges.

Additional Considerations:

• SSTB status is determined at the entity level for pass-throughs, but the QBI deduction is claimed at the individual level. Owners should ensure that K-1s and supporting documentation clearly identify SSTB and non-SSTB income.
• The IRS has provided transition relief and proposed regulations for new reporting requirements related to tip and overtime deductions, which may also affect SSTBs in service industries.

Conclusion:

SSTB clients should focus on managing taxable income relative to the expanded phase-in range, documenting material participation, leveraging the de minimis rule where possible, and maintaining robust records for aggregation and loss tracking. These steps will help maximize the QBI deduction and ensure compliance with the new permanent rules under OBBBA for 2026 and beyond.

Finally, always happy to sit down with you and discuss these and other tax and business considerations as you plan for continued growth and success!