Are advertising agencies that hire directors for commercials considered engaged in a specified service trade or business under IRS rules?
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To determine whether advertising agencies that hire directors for commercials are considered engaged in a specified service trade or business (SSTB) under IRS rules, we must analyze the definitions and examples provided in the relevant statutes and regulations.
1. Definition of SSTB
Under IRC §199A(d)(2) and Treas. Reg. §1.199A-5(b), an SSTB includes any trade or business involving the performance of services in certain fields, such as health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, investing and investment management, trading, dealing in securities, partnership interests, or commodities, and any trade or business where the principal asset is the reputation or skill of one or more of its employees or owners.
Performing Arts
- The "performing arts" field is defined as the performance of services by individuals who participate in the creation of performing arts, such as actors, singers, musicians, entertainers, directors, and similar professionals performing services in their capacity as such.
- However, the regulations clarify that the performance of services in the field of performing arts does not include the provision of services by persons who themselves are not performing artists (e.g., persons who may manage or promote such artists, and other persons in a trade or business that relates to the performing arts). It also does not include the provision of services by persons who broadcast or otherwise disseminate the performances of such artists to the public.
Consulting
- "Consulting" is defined as providing professional advice and counsel to clients to assist the client in achieving goals and solving problems. However, consulting does not include services other than advice and counsel, such as sales or economically similar services, or the provision of training and educational courses. Consulting services embedded in, or ancillary to, the sale of goods or performance of services on behalf of a trade or business that is otherwise not an SSTB are not considered consulting if there is no separate payment for the consulting services.
Reputation or Skill
- A trade or business is also an SSTB if its principal asset is the reputation or skill of one or more of its employees or owners, demonstrated by receiving fees or other income for endorsing products or services, licensing the use of an individual's identity, or appearing at events or in media formats.
2. Application to Advertising Agencies Hiring Directors
- If an advertising agency is itself in the business of creating commercials and hires directors to direct those commercials, the key question is whether the agency is performing services in the field of performing arts or is merely facilitating or managing the production.
- The regulations and examples make clear that only those directly participating in the creation of performing arts (e.g., the director, actors) are considered to be performing services in the field of performing arts. The agency, unless it is itself acting as the director or performer, is not considered to be engaged in the field of performing arts simply by hiring or managing those who are.
- If the agency's principal business is managing, promoting, or arranging for directors to be hired, but not actually directing or performing, it is not an SSTB in the field of performing arts. This is supported by the regulatory language that excludes managers and promoters from the definition of performing arts SSTBs.
- However, if the agency receives fees for the use of the reputation or skill of its employees or owners (for example, if the agency's principal asset is the reputation of a famous director who is an owner or employee), and the agency receives endorsement or licensing fees, it could be considered an SSTB under the "reputation or skill" prong.
3. Summary Table from Regulations
- Directors: If the director is an employee or owner of the agency and is performing services as a director, that portion of the agency's business may be an SSTB in the field of performing arts.
- Agency as Manager/Promoter: If the agency is only managing, arranging, or hiring directors for clients, and not itself performing or creating the art, it is not an SSTB in the field of performing arts.
- Consulting: If the agency provides professional advice and counsel (consulting) as a separate service, that portion may be an SSTB in the field of consulting, but only if it meets the definition and is not merely sales or embedded in non-SSTB services.
4. Conclusion
Advertising agencies that hire directors for commercials are not generally considered engaged in a specified service trade or business under IRS rules solely by virtue of hiring directors. The SSTB classification applies to those directly performing services in the field of performing arts (such as the directors themselves), not to agencies that manage, arrange, or facilitate such services. However, if the agency's principal asset is the reputation or skill of its employees or owners, or if it provides consulting services as defined in the regulations, it may be considered an SSTB for those activities.
If you have a specific fact pattern (e.g., the agency is owned by a well-known director who is also performing services), further analysis may be required.
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