How does the IRS distinguish a director's role from consulting services under the SSTB rules?
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The IRS distinguishes a director’s role from consulting services under the SSTB (Specified Service Trade or Business) rules primarily by focusing on the nature of the services performed and the capacity in which the individual acts.
1. SSTB Definition and Consulting
Under section 199A and the related regulations, an SSTB includes any trade or business involving the performance of services in the field of consulting. Consulting is defined as providing professional advice and counsel to clients to assist them in achieving goals and solving problems. However, the regulations specifically exclude certain activities from the definition of consulting, such as services that are sales or economically similar to sales, or services that are embedded in or ancillary to the sale of goods or non-SSTB services, provided there is no separate payment for the consulting services.
2. Director’s Role
A director, such as a member of a board of directors, is generally responsible for governance, oversight, and high-level decision-making for a corporation. The director’s duties typically include attending board meetings, voting on corporate matters, and providing strategic direction, but not necessarily providing advice and counsel to clients in the manner of a consultant.
The regulations and IRS guidance do not automatically treat a director’s services as consulting. Instead, the determination depends on the facts and circumstances:
- If a director is simply performing the typical duties of a board member—such as attending meetings, voting, and overseeing management—these activities are not considered consulting for SSTB purposes.
- If, however, a director is separately engaged to provide advice and counsel to the corporation (beyond the normal scope of board duties), and is compensated for those services, that activity may be considered consulting and thus an SSTB.
3. Key Distinctions
- Capacity and Compensation: The IRS looks at whether the individual is acting in the capacity of a director (governance, oversight) or as a consultant (advice and counsel). If the compensation is for board service, it is not consulting. If the compensation is for advice and counsel outside the board role, it may be consulting.
- Nature of Services: Routine board activities (e.g., attending meetings, voting) are not consulting. Providing professional advice to the company as a separate engagement is consulting.
- Facts and Circumstances: The IRS will consider all relevant facts, including the terms of engagement, the nature of the services, and how the individual is compensated.
4. Examples and Precedent
The regulations under section 199A do not provide a specific example of a director’s services, but the distinction is consistent with other areas of tax law. For instance, in the context of personal service corporations and the cash method of accounting, the IRS has distinguished between board service and consulting by focusing on whether the individual is providing advice and counsel (consulting) or simply fulfilling board duties (not consulting).
5. Summary Table
6. Conclusion: The IRS distinguishes a director’s role from consulting services under the SSTB rules by examining the nature of the services performed and the capacity in which the individual acts. Routine board service is not consulting, but separately compensated advice and counsel may be. The determination is fact-specific and depends on the actual activities and compensation arrangements.
If you have a specific scenario in mind (e.g., a director who also provides paid advice to the company), please provide more details for a more tailored analysis.
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