Are individuals who direct or produce commercials subject to SSTB limitations under tax law?
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Yes, individuals who direct or produce commercials are generally subject to the Specified Service Trade or Business (SSTB) limitations under section 199A of the Internal Revenue Code.
Legal Analysis
1. Definition of SSTB
Section 199A and the related Treasury Regulations define an SSTB as any trade or business involving the performance of services in certain fields, including "performing arts" and "consulting," among others. Specifically, the regulations state that the field of performing arts includes services performed 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.
2. Application to Directors and Producers of Commercials
- Directors: The regulations explicitly include "directors" as professionals in the field of performing arts. The field of performing arts is not limited to theatrical or cinematic productions; it encompasses any performance-based media, which would include commercials, as these are audiovisual works involving direction and production similar to other performing arts content.
- Producers: While the regulations do not list "producers" by name, producers are generally considered to be involved in the creation and management of performing arts productions. If a producer's role is integral to the creative process of a commercial (as is typical), their services would also fall within the field of performing arts for SSTB purposes.
3. Commercials as Performing Arts
The regulations do not distinguish between types of audiovisual content (e.g., movies, TV shows, commercials) for purposes of the performing arts SSTB definition. The key factor is whether the individual is participating in the creation of performing arts content. Commercials, being scripted, directed, and produced audiovisual works, are included in this scope.
4. SSTB Limitation Consequences
If a trade or business is classified as an SSTB, then:- Taxpayers with taxable income above the applicable threshold and phase-in range cannot claim the section 199A qualified business income (QBI) deduction for income from that SSTB.- For taxpayers with income within the phase-in range, only a portion of the QBI, W-2 wages, and UBIA of qualified property from the SSTB is eligible for the deduction.
5. Exceptions and De Minimis Rule
There are exceptions for businesses with low gross receipts from SSTB activities:- If gross receipts are $25 million or less and less than 10% are from SSTB activities, the business is not treated as an SSTB.- If gross receipts are more than $25 million and less than 5% are from SSTB activities, the business is not treated as an SSTB.
6. Examples from Regulations
The regulations provide examples where directors and similar professionals are considered to be engaged in an SSTB in the field of performing arts, and their income is subject to the SSTB limitations.
7. Conclusion
Individuals who direct or produce commercials are generally considered to be engaged in the field of performing arts for purposes of section 199A. As such, their activities are subject to the SSTB limitations, meaning that the QBI deduction may be limited or disallowed depending on the taxpayer's income level and the proportion of SSTB activities in their business.
If you have a specific fact pattern (e.g., a producer who only handles logistics and not creative aspects), further analysis may be required to determine if the SSTB rules apply.
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