How does the consulting SSTB category affect eligibility for the 20% QBI deduction for high-income earners?
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The consulting category as a specified service trade or business (SSTB) has a significant impact on the eligibility for the 20% qualified business income (QBI) deduction under section 199A, especially for high-income earners. Here’s a detailed explanation of how the rules operate, with legal nuance and references to the Internal Revenue Code, Treasury Regulations, and IRS guidance:
1. Definition of Consulting as an SSTB
Under section 199A(d)(2), an SSTB includes any trade or business involving the performance of services in the field of consulting. Treasury Regulations further define consulting as the provision of professional advice and counsel to clients to assist them in achieving goals and solving problems, including advice regarding advocacy with the intention of influencing government decisions or lobbying. However, consulting does not include services that are embedded in, or ancillary to, the sale of goods or performance of services on behalf of a trade or business that is not otherwise an SSTB, provided there is no separate payment for the consulting services.
2. General QBI Deduction Rules
Section 199A allows a deduction of up to 20% of QBI from a qualified trade or business, plus 20% of qualified REIT dividends and qualified publicly traded partnership (PTP) income. However, not all trades or businesses are “qualified” for this purpose. SSTBs are generally excluded for high-income taxpayers.
3. Income Thresholds and Phase-In Ranges
For 2025, the relevant income thresholds are:- Married Filing Jointly: $394,600 (threshold), $494,600 (end of phase-in)- All Other Returns: $197,300 (threshold), $247,300 (end of phase-in)
If taxable income (before the QBI deduction) is at or below the threshold, the SSTB limitation does not apply. If taxable income is above the threshold but within the phase-in range, the limitation is phased in. If taxable income is above the phase-in range, the SSTB is fully excluded from the QBI deduction.
4. Effect on High-Income Earners
a. Above the Phase-In Range (Fully Phased Out)
If a taxpayer’s taxable income exceeds the phase-in range (e.g., over $494,600 for joint filers in 2025), no QBI, W-2 wages, or UBIA of qualified property from a consulting SSTB is taken into account in calculating the QBI deduction. This means high-income owners of consulting businesses are not eligible for the 20% QBI deduction on income from those businesses.
b. Within the Phase-In Range (Partial Limitation)
If taxable income is within the phase-in range, only a portion of the QBI, W-2 wages, and UBIA from the SSTB is eligible for the deduction. The “applicable percentage” is calculated based on how far the taxpayer’s income is into the phase-in range. The deduction is proportionally reduced until it is eliminated at the top of the range.
c. Below the Threshold
If taxable income is at or below the threshold, the consulting business is treated as a qualified trade or business, and the full 20% QBI deduction is available, even if the business is an SSTB.
5. De Minimis Rule
If a business has $25 million or less in gross receipts and less than 10% of those receipts are from SSTB activities (or less than 5% if gross receipts exceed $25 million), the business is not treated as an SSTB for that year, and the QBI deduction is not limited by the SSTB rules.
6. Anti-Abuse and Related Party Rules
If a non-SSTB provides property or services to a commonly owned SSTB (50% or more common ownership), a portion of the non-SSTB’s income may be recharacterized as SSTB income and thus subject to the same limitations.
7. Practical Examples
- Example 1: A consultant with taxable income of $600,000 (married filing jointly) from a consulting business will not be eligible for the QBI deduction on that income.
- Example 2: A consultant with taxable income of $420,000 (married filing jointly) will have the deduction partially phased out.
- Example 3: A consultant with taxable income of $350,000 (married filing jointly) will be fully eligible for the deduction.
8. Summary Table
9. Conclusion
For high-income earners, the consulting SSTB category generally prevents eligibility for the 20% QBI deduction on income from consulting businesses once taxable income exceeds the phase-in range. Taxpayers with income within the phase-in range receive a reduced deduction, and those below the threshold are fully eligible. The rules are strictly applied, and anti-abuse provisions prevent circumvention through related entities or recharacterization of income.
If you need a calculation for a specific scenario or have questions about whether a particular business activity qualifies as consulting or as an SSTB, please provide more details.
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