Is serving as an outside director and receiving director's fees classified as a specified service trade or business under Section 199A?
Ask Blue J any tax question, then go deeper. Follow up, add client-specific context, and explore the sources behind every answer with Blue J’s generative AI solution for tax research.
Serving as an outside director and receiving director's fees is generally not classified as a specified service trade or business (SSTB) under Section 199A.
1. Analysis
1.1. Definition of SSTB under Section 199A
Section 199A and its regulations define an SSTB as any trade or business involving the performance of services in certain specified fields, including health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, investing and investment management, trading or dealing in securities, partnership interests, or commodities, or any trade or business where the principal asset is the reputation or skill of one or more of its employees or owners, as demonstrated by certain types of endorsement or appearance income.
The regulations provide detailed definitions for each field. For example, "consulting" is defined as providing professional advice and counsel to clients to assist them in achieving goals and solving problems, but excludes services other than advice and counsel, such as sales or the provision of training and educational courses.
1.2. Director’s Services and SSTB Categories
- Director’s Role: An outside director typically participates in board meetings, provides oversight, and makes decisions regarding the management and direction of the corporation. The director is elected by shareholders and receives compensation (director’s fees) for these services.
- Not Consulting: While directors may provide advice as part of their duties, the regulations clarify that consulting for SSTB purposes means providing professional advice and counsel to clients. The director’s role is not typically that of a consultant to the corporation as a client, but rather as a member of the governing body of the corporation. The director’s advice is part of their fiduciary and managerial responsibilities, not a separate consulting engagement.
- Not Financial Services, Law, or Other Listed Fields: The director’s activities do not fall within the definitions of financial services, law, accounting, or other listed SSTB fields as described in the regulations. For example, financial services are defined as managing wealth, advising clients with respect to finances, etc., which is distinct from the general oversight and governance provided by a director.
1.3. Reputation or Skill Category
- The SSTB definition includes any trade or business where the principal asset is the reputation or skill of one or more employees or owners, but only if the business consists of receiving fees for endorsing products or services, licensing the use of one’s image, or receiving fees for appearances.
- Director’s fees are paid for governance and oversight, not for endorsement, licensing, or appearances. Therefore, this category does not apply to outside directors.
1.4. Trade or Business Requirement
- For Section 199A, the activity must rise to the level of a trade or business under Section 162. Revenue Ruling 72-86 and TAM 8743002 confirm that serving as a director and receiving director’s fees can constitute a trade or business if the activity is regular, continuous, and profit-motivated.
- However, being a trade or business under Section 162 does not automatically make the activity an SSTB under Section 199A; it must also fit within one of the specifically enumerated SSTB categories.
1.5. Employee Services Exclusion
- The regulations clarify that the trade or business of performing services as an employee is not a qualified trade or business for Section 199A purposes. However, outside directors are generally not employees but independent contractors, so this exclusion does not apply.
2. Conclusion
Serving as an outside director and receiving director’s fees, while potentially a trade or business under Section 162, is not classified as a specified service trade or business (SSTB) under Section 199A unless the director’s activities independently fall within one of the specifically enumerated SSTB fields (such as consulting, if the director is separately engaged as a consultant rather than as a director). In the ordinary case, outside director services do not constitute an SSTB.
Therefore, director’s fees from serving as an outside director are not treated as income from an SSTB for Section 199A purposes.
Was this answer helpful?
What Blue J customers are saying
“We are excited to use Blue J to elevate the initial work product our team is able to produce."
"We’re incorporating Blue J to ensure our people are well-equipped with a research tool that delivers on both ease of use and quality of deliverable. It will save us a lot of time as a starting point, so we can focus our efforts on the analysis. Ultimately, it helps us get to the right answer, faster.”
"We’re incorporating Blue J to ensure our people are well-equipped with a research tool that delivers on both ease of use and quality of deliverable. It will save us a lot of time as a starting point, so we can focus our efforts on the analysis. Ultimately, it helps us get to the right answer, faster.”
"We had used Checkpoint for a long time but found it wasn’t particularly well-used in our practice."
"A lot of our practitioners would have to turn to Google to find what they were looking for, which of course isn’t ideal. Blue J is a real game-changer when it comes to this, since it combines the efficiency of Google with the authoritative tax materials our people really need to serve their clients best. At ELO, we pride ourselves on providing services that are focused on value for clients and exceeding their expectations. Adding Blue J to our toolbox will enable us to do just that, as we continue to evolve our service offerings to better serve our clients’ needs.”
"A lot of our practitioners would have to turn to Google to find what they were looking for, which of course isn’t ideal. Blue J is a real game-changer when it comes to this, since it combines the efficiency of Google with the authoritative tax materials our people really need to serve their clients best. At ELO, we pride ourselves on providing services that are focused on value for clients and exceeding their expectations. Adding Blue J to our toolbox will enable us to do just that, as we continue to evolve our service offerings to better serve our clients’ needs.”
"We find this tool to be a game-changer for us and our clients.”
“We had the opportunity to pilot some other AI solutions in the market, and found that the improvement over traditional search was limited - except in Blue J’s case, where the efficiency gain over traditional research methods is significant."
“We had the opportunity to pilot some other AI solutions in the market, and found that the improvement over traditional search was limited - except in Blue J’s case, where the efficiency gain over traditional research methods is significant."
“Blue J is an exciting technology because it enables the practitioner to remain in the driver’s seat of the analysis."
"Thoughtful functions are included to encourage and facilitate deeper analysis, not to replace or reduce it. We’ll continue to find new and impactful ways to leverage the technology, which has benefited our clients and staff alike. At RSM we strive to be compelling to our clients and to be digital by embracing new technologies to fulfill that promise.”
"Thoughtful functions are included to encourage and facilitate deeper analysis, not to replace or reduce it. We’ll continue to find new and impactful ways to leverage the technology, which has benefited our clients and staff alike. At RSM we strive to be compelling to our clients and to be digital by embracing new technologies to fulfill that promise.”
"We wanted to have a tool that people were using at all staff levels."
"We wanted something that lived up on their third screen - something that would be available and helpful to them every day. What we've found is it's been easy to get people to get into the habit of using Blue J because it helps people. Blue J allows us to quickly respond to client questions in a way that they can understand it, which helps us deal with the volume of client questions that come in. We were up and running very quickly with Blue J - within 5 minutes, our staff understood how this will be helpful, and the rest of the training program is refining prompting skills and building use cases and best practices."
"We wanted something that lived up on their third screen - something that would be available and helpful to them every day. What we've found is it's been easy to get people to get into the habit of using Blue J because it helps people. Blue J allows us to quickly respond to client questions in a way that they can understand it, which helps us deal with the volume of client questions that come in. We were up and running very quickly with Blue J - within 5 minutes, our staff understood how this will be helpful, and the rest of the training program is refining prompting skills and building use cases and best practices."
