What documentation is required to support that directing or producing commercials does not constitute an SSTB for tax purposes?
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To support that directing or producing commercials does not constitute a Specified Service Trade or Business (SSTB) for purposes of the qualified business income (QBI) deduction under IRC §199A, you must provide documentation and analysis demonstrating that the activity does not fall within any of the fields listed as SSTBs in the statute, regulations, and IRS guidance.
1. Understanding the SSTB Definition
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 the following fields:
- 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
- Any trade or business where the principal asset is the reputation or skill of one or more employees or owners, as demonstrated by certain types of endorsement, licensing, or appearance income
The regulations provide detailed definitions and examples for each field.
Performing Arts
The field of "performing arts" 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, in their capacity as such. However, the regulations clarify that this does not include services that do not require skills unique to the creation of performing arts, such as maintenance and operation of equipment or facilities, or the provision of services by persons who broadcast or disseminate video or audio of performing arts to the public.
2. Documentation to Support Non-SSTB Status
To support that directing or producing commercials is not an SSTB, you should gather and maintain documentation that demonstrates:
A. The Nature of the Activity
- Job Descriptions and Contracts: Clearly describe the services provided. If the activity is limited to technical production, filming, editing, or logistical management of commercials, and does not involve the creation or performance of performing arts (e.g., acting, singing, or directing actors in a dramatic or artistic sense), this should be documented.
- Invoices and Statements of Work: These should specify the nature of the services rendered (e.g., video production, technical direction, project management) and avoid language that suggests involvement in the performing arts or other SSTB fields.
B. The Role of the Taxpayer
- Organizational Charts and Employee Roles: Show that the principal asset of the business is not the reputation or skill of one or more employees or owners, unless the business is receiving endorsement, licensing, or appearance fees as described in the regulations.
- Compensation Structure: Demonstrate that income is not derived from endorsement, licensing, or appearance fees, but rather from production services.
C. The Type of Content Produced
- Samples of Work/Product: Provide examples of commercials produced, showing that they are advertisements and not performances of the type contemplated in the performing arts definition.
- Client Lists and Engagement Letters: Indicate that clients are businesses seeking advertising services, not audiences seeking artistic performances.
D. Separation from SSTB Activities
- Business Purpose Statements: State that the business is engaged in commercial production, not in the creation of performing arts or other SSTB fields.
- Segregation of Activities: If the business also engages in activities that could be SSTBs (e.g., directing feature films or live performances), maintain separate books and records for the commercial production activity to demonstrate it is a distinct trade or business.
3. Legal Reasoning and Precedent
The regulations and IRS guidance emphasize that not all video or film production is an SSTB. For example, the production of commercials, training videos, or other non-artistic content is generally not considered performing arts, unless the activity involves the creation of artistic performances by actors, musicians, or similar professionals.
- Example: A company that films and edits commercials for businesses, without providing acting or artistic direction, is not engaged in the performing arts SSTB. However, if the company’s principal asset is the reputation or skill of an individual (e.g., a celebrity director), or if it receives income for endorsements or appearances, it may be considered an SSTB.
4. De Minimis Rule
If the business has gross receipts of $25 million or less and less than 10% of gross receipts are from SSTB activities, or more than $25 million and less than 5% are from SSTB activities, the entire business is not treated as an SSTB.
5. Summary of Required Documentation
- Detailed job descriptions, contracts, and statements of work
- Organizational charts and compensation records
- Samples of commercials and client engagement documents
- Business purpose statements and, if applicable, separate books and records for non-SSTB activities
- Evidence that income is not derived from endorsement, licensing, or appearance fees
6. Conclusion
To support that directing or producing commercials does not constitute an SSTB, you must document that the activity is not in a listed SSTB field, particularly not in the performing arts as defined by the regulations, and that the business’s principal asset is not the reputation or skill of its employees or owners in the manner described in the SSTB rules. Proper documentation and clear separation of activities are essential to substantiate the position for tax purposes.
If you have specific facts about the business’s activities, further tailored documentation recommendations can be provided.
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