The proposed Section 199A regulations contain rules for the treatment of a trade or business that is not a specified service trades or business (“SSTB”) but has some relatively small elements that are attributable to the performance of services in a field that would qualify as an SSTB. These rules are contained in Section 1.199A-5(c)(1), and the SSTB issue is important because, with some exceptions based upon income level, income from an SSTB is not eligible for the Section 199A deduction.
Under these rules, if a non-SSTB has some relatively small elements that are SSTB services, then the SSTB services will not taint the treatment of the overall business. Specifically, the rule provides that for a trade or business with gross receipts of $25M or less for a taxable year (before application of the aggregation rules), the trade or business will not be treated as an SSTB if less than 10% of its gross receipts are attributable to an SSTB. If the gross receipts of the trade or business are more than $25M, then the 10% threshold is dropped to 5%. For example, if an eye glass store had $10M total gross receipts, and $9.5M of such gross receipts were attributable to the sale of eye glasses, and $0.5M of the gross receipts attributable to eye examinations performed by ophthalmologists, then the entire trade or business would be considered a non-SSTB for purposes of the Section 199A deduction.
The regulations do not address a scenario where, for example, $2M of the gross receipts were attributable to eye examinations. In that scenario, will the entire $10M business be treated as an SSTB? That does not seem like it should be the correct answer. A better answer would be that the eye glass and eye exam activities are treated as two separate trades or business for Section 199A purposes.
In interesting scenario is if the individual taxpayer operated the eye glass ($9.5M of gross receipts) and eye exam ($0.50M of gross receipts) businesses in separate entities. In that case, the eye glass business would be a non-SSTB, and the eye exam business would be an SSTB (and thus not eligible for the Section 199A deduction). However, a tax planning opportunity may exist to merge the two entities, and then take advantage of the aggregation rule to “cleanse” the eye exam business of its SSTB taint by having it become a de minimis part of the eye glass business under the aggregation rules.