If you’ve read about the QBI deduction, you’ve probably noticed a frustrating pattern:
Some business owners get a generous tax break.
Others — often earning similar amounts — get nothing.
This isn’t random. And it isn’t unfair favoritism.
It comes down to what type of business you run.
In this post, we’ll explain:
- What a Specified Service Trade or Business (SSTB) is
- Why the IRS treats these businesses differently
- Why income level matters more for some businesses than others
No tax jargon. No formulas. Just clarity.
A Quick Recap: Why QBI Exists at All
The QBI deduction was created to give certain business owners a tax benefit similar to what corporations received after the Tax Cuts and Jobs Act.
In simple terms:
If you earn income from a business you own, the tax code may let you deduct up to 20% of that income before calculating federal income tax.
If you want the full foundation, start here:
What Is the QBI Deduction? A Plain-English Guide for Business Owners
But here’s the catch:
Not all businesses were meant to benefit equally.
What Is a “Specified Service Trade or Business” (SSTB)?
An SSTB is a business where the primary value comes from the owner’s personal skill, expertise, or reputation.
In other words:
The business earns money because of who you are, not because of what you sell or produce.
Common SSTB categories include:
- Health professionals (doctors, dentists, chiropractors)
- Lawyers and accountants
- Consultants and advisors
- Financial professionals
- Athletes and entertainers
The IRS maintains a formal definition under Internal Revenue Code §199A, which governs the QBI rules.
You can view the official guidance here: IRS QBI Overview (Section 199A)
https://www.irs.gov/newsroom/qualified-business-income-deduction
Why Does the IRS Treat SSTBs Differently?
This is the part most people miss.
The QBI deduction was designed to:
- Encourage business investment
- Reward businesses that scale beyond the owner
- Support job creation and capital deployment
Service businesses built primarily on personal expertise don’t fit that goal as neatly.
If a business:
- Stops producing income when the owner stops working
- Doesn’t rely heavily on equipment, inventory, or employees
- Is difficult to scale beyond the individual
…the IRS limits how much QBI benefit it receives at higher income levels.
That’s not punishment.
It’s policy design.
Why Income Level Matters More for SSTBs
Here’s the key concept to lock in:
SSTBs don’t automatically lose the QBI deduction.
They lose it as income increases.
At lower income levels:
- SSTBs are treated similarly to other businesses
- The QBI deduction may still apply
As income rises:
- The deduction begins to phase out
- Eventually, it can disappear entirely
This is why two business owners can:
- Earn similar revenue
- Run different types of businesses
- Receive very different tax outcomes
If you want to understand why income changes everything, read:
Why Income Levels Change the QBI Deduction
A Simple Example
Imagine two business owners:
Owner A
- Runs a consulting practice
- Revenue depends entirely on their personal expertise
- No significant equipment or employees
Owner B
- Owns a manufacturing business
- Uses machinery, inventory, and staff
- Income is less tied to personal reputation
At higher income levels:
- Owner B may still qualify for QBI
- Owner A may lose the deduction entirely
Same income.
Different structure.
Different tax outcome.
This Is Where Planning May — or May Not — Help
Here’s an important truth (and an exam favorite):
Entity changes alone do not magically fix SSTB limitations.
Re-labeling a consulting business as an S corporation doesn’t remove its SSTB status.
What can matter:
- How income is characterized
- Whether parts of the business are genuinely non-service activities
- Wage structure (for non-SSTBs)
We’ll tackle wages and structure next.
What This Means for Business Owners
If you run a service-based business:
- The QBI deduction is still worth understanding
- But expectations matter
- High income can override otherwise “good” planning
If you don’t run a service business:
- You may have more flexibility
- Other limits (like wages) become more important
Either way, clarity beats guessing.
What’s Next in This Series
Next, we’ll cover the most misunderstood limiter of all:
Why Wages Can Cap the QBI Deduction (Even When Income Qualifies)