Allocating SSTB Scorp

[Avs19]

Hi,

I'm sure this question has been asked before but am having a hard time finding the answer. I came across the question in the link below but am still confused.

https://accountants.intuit.com/community/proseries-tax-discussions/discussion/allocating-sstb/00/137...

An individual owns 100% of an Scorp that has a mix of consulting and non consulting activities. Consulting 20% and non consulting 80%. Is he able to split these activities between SSTB and Non-SSTB income on his 1120S? 

He invoices his customers separately. He doesn't maintain separate books and records but his expenses for the consulting portion are minimal. He's the only employee but we can probably figure what percentage of his wages were for consulting.

Thanks

[Avs19]

I did find this on the IRS site:

There is a de minimis rule for a single trade or business that has income from both specified service activities and other activities. The de minimis rule states that if a trade or business has gross receipts of $25 million or less and less than 10% of its gross receipts are attributable to specified service activities, or gross receipts of more than $25 million and less than 5% of its gross receipts are attributable to specified service activities, the trade or business as a whole is not an SSTB. If, however, the gross receipts from specified service activities exceed the percentage specified in the de minimis rule, the entire trade or business is treated as an SSTB.

So if their total receipts are 2 million and receipts from consulting are $100,000 then I take it all income is not SSTB. Does that sound right?

[Terry53029]

You say your client has 20% SSTB, so that means he cannot split. the irs says 10%. Just want to point out The IRS also says,  The SSTB label is irrelevant if your 2023 total taxable income (which includes non-business as well as business income) is $182,100 (or $364,200 if you're filing jointly) or less. At these lower income levels, owners of SSTB as well as non-SSTB businesses can qualify for the same QBI deduction. 

The QBI deduction phases out for SSTBs. You'll still qualify for a partial deduction based on the applicable percentage if your taxable income before the QBI deduction is:

• More than $182,100 but less than $232,101 if single, head of household, married filing separately or qualifying surviving spouse, or
• More than $364,200 but less than $464,201 if married filing jointly

[Avs19]

My initial figures were incorrect. Out of 2 million in total receipts, only $100,000 was for consulting. The other 1.9 million was for selling products and installation. Prior to 2023, a majority of his receipts were for consulting so we treated the business as an SSTB. He made over $600,000 net last year so the SSTB label is relevant.

Thanks Terry!

[Terry53029]

If income is under 25 million, and only 5% SSTB then he can take full income as non SSTB

[Avs19 · Accepted solution]

I think that if it's under 25 million, and less than 10% SSTB then he can take full income as a non SSTB. His gross was only 2 million

This is directly from the IRS:

The de minimis rule states that if a trade or business has gross receipts of $25 million or less and less than 10% of its gross receipts are attributable to specified service activities, or gross receipts of more than $25 million and less than 5% of its gross receipts are attributable to specified service activities, the trade or business as a whole is not an SSTB