The Internal Revenue Service and the Treasury Department are keeping in place a key bright-line test for mixed businesses that combine services and product sales: as of September 7, 2025, a trade or business is not treated as a Specified Service Trade or Business (SSTB) if less than 10 percent of its gross receipts—or 5 percent if gross receipts are greater than $25 million—are from the performance of specified services. This rule, which sits at the center of Section 199A and its Qualified Business Income (QBI) deduction framework, remains unchanged heading into the 2025 filing cycle.
It matters because the SSTB label can limit or end a taxpayer’s ability to claim the 20 percent QBI deduction once income is above the law’s phase-out thresholds. In plain terms, the rule allows companies that do a little bit of specified service work alongside non-service activities to stay out of SSTB status so long as the service slice of gross receipts stays small. If it crosses the threshold, the whole operation is treated as an SSTB for QBI purposes.
How the two-tier gross receipts test works
- If total gross receipts are $25 million or less, the 10 percent threshold applies to the specified service portion.
- If total gross receipts are above $25 million, the threshold drops to 5 percent.
Crossing the 10 percent or 5 percent line for specified service receipts means the entire trade or business is treated as an SSTB. This is not a sliding scale—exceeding the relevant percentage triggers full SSTB classification for that trade or business.
The rule is designed to:
– Stop firms that primarily perform specified services (e.g., consulting, health, law) from claiming the QBI deduction by tucking those services inside a larger bundle of activities.
– Allow mixed businesses with a small service component to qualify for the deduction.
The Treasury regulations and IRS guidance under 26 CFR § 1.199A-5 set out this threshold test and how it fits into the broader QBI deduction rules.
Two illustrative examples from the regulations
Example 1 — Landscape LLC (single trade or business)
Landscape LLC sells lawn care and landscaping equipment and also provides charged landscape design advice. Key facts:
– Gross receipts: $2,000,000
– Design services receipts: $250,000 (consulting = specified service)
– Landscape LLC keeps one set of books and records and treats equipment sales and design services as one trade or business under Sections 162 and 199A.
Because design service receipts are 12.5% of total gross receipts (above the 10% threshold for this receipts level), the entire trade or business is treated as an SSTB for QBI purposes.
Example 2 — Animal Care LLC (separate trades or businesses)
Animal Care LLC operates a veterinarian clinic and separately develops/sells organic dog food. Key facts:
– Gross receipts (total): $3,000,000
– Veterinary services receipts: $1,000,000 (specified service)
– The company separately invoices, maintains separate books and records, and employs distinct staff for the clinic and the dog food business.
– It treats the veterinary practice and the dog food operations as separate trades or businesses under Sections 162 and 199A.
Result: SSTB status applies only to the veterinarian clinic, while the dog food development and sales business is not an SSTB.
Practical steps for taxpayers and advisors
Follow these sequential steps each year:
- Identify all trades or businesses operated by the entity or individual.
- Determine which activities meet the Section 199A definition of specified services (e.g., health, law, accounting, consulting, financial services, performing arts).
- Calculate the portion of gross receipts from those specified services within each trade or business.
- Compare specified-service gross receipts to total gross receipts for that trade or business:
- ≤ $25 million: 10% threshold
- > $25 million: 5% threshold
- If the specified services portion exceeds the relevant threshold, treat the entire trade or business as an SSTB.
- If activities are legitimately maintained as separate trades or businesses (separate books, staff, operations), SSTB classification applies only to the specified service trade or business.
- If SSTB status applies and the taxpayer’s taxable income exceeds the phase-out thresholds (e.g., $383,900 for married filing jointly in 2024, adjusted annually), apply the QBI deduction phase-out rules.
Accurate bookkeeping, separate invoicing, and careful gross receipts tracking are decisive. The composition of gross receipts can change year-to-year, so this analysis must be repeated annually.
Recordkeeping and structural considerations
Two features are particularly important in practice:
- Invoices and contracts matter. Separate invoicing for specified services (as in the Landscape LLC example) clarifies attribution of receipts and supports the percentage calculation.
- Treatment under Section 162 matters. Electing or treating activities as a single or separate trade or business (backed by separate books and staff) can control the SSTB outcome.
The regulations emphasize substance over form: genuine operational separation (separate employees, ledgers, activities) can keep non-service lines outside SSTB classification. Paper-only separations without operational substance are subject to the IRS anti-abuse rules.
Anti-abuse rules and safe harbors
The regulatory framework includes:
– Anti-abuse provisions that scrutinize attempts to split activities that are not genuinely separate.
– Safe harbor guidance describing how the IRS treats common ownership, shared facilities, and interdependence.
The thrust: separation must be real—legal, accounting, and operational distinctions—not merely technical measures to chase tax benefits.
Economic stakes and policy background
- For non-SSTB businesses, the QBI deduction remains available subject to wage and property limits once income rises above thresholds.
- For SSTBs, the deduction phases out and can go to zero as income increases.
- The Tax Cuts and Jobs Act of 2017 created the QBI deduction and the SSTB concept; 2018 Treasury regulations added the gross receipts threshold test to guard mixed businesses.
- Since 2018, the core 10% / 5% thresholds and the specified services list have remained stable; annual adjustments have been limited to inflation-indexing income-phase-out thresholds.
- The regulations at 26 CFR § 1.199A-5 continue to define SSTBs, gross receipts measurement for the threshold test, and how SSTB status affects deduction calculations.
Practical guidance and resources
- Maintain accurate, separate books and records for each line of activity.
- Use separate invoicing for specified services.
- Identify activities that meet the regulations’ definitions of specified services.
- Calculate the specified service share of gross receipts each year at the trade or business level.
- Review whether activities truly qualify as separate trades or businesses under Section 162, supported by separate staff and operations.
- Apply the 10% threshold for businesses with ≤ $25 million gross receipts and 5% for those > $25 million.
- If specified-service share exceeds the relevant threshold within a single trade or business, treat the entire trade or business as an SSTB.
- If specified-service share exceeds the relevant threshold within a single trade or business, treat the entire trade or business as an SSTB and apply QBI phase-out rules.
The official IRS instructions and forms remain the central compliance tools. For taxpayers filing without complex allocations, the IRS provides Form 8995, Qualified Business Income Deduction Simplified Computation (Instructions), and its instructions. The current instructions for 2024 returns reflect the 10% and 5% gross receipts thresholds and explain SSTB treatment when taxable income exceeds inflation-adjusted thresholds.
The government’s official instructions for Form 8995 are available on the IRS website at Form 8995, Qualified Business Income Deduction Simplified Computation (Instructions).
When definitions are unclear
- The regulations list fields such as health, law, accounting, consulting, financial services, and performing arts, but some activities may present borderline cases.
- When in doubt, review the regulation text and examples closely to determine whether an activity fits the specified services definition.
- The anti-abuse rules address form-over-substance maneuvers—splitting one service business into nominal entities without real operational separation will likely fail scrutiny.
Bottom line and action items for 2025
- The 10% and 5% SSTB gross receipts thresholds continue to apply in 2025.
- Mixed businesses that keep specified services below the threshold within a single trade or business can avoid SSTB status; if specified services rise above the threshold, the entire trade or business becomes an SSTB.
- Proper structuring—supported by separate books, records, employees, and operational distinctions—can confine SSTB status to the service arm while protecting product or non-service operations.
- Because sales mixes change, re-run the analysis every year.
Operational to-do list:
– Keep accurate, separate books and records for each line of activity.
– Use separate invoicing when charging for specified services.
– Identify which activities meet the regulations’ definitions of specified services.
– Calculate the specified service share of gross receipts each year at the trade or business level.
– Review whether activities qualify as separate trades or businesses under Section 162, supported by separate staff and operations.
– Apply the 10% threshold for businesses with $25 million or less in gross receipts and the 5% threshold for those above $25 million.
– If the specified service share exceeds the relevant threshold within a single trade or business, treat the entire trade or business as an SSTB and apply the QBI phase-out rules.
By preserving clear records, choosing structures that align with actual operations, and reviewing the thresholds annually, taxpayers and advisors can manage the risk that specified service revenue will push a mixed business into SSTB status and affect the QBI deduction.
This Article in a Nutshell
As of September 7, 2025, the IRS and Treasury maintain the 10%/5% bright-line gross receipts test under 26 CFR § 1.199A-5 for mixed businesses combining specified services and product sales. If specified-service receipts exceed 10% for entities with $25 million or less in gross receipts, or 5% for those above $25 million, the entire trade or business is treated as an SSTB, potentially eliminating the 20% QBI deduction once income passes phase-out thresholds. The test applies at the trade-or-business level; genuine operational separation—separate books, invoices, staff, and operations—can confine SSTB status to the service arm. Anti-abuse rules scrutinize superficial separations. Taxpayers should annually identify trades, classify specified services (e.g., health, law, consulting), compute specified-service shares, and document operational separations. Form 8995 instructions and 26 CFR § 1.199A-5 provide compliance guidance. Accurate recordkeeping and yearly re-evaluation are critical to managing SSTB risk and preserving QBI benefits.
