Understanding Qualified Trade or Business Under Section 199A and SSTBs

Use this fast filter to see if your income may qualify under Section 199A:

• Do you earn income from a pass-through entity (sole proprietorship, partnership, S corporation, or certain trusts/estates) or from a rental activity? If yes, continue.
• Is the income from a “qualified trade or business” under Section 162, not from services as an employee? If yes, continue.
• Is your activity carried on with a real profit motive and with considerable, regular, and continuous involvement? If yes, continue.
• Is your business an SSTB (specified service trade or business)? If no, you may qualify. If yes, you may still qualify if your taxable income is at or below the threshold amount plus $50,000 (or $100,000 if filing jointly).

If you answered yes to the first three, and either your work is not an SSTB or your income sits under the threshold rules, you likely have qualified business income (QBI) from a qualified trade or business.

Core requirements for a qualified trade or business

To claim the QBI deduction under Section 199A, your income must come from a qualified trade or business. Law and IRS rules frame this in two steps:

• Section 199A(d) defines a qualified trade or business as any trade or business other than:
  • An SSTB, or
  • Services performed as an employee.
• The regulations at 26 CFR §1.199A-1(b)(14) tie “trade or business” to Section 162. Courts — not the statute — set the test for Section 162, which focuses on:
  • Profit motive: you work with a real intent to make money.
  • Regularity and continuity: you work in a steady, ongoing way, not just occasionally.

Important notes:
– For pass-through entities, the trade-or-business test is applied at the entity level.
– A hobby does not qualify. However, a gambling activity can qualify if it meets the profit motive and continuity test (see Commissioner v. Groetzinger, 480 U.S. 23 (1987)).
– Rentals that don’t fully meet Section 162 can still qualify in two ways:
– If rented or licensed to a commonly controlled business, or
– If the rental real estate enterprise meets the safe harbor (generally, 250+ hours of rental services and other conditions).

How SSTB status affects eligibility

An SSTB involves services in fields such as 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; and any business where the main asset is the reputation or skill of one or more owners or employees (for example, paid endorsements or licensing of a name or image).

• If your business is an SSTB, QBI treatment depends on your taxable income:
  • At or below the threshold plus $50,000 (single/other) or $100,000 (married filing jointly): treat the SSTB like any other qualified trade or business.
  • Above those levels: the deduction phases out and can be fully disallowed for SSTB income.
• A de minimis rule may keep you out of SSTB status if SSTB-type services are only a small part of your total business. If you exceed the limit, the entire business can be treated as an SSTB.

Clear yes/no criteria

You likely qualify if:
– You operate a trade or business with a true profit intent, and your activity is regular and continuous.
– Your income is from a pass-through or sole proprietorship, not wages from an employer.
– Your business is not an SSTB, or it is an SSTB but your taxable income sits within the threshold exception.
– Your rental enterprise meets the safe harbor or qualifies under common control rules.

You likely do not qualify if:
– Your activity is a hobby or sporadic venture with little ongoing effort.
– You are performing services as an employee (W-2 job does not count).
– Your SSTB income is above the phase-out range.
– You are a former employee doing mostly the same work for the same client as an independent contractor within 3 years; the IRS presumes that is still employee services unless you can rebut it.

Examples that clarify the line

• Non-SSTB consultant: A logistics consultant advising on warehouse layouts works full-time through an LLC with several clients. Steady work, clear profit intent, books and records, and no employee status. This is a qualified trade or business; QBI likely applies.
• SSTB with lower income: A solo CPA with taxable income under the threshold plus $50,000 (or $100,000 joint). Although accounting is an SSTB, the exception applies, so treat it like any other qualified trade or business.
• Hobby vs. business: A weekend crafter sells a few items online without tracking margins or seeking customers. Low sales and no steady activity point to a hobby. No QBI.
• Gambling activity: A professional bettor who keeps detailed records, places wagers regularly, and treats it as a business may meet the Groetzinger test. QBI may apply if other rules are met.
• Rental real estate safe harbor: A small landlord shows more than 250 hours of rental services across the year and keeps required records. QBI may apply if the safe harbor is met.

Disqualifying factors to watch

• Employee services: W-2 wages can’t be QBI.
• SSTB income above phase-out: When taxable income exceeds SSTB limits, the QBI deduction for that income is denied.
• Lack of profit intent: No plan to make money is a red flag.
• Irregular activity: Work that is not regular and ongoing may fail the Section 162 standard.
• Aggregation mistakes: Improperly mixing SSTB and non-SSTB activities can taint the whole business.

Alternatives if you’re not eligible

• Consider other deductions and credits outside Section 199A.
• If you miss eligibility due to an SSTB phase-out, consider whether timing of income or expenses (within legal limits) could bring taxable income within the allowed range.
• If the issue is hobby status, formalize operations: maintain books, market actively, and document profit-seeking steps to meet Section 162.
• For rentals that miss safe harbor, evaluate whether common control with an operating business could qualify the rental as a trade or business for QBI.

According to analysis by VisaVerge.com, careful activity-level review and clean documentation often make the difference between denial and a solid deduction.

How to improve your chances

• Prove profit motive:
  • Keep a business plan and update it.
  • Track marketing, customer outreach, and pricing decisions.
  • Maintain separate bank accounts and accurate books.
• Show regular and continuous activity:
  • Record work hours, tasks, and service dates.
  • Keep contracts, invoices, and receipts.
• For rentals:
  • Track hours to meet the 250-hour safe harbor.
  • Keep logs of repairs, leasing, tenant screening, and management.
• Avoid employee-service traps:
  • If you left a job and now perform similar services for the same payer, document why this is a real business, not disguised employment, and diversify your client base.

Filing steps and official resources

• Use Form 8995 (Qualified Business Income Deduction Simplified Computation) or Form 8995-A (for more complex cases).
  1. Download Form 8995 from the IRS: Form 8995
  2. Download Form 8995-A: Form 8995-A
• Read the instructions and the IRS overview page for Section 199A rules, definitions, and worksheets:
  • Official IRS page on the QBI deduction: Qualified Business Income (QBI) deduction

These pages explain definitions like qualified trade or business, the SSTB rules, and the Section 162 standard. The IRS also outlines the rental real estate safe harbor in Rev. Proc. 2019-38.

Special situations you should review

• Multiple lines of business: Identify each trade or business separately. Some may be SSTBs, others not.
• Aggregation elections: In some cases you can combine certain businesses for QBI purposes — follow IRS rules carefully before electing.
• De minimis SSTB content: If SSTB portion stays within the allowed small share, you may avoid SSTB classification. Exceed it, and the entire business can be treated as an SSTB.
• Former employee rule: If you switch from employee to contractor performing similar services for the same customer within 3 years, the IRS presumes it’s still employee services. Keep strong records if you want to rebut this presumption.

Practical tips for the Section 162 trade-or-business test

• Treat it like a real business in the United States 🇺🇸:
  • Consider separate entity setup if appropriate.
  • Use clear invoicing, consistent client work, and active prospecting.
  • Maintain regular schedules, calendars, and diaries that show continuity.
• Price with profit in mind. Losses alone don’t kill your claim, but long-term losses without a plan will.
• Keep contemporaneous logs for rentals and service work. Memory is not enough if the IRS asks.

When to seek professional help

Section 199A is generous but technical. If your activity sits near the gray line — mixed SSTB and non-SSTB services, rentals with variable hours, or former-employee issues — consult a qualified tax professional who works with pass-throughs. The lack of a bright-line definition under Section 162 means your facts and records matter.

Bottom line

• The QBI deduction hinges on having income from a qualified trade or business under Section 162, not from an employee role.
• SSTB status limits the deduction unless your taxable income is within the threshold plus $50,000 (or $100,000 joint) exception.
• Strong proof of profit motive and steady activity, along with careful filings on Form 8995 or Form 8995-A, gives you the best chance to claim the deduction lawfully under Section 199A.