Introduction
If you're a mortgage broker or considering entering this profession, you've likely come across the term "SSTB" (Specified Service Trade or Business). Understanding whether your business falls under this category is crucial for tax planning and compliance purposes. In this article, we'll explore the definition of an SSTB, the criteria for determining if a mortgage broker qualifies as one, and the potential tax implications.
What is an SSTB?
The term "Specified Service Trade or Business" was introduced as part of the Tax Cuts and Jobs Act (TCJA) of 2017. An SSTB is a type of business that provides services in certain fields, including health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, and investing and investment management.
Do Mortgage Brokers Qualify as an SSTB?
The short answer is: it depends. The determination of whether a mortgage broker qualifies as an SSTB is not always straightforward and can vary based on the specific circumstances of the business.
According to the Internal Revenue Service (IRS), mortgage brokers are generally considered to be providing "brokerage services," which is one of the specified service trades or businesses listed in the TCJA. However, there are some exceptions and nuances to consider.
The "Loan Origination" Exception
The IRS has provided guidance that clarifies that the term "brokerage services" does not include "services in the field of loan origination." This means that if a mortgage broker's primary activities involve originating loans, rather than merely facilitating transactions between buyers and sellers, they may not be considered an SSTB.
To determine if a mortgage broker falls under the loan origination exception, the IRS considers factors such as:
- Nature of Services: The specific services provided by the mortgage broker, including loan application processing, underwriting, and funding.
- Compensation Structure: If the compensation is primarily based on the successful origination and closing of loans, rather than commission-based fees for facilitating transactions.
- Licensing and Regulation: Whether the mortgage broker is licensed and regulated as a loan originator, rather than a traditional broker.
Ancillary Services and Mixed Businesses
It's also important to note that even if a mortgage broker's primary activities qualify as an SSTB, any ancillary services they provide that are not specified service trades or businesses may be eligible for the qualified business income (QBI) deduction. This deduction allows eligible businesses to deduct up to 20% of their qualified business income, subject to certain limitations.
Additionally, if a mortgage broker's business involves both SSTB and non-SSTB activities, the income and expenses must be allocated accordingly for tax purposes.
Tax Implications of Being an SSTB
If a mortgage broker is determined to be an SSTB, there are several potential tax implications:
- Qualified Business Income (QBI) Deduction: SSTBs are generally ineligible for the 20% QBI deduction, which can significantly increase their effective tax rate compared to non-SSTBs.
- Limitations on Deductions: SSTBs may face limitations on certain deductions, such as the state and local tax (SALT) deduction and the deduction for qualified business income.
- Increased Compliance Burden: SSTBs may be subject to additional reporting and compliance requirements, which can increase administrative costs and complexity.
Conclusion
Determining whether a mortgage broker qualifies as an SSTB is a nuanced and context-specific analysis. While mortgage brokers are generally considered to provide "brokerage services," which are classified as an SSTB, the loan origination exception and the nature of the specific services provided can impact this determination.
If you're a mortgage broker or considering entering this profession, it's essential to consult with a qualified tax professional who can evaluate your specific circumstances and provide guidance on the tax implications and strategies for minimizing your tax liability.
By understanding the criteria for SSTBs and the potential tax consequences, you can make informed decisions and plan accordingly to ensure compliance and maximize your financial success.
