Business Tax Preparation · Advising the business taxpayer

Type of industry (e.g., specified service business owners)

Industry matters in the Code in two quite different ways. Some provisions ask what a business does and give a different rule accordingly — long-term contracts, extraction, farming. Others use an industry list as a proxy for something else, and those lists overlap without matching. Treating any two of them as the same list is the reliable way to get a question wrong.

The rule

Three lists, and they differ. For section 199A: a trade or business described in IRC § 1202(e)(3)(A), read without the words "engineering, architecture," and with "employees or owners" substituted for "employees", or one involving investing and investment management, trading, or dealing in securities, partnership interests or commodities^TY2026 (IRC § 199A(d)(2)). For the small business stock exclusion: a qualified trade or business for the small business stock exclusion excludes services in health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services and brokerage, any business whose principal asset is the reputation or skill of its employees, banking, insurance, financing, leasing and investing, farming, extraction of products eligible for depletion, and hotels, motels and restaurants^TY2026 (IRC § 1202(e)(3)). For the cash method: the function test is met where substantially all the corporation’s activities involve performing services in health, law, engineering including surveying and mapping, architecture, accounting, actuarial science, performing arts or consulting — substantially all meaning 95 percent or more of employee time, activities incident to the services counting toward it^TY2026 (Reg. § 1.448-1T(e)(4)(i)). The relationship between the first two is stated in the statute itself: the section 199A list is the section 1202 list read *without* the words "engineering, architecture" and with "employees or owners" substituted for "employees", plus investing and investment management, trading and dealing in securities, partnership interests or commodities — so engineering and architecture are excluded from the small business stock exclusion but are not specified service trades for section 199A^TY2026.

A specified service business is not simply excluded. a specified service trade or business does not simply fail once the threshold is passed — while taxable income is under the threshold plus the phase-in width, only the applicable percentage of its qualified items, W-2 wages and unadjusted basis is taken into account, the percentage falling from 100 to zero across that range^TY2026 (IRC § 199A(d)(3)). Below the threshold — where taxable income does not exceed the threshold amount, the wage and property limitation is disregarded entirely and the deduction is simply 20 percent of qualified business income^TY2026 (IRC § 199A(b)(3)) — the status does not matter at all.

And the figures. $403,500 on a joint return, $201,775 for a married individual filing separately, and $201,750 in any other case — the IRC § 199A(e)(2) threshold amounts for taxable years beginning in 2026^TY2026 (IRC § 199A(e)(2); Rev. Proc. 2025-32 § 3.26), with $553,500 on a joint return, $276,775 for a married individual filing separately, and $276,750 in any other case — the top of the IRC § 199A(b)(3)(B) and § 199A(d)(3)(A) phase-in range for taxable years beginning in 2026^TY2026 and $75,000, or $150,000 on a joint return — raised from $50,000 and $100,000 for taxable years beginning after 31 December 2025^TY2026.

Industry regimes that turn on what the business does. Construction: the percentage of completion requirement does not apply to a residential construction contract, or to any other construction contract entered into by a taxpayer other than a prohibited tax shelter who estimates at the outset that it will be completed within 2 years and who meets the IRC § 448(c) gross receipts test for the year the contract is entered into^TY2026 (IRC § 460(e)(1)). Extraction: percentage depletion applies only to the mines, wells and other natural deposits listed in IRC § 613(b) — a list that does not include timber, so timber is limited to cost depletion^TY2026 (IRC § 613(b)) and except as IRC § 613A otherwise provides, the depletion allowance for an oil or gas well is computed without regard to IRC § 613 — that is, percentage depletion is denied^TY2026 (IRC § 613A(a)). Farming: IRC § 448(b)(1) lifts the cash method prohibition for a farming business regardless of receipts.

And the code on the return. a six-digit principal business activity code based on the North American Industry Classification System, chosen as the activity from which the enterprise derives the largest percentage of its total receipts, entered on page 1 of the return with the activity and a brief description of the principal product or service^TY2026 (Instructions for Form 1120-S) — a different classification again, chosen by receipts and used for comparison rather than for any substantive rule.

Current figures

How it works in practice

Ask which list the question is using before answering it. Engineering is the clearest example: it is excluded from a qualified trade or business for the section 1202 small business stock exclusion, and it is not a specified service trade or business for section 199A, because IRC § 199A(d)(2)(A) applies the section 1202 list “without regard to the words ‘engineering, architecture’”. A candidate carrying one list answers half the questions wrongly.

The section 199A list is wider than section 1202 in one direction too. IRC § 199A(d)(2)(B) adds investing and investment management, trading, and dealing in securities, partnership interests or commodities — categories § 1202(e)(3)(A) does not name. And it substitutes “employees or owners” for “employees” in the reputation-or-skill limb, which catches a business built around its proprietor rather than its staff.

Get the three-band structure right. Below the threshold, specified service status is irrelevant and the wage and property limitations are disregarded entirely. Between the threshold and the top of the phase-in range, the applicable percentage in IRC § 199A(d)(3)(B) reduces the qualified items, W-2 wages and unadjusted basis proportionately — so the deduction shrinks rather than disappearing. Above the top of the range, a specified service business gets nothing. Saying the deduction is “disallowed above the threshold” collapses the middle band and is wrong for most of the taxpayers it matters to.

The qualified personal service corporation fields are a third list with a different purpose. They decide access to the cash method for a corporation under IRC § 448(b)(2), and their content differs again: engineering is on that list, expressly including surveying and mapping, and the test is 95 percent of employee time rather than a share of receipts or income.

Some industry rules are about the activity, not about a list. A construction business is on percentage of completion unless it fits the IRC § 460(e) exception, which combines a duration estimate with the gross receipts test. An extractive business may take percentage depletion only for the deposits IRC § 613(b) names, and oil and gas is denied it by default under IRC § 613A(a). A farming business escapes the IRC § 448 cash method bar outright.

Do not confuse any of this with the activity code. The six-digit code on the return classifies the business for comparison against industry data. It has no substantive effect on any of these provisions, and a business can carry a manufacturing code while being a specified service trade or business for section 199A purposes.

Scenarios

Traps

How this has changed

Section 199A’s industry list was drafted by cross-reference in 2017 and has not been amended since, which is why the “without regard to the words engineering, architecture” construction survives — the words are still in section 1202 and still read out of section 199A. What moved in 2025 was the arithmetic around the list rather than the list itself: Pub. L. 119-21 § 70105(a) widened the phase-in range by half, so a specified service business now keeps a partial deduction across a materially wider band of income, and § 70105(b)(1) removed the section’s expiry.

Section 1202 has moved more substantially. The exclusion percentage now depends on when the stock was acquired and how long it was held, with a shorter minimum holding period for stock acquired after the applicable date, so an industry question about qualified small business stock has to be answered with the acquisition date in hand.

The long-term contract exception has been stable, but its reach has grown with the IRC § 448(c) threshold — a construction business that was required to use percentage of completion a decade ago may now qualify for the exception without changing anything about its contracts.

Nothing in the post-2024 legislation alters IRC § 460(e), § 613 or the qualified personal service corporation definition.

Exam focus

Learn the section 1202 list first, because both of the others are defined against it. Then learn the two modifications section 199A makes — the removal of engineering and architecture, and the substitution of “employees or owners” — and the additional financial categories in IRC § 199A(d)(2)(B).

Know the three-band structure for section 199A and be able to compute the applicable percentage: 100 percent reduced by the ratio of the excess over the threshold to the phase-in width.

Keep the qualified personal service corporation fields separate and remember that engineering is on that list and that the test is a share of employee time.

For industry-specific regimes, know the IRC § 460(e) construction exception with both its limbs, that IRC § 613A(a) denies percentage depletion for oil and gas by default, and that a farming business escapes the IRC § 448 cash method bar under § 448(b)(1).

Finally, keep the activity code out of the substantive analysis entirely.

Check yourself

1. An architect with taxable income above the top of the phase-in range asks whether the practice is a specified service trade or business. What do you say?

Answer: No. IRC § 199A(d)(2)(A) adopts the IRC § 1202(e)(3)(A) list “applied without regard to the words ‘engineering, architecture’”, so architecture is read out of the definition for section 199A purposes even though it is excluded from a qualified trade or business for the small business stock exclusion. The practice is a qualified trade or business — but above the threshold the wage and property limitation applies in full, so whether it produces a deduction depends on the W-2 wages paid and the unadjusted basis of qualified property held.

2. A joint-filing couple’s taxable income exceeds the section 199A threshold by half the phase-in width. Their business is a law firm. What percentage of its qualified items enters the computation?

Answer: 50 percent. IRC § 199A(d)(3)(B) defines the applicable percentage as 100 percent reduced by the ratio of the taxable income in excess of the threshold to the phase-in width, and half of the width gives a reduction of 50 points. That percentage applies to the qualified items of income, gain, deduction and loss, to the W-2 wages and to the unadjusted basis of qualified property alike, so all three inputs are halved before the wage and property limitation is applied to what remains.

3. Why can a corporation be a qualified personal service corporation for IRC § 448 and not a specified service trade or business for section 199A?

Answer: Because the two provisions use different lists for different purposes. Reg. § 1.448-1T(e)(4)(i) lists eight fields including engineering, expressly with surveying and mapping, and asks whether 95 percent or more of employee time is spent in one of them — a test about access to the cash method. IRC § 199A(d)(2) works from the section 1202 list with engineering and architecture read out, and asks about the character of the trade or business for the deduction. An engineering corporation meets the first and fails the second, which is not a contradiction.

4. A construction company meeting the gross receipts test enters a contract it estimates will take thirty months. May it use the completed contract method?

Answer: Not under IRC § 460(e)(1)(B), which requires the taxpayer to estimate at the time the contract is entered into that it will be completed within the 2-year period beginning on the contract commencement date. Thirty months fails that limb even though the gross receipts test is met — both are required. The exception is applied contract by contract, so the company’s other contracts under two years are unaffected. A residential construction contract has its own more generous treatment.

5. Why does the activity code on the return not answer any of these questions?

Answer: Because it is a classification for comparison, not a substantive test. The six-digit code is chosen by the activity producing the largest percentage of total receipts and is used to measure the return against published industry data on examination. None of section 199A, section 1202, IRC § 448, IRC § 460 or IRC § 613 refers to it. A business can hold a manufacturing code and be a specified service trade or business, or hold a professional services code and not be one — the substantive tests look at what the business does and how, not at what it entered on page one.