The Treasury Department has moved to clear up some confusion in the Trump tax cut law by proposing that the full 20 percent deduction for pass-through businesses be made available to a broad spectrum of small businesses, including insurance agents and brokers.
Many small businesses that are organized as pass-throughs such as S-corporations, limited liability corporations and partnerships, including insurance agents and brokers, have been waiting for clarification on their eligibility.
The Treasury’s guidance on the tax deduction was necessary because the language of the Tax Cuts and Jobs Act (TCJA) indicated that the full tax break would not be available to certain specified service trades or businesses but left some question whether insurance businesses were considered part of that group.
Treasury and the Internal Revenue Service have now proposed that insurance agents and brokers, as well as real estate agents and brokers, not be included in the definition of the specified businesses that face limits on their eligibility.
In the words of the proposed guidance, the meaning of brokerage services not eligible for the deduction includes services provided by stock brokers and other similar professionals “but does not include services provided by real estate agents and brokers, or insurance agents and brokers.”
Q&A from IRS on 20% Deduction for Qualified Business Income
According to the IRS, the Trump tax law allows owners of eligible sole proprietorships, partnerships, trusts and S- corporations to deduct 20 percent of their qualified business income.
The deduction is generally available to eligible taxpayers whose 2018 taxable incomes fall below $315,000 for joint returns and $157,500 for other taxpayers.
However, the law limits deductions for taxpayers with higher incomes if they are in certain specified service trades or businesses. The IRS has now said insurance agencies and brokerages are not among the services facing limitations.
The deduction — referred to as the Section 199A deduction — is available for tax years beginning after Dec. 31, 2017. Eligible taxpayers can claim it for the first time on the 2018 federal income tax return they file next year. Qualified business income includes domestic income from a trade or business. Employee wages, capital gain, interest and dividend income are excluded.
The 20 percent deduction was designed to target small businesses that don’t benefit from the Trump tax law’s reduction in the top corporate rate from 35 percent to 21 percent.
While these proposals are subject to further review and could change, insurance agencies, many of which are pass-throughs, welcomed them.
“Our initial read of the draft regulations is that agents and brokers are not a specified service trade. While these are draft regulations and not yet final, we see this as a very positive development,” Charles Symington, Independent Insurance Agents and Brokers of America (Big “I”) senior vice president of External, Industry & Government Affairs, told Insurance Journal.
According to the association, two-thirds of its member agencies are pass-through entities.
Symington said his group has “been spending a great deal of time on this issue on the Hill and with the Administration arguing that insurance agents and brokers” organized as pass-throughs should receive the full benefit of the new 20 percent deduction.
Symington said that the Big “I” is currently reviewing the draft and will provide comments to the IRS.
Congress passed the Trump tax act in December 2017. Treasury officials had hoped to issue clarifying rules earlier this summer.
About 90 percent of U.S. businesses are organized as pass-throughs. They range from mom-and-pop stores to private equity funds.
“The pass-through deduction is an important tax cut for small and mid-size businesses, reducing their effective tax rates to their lowest levels since the 1930s,” said Treasury Secretary Steven T. Mnuchin. “Pass-through businesses play a critical role in our economy. This 20-percent deduction will lead to more investment in U.S. companies and higher wages for hardworking Americans.”
The proposed rules also set forth safeguards to prevent employees from becoming reclassified as independent contractors to qualify for the tax break.
According to the IRS, taxpayers may rely on these proposed regulations until final regulations are published in the Federal Register. The public has 45 days to comment on the proposals.
The IRS issued a Q&A on the deduction after announcing its proposals.