Some Clarity On the 20% Pass-Through Deduction

Some Clarity On the 20% Pass-Through Deduction

Maybe there’s some favorable news for insurance agents and brokers, but don’t jump too high!

Recall that the Tax Cuts and Jobs Act of 2017 (TCJA) lowered the highest tax rate on C-corporations to 21%. To afford at least a partially similar benefit to pass-through businesses (S-corporations, partnerships, and sole proprietorships, or any LLC taxed as one of those three), a business deduction was possible that could be applied to the owner’s individual taxable income.

This “Section 199A Deduction” could be up to 20% of a business’s qualified business income

(QBI – the definition is unimportant for purposes of this article).  The deduction was subject to a phase-out or reduction, and TCJA divided all pass-through businesses into two categories for purposes of determining the amount of this “deduction reduction.”

The first was Specified Service Businesses. An owner of a Specified Service Business is eligible for a full 20% deduction if his or her personal taxable income is below $157,500 ($315,000 if filing jointly).  As taxable income increases the size of the deduction is reduced until the owner’s taxable income reaches $207,500 ($415,000 if filing jointly).  After that there is no deduction available.

The same taxable income level breakpoints are applied to businesses in the second category, Non-service Businesses, but their owners have an advantage in that the deduction phases out less or not at all if (in a nutshell) the company has a sizeable multi-employee wage base, or the owner has significant basis in the business.

The brou-ha-ha within the insurance industry when TCJA was passed was whether or not insurance agents and insurance brokers fell into the more advantageous second category (Non-service Businesses).

The legislation was unclear.

But now the U.S. Treasury has issued final regulations for TCJA that would include in the second (again, the more favorable) category of Non-service Businesses all insurance agents, agencies and brokerages taxed as a pass-through.  But the circumspect insurance advisor has reason to pause.

One group that the TCJA definitely specifies as a Specified Service Business are companies involved in “financial services”

These services are defined (in part) as the provision of financial services including “managing wealth, advising clients with respect to finances, developing retirement plans, developing wealth transitions plans . . .”, etc. (emphasis added).

It is hard to imagine comprehensive insurance planning that does not wander over into these regions.  Consult with your tax advisor for a final conclusion.

The good news for small insurance enterprises is that, business category notwithstanding; taxpayers with taxable income under $157,500 ($315,000 if filing jointly) are still eligible for the full 20% reduction and eligible for some relief at higher taxable income levels.

An excellent discussion from Principal Financial of the Section 199A Deduction under TCJA and the Regulations is available HERE.

Look it over and contact me at tom@cpsadvancedmarkets.com or 706-354-0401 with questions on this or any advanced planning issue.