The U.S. Treasury issued final regulations and other guidance on a provision of the Tax Cuts and Jobs Act that allows owners of sole proprietorships, partnerships, trusts, and S corporations to deduct up to 20 percent of their qualified business income on their taxes.
The mid-January final rules cleared up lingering doubts about whether insurance agents qualify for the full 20 percent deduction for their 2018 taxes and for years going forward until 2025 under President Donald Trump’s tax law. They do qualify.
“This regulation is a major and hard-fought win for Big ‘I’ members — the vast majority of which are organized as pass-through entities. Prior to the regulation being finalized, there was uncertainty surrounding the application of the deduction to insurance businesses,” said Bob Rusbuldt, president and CEO, Independent Insurance Agents and Brokers of America (Big “I”).
The final rules follow draft rules issued in August. That earlier guidance said for the first time that insurance agents and real estate brokers specifically would not be included in the definition of the specified businesses that face limits on their eligibility. The August guidance was approved for use by agents for 2018 tax filings.
However, the lack of final rules from Treasury until today raised questions about whether the earlier guidance might be changed and about the tax break’s status in future tax years, Charles Symington, Big “I” senior vice president of External, Industry & Government Affairs, told Insurance Journal.
The questions about taxes for 2018 and taxes for years until 2025 when the deduction expires have now been answered in agents’ favor.
Owners and shareholders of insurance agencies and brokerages can take up to a 20 percent tax deduction on qualified business income, no matter their taxable income levels, because the IRS does not consider insurance agents and brokers to be engaged in a “specified service trade or business.” Owners and shareholders of “specified service trades and businesses” cannot take advantage of the deduction if their taxable income is over a certain level.
“Big ‘I’ members, whether organized as a pass-through entity or a C-corporation, can now rest assured that the tax reform law is working for them and their employees,” Symington said.
Symington said he and fellow lobbyists from the Council of Insurance Agents and Brokers, real estate agents and others have been working for the past year – including over the holidays and during the government shutdown when communication was difficult- to secure this final rule.
“These regulations provide much needed certainty to insurance agencies and brokerages and their employees. We thank the Administration for moving quickly to finalize these important regulations despite the partial government shutdown,” CIAB said in a statement.
The deduction, referred to as the Section 199A deduction, is available for the first time on the 2018 federal income tax returns.
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.
“Small and mid-size businesses are the engines of growth for the U.S. economy,” said Treasury Secretary Steven T. Mnuchin. “The pass-through deduction will drive more investment in U.S. companies and higher wages for American workers. This provision will reduce pass-through business tax rates to their lowest rate in more than 80 years.”
It is estimated that between 17 and 40 million American business owners will be able to take advantage of this deduction.
According to the Big “I,” two-thirds of its member agencies are pass-through entities.
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