President Trump signed into law sweeping changes to the U.S. tax code on Dec. 22, 2017.
While it is clear how the new tax reform laws will impact agencies that are organized as Subchapter C Corporations, questions loom about agencies that are organized as pass-through entities such as Subchapter S Corporations, Partnerships and Sole Proprietorships.
A new section has been added to the individual tax code that creates a 20 percent deduction on “qualified business income” (QBI) for owners/shareholders of pass-through businesses.
However, the new tax law prohibits owners/shareholders of some types of businesses from using the deduction if their overall taxable income is above certain thresholds.
Specifically, an owner/shareholder of a “specified services business” with annual taxable income above $415,000 (joint) an $207,500 (single) cannot utilize the deduction.
Pass-through owners/shareholders below these levels can benefit from the deduction in whole or in part; and as a result, the vast majority of member pass-throughs are likely to receive the deduction.
At this time, it is unclear whether insurance agencies and brokerages will be considered a “specified service business” by the Internal Revenue Service (IRS).
While OIA focuses on state issues pertinent to Ohio independent agents and consumers, your national associations advocate before Congress and the Trump administration.
Legal analysis completed by the Big “I” and confirmed by an outside law firm has determined that there are grounds for the IRS to include insurance agencies and brokerages in the definition of “specified service business.”
This could limit the ability of some larger pass-through members from using the deduction.
However, there are reasonable arguments for the exclusion of insurance agencies and brokerages from the definition, either in whole or in part, based on the specific activities of an agency or brokerage.
Big “I” is currently advising members who have taxable income above the specified levels that, out of an abundance of caution, they should assume they are limited in their ability to use the deduction and that they should reach out to their accountants and relevant legal professionals for advice.
Where Things Stand Right Now
Big “I” is strenuously advocating before Treasury and the IRS that Congress did not intend to include insurance agents and brokers in the definition of “specified service activities” and any forthcoming guidance or regulations should appropriately reflect that.
The Big “I” is working with a coalition of other producer groups to advocate on this issue before the Treasury Department and the IRS.
The coalition sent a letter to key department officials and has also held calls and meetings with the department. Big “I” is hopeful that any implementation regulations or guidance, expected later this year, will treat agents and brokers appropriately.
OIA will keep members informed as we learn more.