On Friday, the IRS issued final regulations governing Section 199A of the tax code. The rule confirms that owners and shareholders of insurance agencies and brokerages organized as pass-through entities are eligible for a tax deduction of up to 20% on “qualified business income”—regardless of taxable income level. The deduction is available for taxable years 2018 through 2025.
The new deduction reduces the top effective tax rate on pass-through income to approximately 29% from 37%. For those in the 24% bracket, it can reduce the rate to as low as 19.2%.
The regulation is a significant government affairs victory for Big “I” member agencies. Since passage of the 2017 tax reform law, the Big “I” has been aggressively advocating before Congress and the Trump Administration to ensure that insurance agencies and brokerages organized as pass-through entities fully benefit from tax reform.
The final regulation is substantially similar to a draft regulation released in August. Under the regulation, owners and shareholders of insurance agencies and brokerages where the owner or shareholder’s annual taxable income does not exceed $315,000 for joint filers and $157,500 for single filers in 2018 can take a 20% deduction on qualified business income.
For insurance agencies and brokerages where the owner or shareholder’s annual taxable income exceeds these levels, the deduction is available for qualified business income derived from the sale and servicing of insurance products. However, the deduction may be limited on income derived from consulting or financial services activities if that non-traditional income exceeds certain de minimis thresholds. Additionally, above these same income levels, the total amount of the deduction cannot exceed 50% of employee W-2 wages, or 25% of W-2 wages plus 2.5% of capital assets, such as tangible property purchased for the business—whichever is greater.
Owners and shareholders of insurance agencies and brokerages organized as pass-through entities can take full advantage of the 20% deduction, no matter their taxable income levels, because the IRS does not consider the sale and servicing of insurance products to be a “specified service trade or business.” Other professions such as doctors, lawyers, accountants, stock brokers and certain consulting and financial advisory activities are a “specified service trade or business” under the regulation.
Owners and shareholders of “specified service trades and businesses” with annual taxable income between $315,000 and $415,000 (joint) and $157,500 and $207,500 (single) will slowly see the deduction phased out. Those above $415,000 (joint) and $207,500 (single) are prohibited from utilizing the new deduction.
While a major victory Big “I” members, the regulations are complex. The Big “I” encourages members—especially those who derive income from non-traditional activities—to consult a tax professional to determine how the new deduction specifically impacts their businesses.