Big Tax Win for Insurance Agents
Insurance agents can now deduct the lesser of 20% of their pass-through Qualified Business Income (“QBI”) received from their agency’s insurance commissions and fees or 20% of taxable income over net capital gain, on their personal tax returns. The Tax Cuts and Jobs Act contained a provision for S-Corporations, partnerships, and LLCs that was intended to provide this deduction, similar to the tax relief C-Corporations received through the reduced corporate tax rate of 21%.
The deduction can be found in Internal Revenue Code Section 199A, which generally provides a deduction for 20% of the QBI from a trade or business. However, the section also included limitations for a specified service trade or business (“SSTBs”). This income limitation amounted to a phase out whereby married, jointly filed, taxpayers were phased out of the deduction at $417,000 of taxable income (single taxpayers at $207,500) for 2018. Initially, it was unclear as to whether insurance agents and insurance brokers were included in the SSTBs and therefore subject to the income limitation.
We are happy to report that the Final Treasury Regulations, issued on January 18, 2019 for Section 199A, and the second draft of IRS Publication 535, do not include services performed by insurance agents and brokers as an SSTB. As a result, insurance agents can deduct 20% of their pass through QBI.
However, it should be noted that if the agency has brokerage commissions from investment or financial planning, those lines of business are still included in the definition of SSTBs. If the agency has these other lines of business, it is critical to consult your tax advisor.
Marsh, Berry & Company, Inc. and MarshBerry Capital, Inc. do not provide tax or legal advice. Tax and legal professionals should be consulted separately before making any decisions that may have tax or legal implications. Any references to tax implications herein should not be interpreted as the provision of tax advice.
1Marsh, Berry & Company, Inc. Financial Advisory services include M&A Advisory*, Business Planning, Perpetuation Planning and Valuations. The Financial Advisory services provided by Marsh, Berry & Company, Inc. and its affiliates are not meant to be construed as services that constitute an offer to buy or sell, or a solicitation of an offer to buy or sell any securities, financial instruments or to participate in any particular trading strategy, or to provide investment recommendations on any company for personal investment purposes. Marsh, Berry & Company, Inc. and its affiliates are not rendering legal, accounting, financial or other advice.
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