On August 9, 2018, the Professional Insurance Agents of America (“PIA”) issued a press release on insurance agents being exempted under the Treasury Department’s proposed regulations implementing the Qualified Business Income Deduction rules under section 199A of the Internal Revenue Code.
Agency Checklists claims no expertise on tax matters, but we were interested in why the PI A considered the proposed regulations a big deal, so we put together the following five points for our interested readers about section 199A, and what it might mean to independent agents and their small business insureds.
The section 199A deduction of up to 20% is new for tax year 2018
Section 199A is part of The Tax Cuts and Jobs Act of 2017 (“2017 Act”), which was signed into law by President Trump on December 22, 2017.
The deduction is very new, and its details are still being fleshed out by the government. For example, the proposed rules for what constitutes qualified business income were only published by the Internal Revenue Service on August 8, 2018.
Starting with tax year 2018, qualified pass-through business owners can take a special deduction under a section the 2017 Act added to the Internal Revenue Code, section 199A. This deduction can offer, in some cases, up to a 20% deduction from what section 199A designates as “qualified business income.”
Qualified pass-through businesses can include S corporations, partnerships, and limited liability companies among others.
For 2018, qualifying business owners of pass-through entities looking to maximize the tax benefits should consult sooner rather than later with their tax consultants. The deduction is very new, and its details are still being fleshed out by the government. For example, the proposed rules for what constitutes qualified business income were only published by the Internal Revenue Service on August 8, 2018.
The section 199A 20% deduction applies to specific domestic business income
Section 199A allows a tax deduction of up to 20 percent of the income earned from a domestic business operated by an individual as a sole proprietorship, individuals in a partnership, owners of S corporations, and in some cases trusts, or estates.
A section 199A deduction is not available for wage income or business income earned through a C corporation. C Corporations obtained their reduced tax rate as part of the 2017 Act to a top rate of 21% from a top rate of 35%.
The section 199A deduction is not available to specified service businesses
Under section 199A, a “qualified trade or business” that may have a deduction is any trade or business other than a “specified service business.” Specified service businesses do not receive a deduction under section 199A. These excluded businesses are businesses in the fields of:
- Actuarial Science;
- Brokerage Services;
- Financial Services;
- Businesses involving investing, investment management, trading or dealing in securities, partnership interests or commodities; and
- Businesses in which the principal asset of the business is the reputation or skill of one or more of its employees or owners.
The press release from the PIA mentioned earlier, announced the fact the proposed Internal Revenue Service regulations designated insurance agents and brokers as being excluded from any of the above categories of specified service businesses.
Although the above business categories do not qualify for the section 199A deduction, business owners in those categories may still obtain the deduction under an income exception. Section 199A contains an “income threshold amount.” For tax year, that income threshold amount is $315,000 for a married couple filing jointly and $157,500 for individuals. If an owner of a specified service business comes within the income threshold amount, they still may obtain the section 199A deduction.
In either case, anyone who might have the opportunity for a section 199A deduction for this year because of ownership a qualified trade or businesses or even a specified service business should consult with their tax adviser or advisers as soon as possible.
Computing the section 199A deduction may require some professional help
For pass-through businesses, the section 199A deduction is based upon “qualified business income.” Qualified business income is the business’ gross income less the business’ allowable business deductions or the business’ adjusted gross income. To this number, however, you add any business rental income, income from publicly traded partnerships, and real estate investment trusts distributions other than for capital gains.
If you own other pass-through business the qualified business income for that business has to be calculated separately. If there are multiple businesses, and one or more has a net operating loss that loss is deducted from the other profitable businesses.
Wages paid to an S corporation shareholder are not included in the qualified business income calculation. Also excluded from the qualified business income calculation are capital gains, dividends, interest, and non-U.S. income.
For a taxpayer whose taxable income is under the section 199A income threshold amount of $315,000 for a married couple filing jointly and $157,500 for an individual, the section 199A deduction from their taxable income is 20% of their qualified business income.
For persons earning more than the income threshold amount under section 199A, the calculations get more complex and should be done by a qualified tax adviser.
The section 199A deduction is a personal deduction on your tax return
A few additional points about the deduction.
The section 199A deduction will be a personal deduction taken on the pass-through owner’s Form 1040. The section 199A deduction will apply whether deductions are itemized, or a standard deduction is used.
The section 199A deduction only reduces income taxes. The deduction has no effect on the pass-through owner’s Social Security or Medicare taxes.
Under the 2017 Act, all provisions that modify the individual income tax will expire on December 31, 2025. The section 199A deduction unless extended by Congress will phase out for tax year 2026. However, before the 199A deduction expires, the non-profit Tax Foundation states that the deduction is expected to lower federal revenue by $414 billion before it is scheduled to sunset. This revenue reduction from the section 199A deduction though is estimated to directly reduce taxes for more than seventeen million households that receive income from pass-through businesses.
Conclusion. With this kind of numbers, it behooves anyone with a pass-through business to either learn about the section 199A deduction or to get in connect with a professional who does know about the deduction.