Treasury Issues Draft Regulations on New 20 Percent Deduction for Pass-Through Businesses

Today, the Internal Revenue Service (IRS) issued the first of three potential regulations governing Section 199A of the tax code. Section 199A provides the 20% tax deduction to an owner or shareholder of a pass-through entity 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.

In other words, all owners or shareholders that are organized as pass-throughs under the above income thresholds can utilize the full 20% deduction and any regulations or guidance released by Treasury, including the draft released today, will not impact this. However, an owner or shareholder of a “specified service trade or business” with annual taxable income between $315,000 – $415,000 (joint) and $157,500 – $207,500 (single) will slowly see the deduction phased out and those above $415,000 (joint) and $207,500 (single) will be prohibited from utilizing the new deduction.

The big question for insurance agents and brokers has been whether we would be considered a “specified service trade or business.”

We are happy to report that INITIAL review of these draft regulations indicates that the IRS DOES NOT consider insurance agents and brokers to be a “specified service trade or business.

Specifically, the draft regulation states:

“Proposed §1.199A-5(b)(2)(x) uses the ordinary meaning of “brokerage services” and provides that the field of brokerage services includes services in which a person arranges transactions between a buyer and a seller with respect to securities (as defined in section 475(c)(2)) for a commission or fee. This includes services provided by stock brokers and other similar professionals, but does not include services provided by real estate agents and brokers, or insurance agents and brokers.”

The Big “I” government affairs team has been working hard on this issue on the Hill and with the Administration arguing that insurance agents and brokers should NOT be considered a “specified service trade or business” and this is a very positive step towards ensuring that Big “I” members organized as pass-throughs receive the full benefit of the new 20 percent deduction. The draft regulation is now open for a public comment period and will become final later this year. The Big “I” is currently reviewing the draft and will provide comments to the IRS, and further guidance to members as needed moving forward.

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