The IRS recently released additional information on the Tax Cuts and Jobs Act of 2017 (TCJA) about the Qualified Business Income deduction (QBI) under Code Section 199A and how it relates to the insurance industry. While previous versions of the regulations were unclear whether insurance agents and brokers would be considered a qualified business, or be categorized as a Specified Service Trade or Business (SSTB). The final regulations have provided additional clarity that suggest insurance agents may be recognized as a qualified trade or business and not an SSTB.
As an SSTB, the 20% deduction is entirely phased out above the taxable income threshold of $315,000 on a joint return or $157,500 for all other taxpayers. Qualified businesses, however, may still receive the deduction over those thresholds, but they may be limited based on wages paid to employees, qualified assets, or total taxable income. There are two specific classifications the insurance industry could fall into: Brokerage Services and Financial Services.
The final regulations of Section 199A discuss a few categories related to insurance and life insurance agents, which are as follows:
- Insurance agents and brokers are not considered a Brokerage Services as an SSTB.
- The sale of insurance is not considered investing and investment management under Financial Services as an SSTB.
- W-2 income to Statutory Employees should be considered qualified trade or business income for the 199A deduction.
From these regulations, it appears that insurance brokers are not considered an SSTB under the Brokerage Services classification and income to statutory employees is not an SSTB.
However, the IRS has made a caveat under the Financial Services classification, that if the business is providing services that are outside of selling insurance, such as financial/wealth advisory, or fee based planning, those activities would be considered SSTB activity. Under the de minimis rule, where a trade or business has gross receipts equal to or less than $25 million, as long as these SSTB activities are attributable to less than 10% of the total business, the whole activity is qualified and not an SSTB. If the activities are over the 10%, the entire business is an SSTB.
As an insurance provider and financial wealth advisor, your business may fall on the line between SSTB and qualified trade or business depending on the amount of other services you provide to your clients. Before filing your 2018 taxes, you will want to determine how much of your business is depending on these other services. We would be happy to assist with this determination and future tax planning on how best to organize your business activities to be most effective and beneficial to you.
The detail below provides the supporting language from the Final 199A Regs for each of the three categories referenced above.
- Insurance agents and brokers are not considered a Brokerage Service as an SSTB.
Details: Excerpts from Final 199A Regs – The performance of services in 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 sale of insurance is not considered investing and investment management under Financial Service as an SSTB.
Details: Excerpts from Final 199A Regs – The Treasury Department and the IRS agree that by operation of section 1202(3)(B), insurance cannot be considered a financial service for purposes of section 199A. The Treasury Department and the IRS decline to categorically exclude services provided by insurance agents from the definition of financial services as financial services such as managing wealth, advising clients with respect to finances, and the provision of advisory and other similar services that can be provided by insurance agents. However, the Treasury Department and the IRS note that the provision of these services to the extent that they are ancillary to the commission-based sale of an insurance policy will generally not be considered the provision of financial services for purposes of section 199A.
- W-2 income to Statutory Employees is considered qualified trade or business income for the 199A deduction
- Please note the above paragraph that SSTB activities has to be attributable to less than 10% of the total business in order for the whole activity to be qualified and not an SSTB. If the activities are over the 10%, the entire business is an SSTB.
- It may be best to disseminate this information to anyone you feel would benefit from it.
- Details: Per IRS Notice 2018-64, money paid to statutory employees are not includable wages for Section 199A in spite of the fact that they are reported on the W-2 because they are subject to FICA. This is good news for a Life Insurance Agent. In tax law, the statutory employee is an independent contractor under the common law rules, but is treated as an employee for FICA purposes. In this special category, the life insurance agent statutory employee operates a trade or business.
It may be best to disseminate this information to anyone you feel would benefit from it.
Please note the above paragraph that SSTB activities has to be attributable to less than 10% of the total business in order for the whole activity to be qualified and not an SSTB. If the activities are over the 10%, the entire business is an SSTB.
We would be happy to answer any questions you may have.