There is good tax news for the insurance industry – the 20 percent deduction for pass-through businesses in the recent tax-cut law is available to a wide array of small business, including insurance agents and brokers.
Confusion in the Law
There had been some confusion surrounding the pass-through business eligibility situation, specifically the eligibility of pass-throughs like S corporations, limited liability corporations and partnerships, which includes insurance agents and brokers.
The uncertainty stemmed from language in the Tax Cuts and Jobs Act pointing out that the full tax break would not apply to selected service trades or businesses. But it was unclear from the wording whether insurance agents and brokers fell under the aegis of those selected businesses.
But the U.S. Treasury Department and Internal Revenue Service have clarified the guidelines, stating clearly that insurance agents and brokers, along with real estate brokers, do not have any limits on their eligibility.
The tax law allows sole proprietorships, partnerships, trusts, and S corporations to deduct 20 percent of their business income for tax purposes. The deduction is aimed at taxpayers who earn up to $315,000 filing jointly, and up to $157,000 for others.
When It Goes Into Effect
The deduction goes into effect for tax years after December 31, 2017. Taxpayers can claim the deduction on their 2018 returns. The deduction, however, only applies to income from a trade or business, not to wages, nor to capital gain, interest and dividend income.
The deduction was designed to help small businesses that could not take advantage of the reduction in the top corporate rate of 35 percent to 21 percent.
The insurance industry was happy with the changes. Two-thirds of the agencies who are members of the Independent Insurance Agents and Brokers of America are pass-through businesses.
About 90 percent of all businesses in the United States are pass-through entities. They cover everything from mom-and-pop stores to private equity funds. The deduction has reduced the tax rates for such businesses to their lowest levels since the 1930s, according to the Treasury Department.
The corporate tax cuts are permanent, while the 20 percent deduction will end in 2025 if Congress does not take action to extend it.
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