Jane Dotson
The US Internal Revenue Code (IRC) has historically treated professional service businesses more harshly than other types of businesses, and this continues with the IRC's Section 199A deduction. This section of the tax law provides a 20% deduction on qualified business income (QBI) for owners of sole proprietorships, partnerships, and S corporations. However, it excludes specified service trades or businesses (SSTBs), which include fields like health, law, accounting, consulting, and financial services. While the definition of financial services is broad, encompassing financial advisors, investment bankers, and wealth planners, insurance agents and brokers are specifically excluded from this definition. This exclusion significantly increases the number of taxpayers eligible for the deduction. However, if an insurance agent also provides investment advice or has multiple business lines, the entire business may be considered an SSTB, impacting their ability to claim the QBI deduction.
| Characteristics | Values |
|---|---|
| Are insurance agents considered a specified service business? | No, insurance agents are not considered to be conducting specified service businesses. |
| Are there exceptions? | Yes, if an insurance agent also provides investment advice for a fee, they may be considered a specified service business. |
| What if an insurance agent also works in investment? | If an insurance agent also works in investment and makes more than 10% of their income from investment, their entire business is considered a specified service business. |
| Are there ways to separate the two types of income? | Yes, it may be possible to split the business into two, but this may not be worth it and may be complicated. |
| Are there other similar professions? | Real estate agents and brokers are also excluded from the specified service business definition. |
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What You'll Learn
Insurance agents are not considered a specified service business
The QBI deduction is a provision of the Tax Cuts and Jobs Act (TCJA) that allows owners, shareholders, or partners of S corporations, partnerships, and sole proprietorships to claim a 20% deduction on their qualified business income. However, SSTBs are not eligible for this deduction if their taxable income exceeds certain thresholds.
The definition of an SSTB includes businesses in fields such as health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, investing, and investment management. While insurance agents may provide some financial services, such as wealth management and advising clients on finances, these services are typically ancillary to the commission-based sale of an insurance policy and are therefore not considered financial services for the purposes of the QBI deduction.
It is important to note that if an insurance agent also operates a separate business that is an SSTB, such as investment advisory services, the entire business may be considered an SSTB if the income from the SSTB-related activities exceeds a certain threshold. This is known as the de minimis rule, and it applies to businesses with total revenues of $25 million or less.
In summary, insurance agents are not considered a specified service business for the purposes of the QBI deduction under the TCJA. However, if they provide additional services that fall under the definition of an SSTB, they may need to evaluate the impact on their tax eligibility.
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Commission-based sales of insurance policies
The amount of commission can vary depending on several factors, including the type of insurance policy, the complexity of the policy, the insurance company, and the agent's experience and performance. Some companies offer different commission rates for different types of policies or sales levels achieved. Experienced agents may be able to negotiate higher commission rates based on their track record. Commissions for new policy sales are generally higher than those for renewals, and commissions for more complex policies like life insurance or long-term care may be higher compared to simpler policies.
In certain cases, insurance agents may receive contingent commissions, which are additional payments based on performance metrics such as meeting sales targets or maintaining low claim ratios. These commission structures are appealing to insurance brokers and companies who want to incentivize and reward high-performing agents. Residual commissions also promote long-term relationships between agents and policyholders, as agents continue to earn from existing policies over time.
While commission-based sales can motivate agents, it's important to consider potential conflicts of interest. Agents' financial incentives may not always align with the best interests of the policyholders, and they may prioritize short-term sales over long-term client relationships. Additionally, commissions can impact the cost of life insurance policies for consumers, as companies may factor in these expenses when setting prices.
To address these concerns, some insurance agents may choose to separate their QBI-eligible insurance business from non-QBI-eligible brokerage commissions. By running multiple businesses or splitting out business lines, they can preserve the QBI deduction and potentially reduce the impact of commissions on their income. However, this strategy may not always be feasible or worth the effort.
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QBI deduction for insurance agents
The US Treasury issued final regulations on the Tax Cuts and Jobs Act (TCJA) in January 2019, providing clarity on the QBI deduction for insurance agents. According to the regulations, insurance agents do not fall under the definition of a "specified service trade or business" (SSTB). This means that owners and shareholders of insurance agencies and brokerages can take advantage of the QBI deduction, deducting up to 20% of their qualified business income (QBI) on their taxes.
The QBI deduction is a provision of the TCJA that allows eligible taxpayers to deduct a portion of their QBI, as well as qualified real estate investment trust (REIT) dividends and qualified publicly traded partnership (PTP) income. To qualify for the deduction, taxpayers must be involved in a trade or business, which includes Section 162 trades or businesses, but excludes trades or businesses conducted through a C corporation or as an employee.
In the case of insurance agents, the IRS specifically excluded them from the definition of SSTBs, which typically include businesses in fields such as health, law, accounting, consulting, and financial services. This exclusion was confirmed in the final regulations issued by the Treasury, providing assurance to insurance agents and clearing up previous uncertainties.
It is important to note that the QBI deduction is subject to limitations based on the taxpayer's taxable income, the type of trade or business, and other factors. Additionally, the strategy of separating QBI-eligible insurance businesses from non-QBI-eligible brokerage commissions can be complex due to IRS regulations regarding single businesses with multiple business lines.
Overall, the QBI deduction can provide significant tax benefits to insurance agents, allowing them to reduce their tax liability and keep more of their business income. By understanding the regulations and exclusions, insurance agents can maximize their tax advantages and ensure compliance with the tax laws.
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Tax regulations for insurance agents
Income Sources
Insurance agents typically have multiple income sources, including commissions, bonuses, and residuals from policies sold in previous years. Commissions form a significant part of their earnings, including renewal commissions when clients renew their policies.
Deductions and Expenses
Maximizing deductions is essential for insurance agents to retain more of their income. While the rules vary by jurisdiction, some common deductible expenses for insurance agents include:
- Mileage for business-related trips, including travel between a home office and client meetings, work errands, and commuting from a home office (if there is no permanent workplace).
- Home office expenses, provided the workspace is dedicated solely to the insurance business.
- Cell phone bills, if the phone is used exclusively for business purposes.
- Continuing education and training expenses, such as state licenses, AHIP fees, and continuing education classes.
- Travel expenses for client travel or business trips, including vehicle use, flights, hotels, and parking.
- Software costs, such as CRM, scheduling systems, and website maintenance.
- Tolls paid while on business trips, unless reimbursed.
- Subscriptions to publications, journals, magazines, and newsletters relevant to the business.
- Membership dues for organizations like the International Association of Insurance Professionals.
- License fees and renewal costs required for the job.
- Promotional items and client gifts up to a certain value.
Non-Deductible Expenses
It is important to note that certain expenses are not deductible. These may include legal violation fees, personal hygiene expenses (e.g., haircuts, standard clothing), and life insurance premiums where the agent is the beneficiary.
QBI Deduction Considerations
The Qualified Business Income (QBI) deduction, as outlined in Section 199A of the Internal Revenue Code, allows owners of certain business structures a 20% deduction on their QBI. However, insurance agents should be mindful of the following regarding the QBI deduction:
- Insurance agents are generally not considered to be conducting specified service businesses and are excluded from the SSTB (Specified Service Trade or Business) definition.
- If an insurance agent also provides investment advisory services or brokerage services, the entire business may be considered a specified service business if more than 10% of their income is from investment-related activities.
- Structuring the insurance business separately from other services, such as investment advisory or brokerage, may help retain the QBI deduction for the insurance-specific revenue stream.
In conclusion, tax regulations for insurance agents involve understanding diverse income sources, maximizing eligible deductions, and carefully navigating the QBI deduction rules, especially when multiple service lines are involved. Seeking professional tax advice is always recommended to ensure compliance and optimize tax benefits.
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Insurance agents and brokers
The Internal Revenue Code (IRC) definition of an SSTB includes many professional service businesses, such as accounting, legal, health, actuarial science, performing arts, financial and brokerage services. However, it is important to note that the IRC specifically excludes traditional banking services, such as taking deposits or making loans, from the definition of financial services.
The regulations provide examples and further clarification on which professions are included and excluded from the definition of an SSTB. For instance, the definition of brokerage services is very narrow and only includes stockbrokers and similar professionals. Additionally, the definition of a specified service or trade business includes "any trade or business where the principal asset is the reputation or skill of one or more of its employees or owners". This provision has been interpreted to include celebrities and public figures who profit from their image, likeness, name, signature, voice, trademark, or any other symbols associated with their identity.
The distinction between SSTBs and non-SSTBs is important for tax purposes, as the Tax Cuts and Jobs Act (TCJA) introduced a new 20% tax deduction for qualified business income (QBI) for passthrough entities, including S corporations, partnerships, and sole proprietorships. This deduction is generally not applicable to SSTBs when taxable income exceeds certain thresholds.
It is worth noting that the situation becomes more complex when an individual operates a single business that includes both SSTB and non-SSTB activities. In such cases, the entire business may be considered an SSTB if more than 10% of its income results from investment-related activities. This has led to discussions about whether it is better to run multiple businesses to preserve the QBI deduction.
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Frequently asked questions
No, insurance agents and brokers are specifically excluded from the definition of SSTB.
An SSTB is a trade or business involving the performance of services in fields like health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, investing and investment management, and trading.
The Treasury Department and the IRS note that commission-based sales of insurance policies are generally not considered the performance of services in the field of investing and investment management.
Businesses designated as SSTBs face limitations on tax deductions. For example, the Section 199A deduction does not apply to SSTBs when taxable income exceeds certain thresholds.
