Jane Dotson
The Tax Cuts and Jobs Act (TCJA) introduced a new tax deduction for pass-through entities, allowing owners, shareholders, or partners to claim a 20% deduction on their qualified business income (QBI). This deduction is known as the Section 199A QBI deduction. An important distinction under this law is between specified service trades or businesses (SSTBs) and non-SSTBs. SSTBs are businesses in fields like health, law, accounting, consulting, athletics, and financial services, while non-SSTBs are those that do not fall into these categories. Insurance agents and brokers are specifically excluded from the definition of SSTB, which has increased the number of taxpayers eligible for the QBI deduction. This exclusion also applies to individuals selling life insurance as an insurance broker. However, hybrid insurance producers, who are also registered investment advisors (RIAs) or brokers, may face complexities in claiming the QBI deduction and might need to consider strategic business structuring to maximize their tax benefits.
| Characteristics | Values |
|---|---|
| Specified Service Trade or Business (SSTB) | Health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, investing and investment management, trading, dealing in certain assets or any trade or business where the principal asset is the reputation or skill of one or more of its employees or owners |
| QBI Deduction | 20% deduction on qualified business income |
| Taxable Income Thresholds | $440,100 for joint filers and $220,050 for other filers |
| Partial Deduction Income Range | $340,100-440,100 for joint filers and $170,050-220,050 for other filers |
| De Minimis Rule | If SSTB income is under 10% of total income and total revenue is under $25 million, the business is not treated as an SSTB |
| Multiple Business Lines | If more than 10% of income comes from SSTB activities, the entire business may be considered an SSTB |
| Common Ownership | If a non-SSTB entity provides 50%-80% of its services to a commonly-owned SSTB, the portion serving the SSTB is treated as an SSTB |
| Exclusions | Real estate agents, insurance agents and brokers, architecture, and engineering |
Explore related products
What You'll Learn
- Insurance agents and brokers are specifically excluded from the SSTB definition
- The QBI deduction and its application to insurance agents
- Running multiple businesses to preserve the QBI deduction
- The impact of the Tax Cuts and Jobs Act on insurance agents
- How insurance agents can reduce taxable income to qualify for the QBI deduction?
Insurance agents and brokers are specifically excluded from the SSTB definition
The Tax Cuts and Jobs Act, which was signed into law in 2017, brought about significant changes to the tax code. One of the provisions in the Act was the introduction of the Qualified Business Income (QBI) deduction, also known as Section 199A. This deduction allows certain businesses to deduct 20% of their pass-through income.
To qualify for the QBI deduction, a business must be a trade or business, excluding C corporations, W-2 wages, and specified service trades or businesses (SSTBs). SSTBs are businesses that involve the performance of services in fields such as health, law, accounting, consulting, athletics, financial services, and brokerage services.
For businesses with a blend of income from SSTB and non-SSTB activities, the de minimis rule applies. If the gross receipts from the SSTB component are below a certain threshold, the business may still be eligible for the QBI deduction. For example, if a business has total revenues of $25 million or less and less than 10% of its income comes from an SSTB, it is not treated as an SSTB.
In conclusion, insurance agents and brokers are specifically excluded from the SSTB definition, allowing them to retain the benefits of the QBI deduction. However, the complexity of the tax regulations and the potential for audits underscores the importance of seeking professional tax advice.
StateFarm Insurance: Comprehensive Coverage and Peace of Mind
You may want to see also
Explore related products
$24.99 $24.95
The QBI deduction and its application to insurance agents
The Tax Cuts and Jobs Act (TCJA) introduced the Qualified Business Income (QBI) deduction, also known as the Section 199A deduction, which allows eligible taxpayers to deduct up to 20% of their QBI. This deduction is applicable to sole proprietorships, partnerships, S corporations, and certain trusts and estates. However, it does not apply to income earned through a C corporation or as an employee.
Insurance agents, brokers, and producers are specifically excluded from the definition of conducting specified service businesses (SSTBs). This means that they can retain the benefits of the QBI deduction even if they are also involved in brokerage services or have income from SSTBs. However, the strategy of separating QBI-eligible insurance business from non-QBI-eligible brokerage commissions can be complex and may not always be advantageous. Running multiple businesses can create additional expenses and complexities, and allocating overhead costs between QBI-eligible and non-QBI-eligible revenue streams can be challenging.
To maximize the QBI deduction, insurance agents with multiple business lines should carefully consider how they structure their businesses. If a single business has multiple lines and total revenues under $25 million, it is considered an SSTB if more than 10% of its income comes from investment-related activities. In such cases, separating the insurance business from brokerage services may be beneficial to preserve the QBI deduction. However, this strategy should be weighed against the potential costs and complexities of running multiple businesses.
Additionally, high-income individuals should be aware that the QBI deduction is subject to limitations based on taxable income. For tax year 2022, the deduction is not applicable if taxable income exceeds $440,100 for joint filers or $220,050 for other filers. It is partially allowed for joint filers with taxable income between $340,100 and $440,100 and other filers with taxable income between $170,050 and $220,050. Below these thresholds, individuals are not subject to the limitations.
In conclusion, insurance agents can benefit from the QBI deduction, especially if they are structured as sole proprietorships, partnerships, S corporations, or certain trusts. By understanding the definition of SSTBs and the income thresholds, insurance agents can maximize their eligibility for the deduction. However, careful consideration should be given to business structure and income sources to optimize tax benefits.
Novitas 101: Understanding the Insurance Basics
You may want to see also
Running multiple businesses to preserve the QBI deduction
The Qualified Business Income (QBI) deduction, also known as Section 199A of the Internal Revenue Code, was established by the 2017 Tax Cuts and Jobs Act (TCJA). It allows eligible self-employed individuals and small business owners to deduct up to 20% of their qualified business income from a domestic business. This includes sole proprietorships, S corporations, partnerships, estates, and trusts.
For those with multiple businesses, the QBI deduction can be optimized by aggregating the businesses. This means that the deduction for each business is calculated separately, and then they are combined for a single entry on the tax return. However, it is important to note that this strategy may not always be beneficial, as running multiple businesses can create additional complexity and expenses.
In certain situations, the IRS has restricted the practice of separating out businesses to maximize the QBI deduction. For example, if a single business has multiple business lines and total revenues under $25 million, the entire business is considered a Specified Service Trade or Business (SSTB) if more than 10% of its income comes from investment-related activities.
SSTBs are businesses involving fields such as health, law, accounting, consulting, athletics, financial services, and investing. If a business owner's taxable income exceeds certain thresholds, the QBI deduction may be reduced or eliminated.
To preserve the QBI deduction, high-income hybrid insurance producers may consider splitting their business lines. However, this strategy may not always be worthwhile due to the added complexity and potential IRS audits.
Inland Marine Insurance: What's in a Name?
You may want to see also
The impact of the Tax Cuts and Jobs Act on insurance agents
The Tax Cuts and Jobs Act (TCJA) was signed into law by the President of the United States on 22 December 2017. The Act introduced a range of tax reforms that impacted insurance companies and insurance agents.
One of the most significant changes was the reduction in the corporate tax rate from 35% to 21% for taxable years beginning after 31 December 2017. This change applied to all corporations, including insurance companies, and also affected the calculation of deferred tax assets. The Act also eliminated the corporate alternative minimum tax (AMT) for the same period, allowing businesses to fully expense the cost of property placed in service after 27 September 2017. This rule is gradually reduced for property placed in service after 31 December 2022, with no expensing available after 31 December 2026.
The TCJA also included several provisions that specifically impacted life insurance companies and property and casualty insurance companies. One notable change was the elimination of any carryback of net operating loss deductions (NOLs), allowing unused NOLs to be carried forward indefinitely. The Act also introduced new rules for life settlements and life insurance company reserves and deductions. Additionally, the lifetime gift tax exclusion was increased, providing new planning opportunities for individuals using life insurance.
Insurance agents and brokers were specifically addressed in the TCJA, clarifying that they would not be included in the definition of "specified service trades or businesses" (SSTB). This meant that owners and shareholders of insurance agencies could take advantage of a 20% tax deduction on qualified business income (QBI), regardless of their taxable income levels. This provision was welcomed by the insurance industry, providing clarity and tax benefits for insurance agents.
Overall, the Tax Cuts and Jobs Act had a significant impact on insurance companies and insurance agents, introducing a range of tax reforms and clarifications that affected their financial planning and business operations.
Nonprofit Insurance: What Kind of Coverage is Necessary?
You may want to see also
How insurance agents can reduce taxable income to qualify for the QBI deduction
Insurance agents are specifically excluded from the definition of financial services for the purposes of the QBI deduction. This means that insurance agents are not considered a Specified Service Trade or Business (SSTB) and can therefore qualify for the 20% QBI deduction on their taxable income.
However, hybrid insurance producers, or insurance producers who are also either RIAs or brokers, registered representatives, may need to take steps to preserve their QBI deduction eligibility. This is especially true for high-income individuals, who will see the QBI deduction completely eliminated for all of their income.
One strategy is to split out the insurance production into a different business line and effectively run multiple businesses, with one brokerage/RIA business and one insurance business. This allows the insurance business to qualify for the QBI deduction. However, this strategy adds a layer of complexity and expense, as the business owner must keep separate books and records and allocate overhead costs between the two businesses. It also raises the risk of an IRS audit, as the business owner may be tempted to minimise expenses in the non-QBI eligible business.
Another strategy for high-income individuals to reduce taxable income and qualify for the QBI deduction is to defer income or accelerate deductions to keep income below the threshold. This can be done by "bunching income" or "bunching deductions", for example, by deferring income to a later tax year or accelerating deductions into the current tax year.
The Business of Protection: Understanding the Insurance Industry
You may want to see also
Frequently asked questions
No, insurance agents are specifically excluded from the SSTB definition.
SSTB stands for a specified service trade or business. This includes businesses in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, investing and investment management, trading, dealing in certain assets, or any trade or business where the principal asset is the reputation or skill of its employees or owners.
Businesses that are not classified as SSTBs may qualify for the QBI (qualified business income) deduction, which provides a 20% deduction on personal tax returns for owners, shareholders, or partners.
