Orlando Harmon
The Tax Cuts and Jobs Act (TCJA) introduced a 20% tax deduction for small businesses, including sole proprietorships, S-corporations, and partnerships, on their qualified business income (QBI). This has raised questions about which businesses qualify for this deduction, with many professional service providers generally excluded unless they meet certain criteria. One of the key designations is that of a specified service trade or business (SSTB), which includes many professional service businesses such as accounting, legal, health, and financial services. Interestingly, insurance agents and brokers are specifically excluded from the definition of SSTB, which has led to discussions about whether insurance is considered a qualified service industry.
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What You'll Learn
Insurance agents and brokers
Both agents and brokers are licensed to operate in their respective states and must comply with all governing statutes and regulations. They are obligated to act in good faith in helping their clients find the best policy for their needs.
To become a licensed insurance agent or broker, individuals may need to meet certain qualifications and licensing requirements, which vary by state. In the State of California, for example, the Department of Insurance assists with the implementation and enforcement of laws relating to the qualifications and licensing requirements.
In terms of taxation, insurance agents and brokers are specifically excluded from the definition of Specified Service Trade or Business (SSTB) under the Tax Cuts and Jobs Act (TCJA). This means that they can benefit from the 20% Qualified Business Income (QBI) deduction on their personal tax returns, which was designed to reduce the tax burden on business owners.
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Tax Cuts and Jobs Act
The Tax Cuts and Jobs Act (TCJA) of 2017 brought about significant changes to federal tax laws, impacting various aspects of financial planning, including life insurance. The TCJA introduced new provisions that have important implications for individuals and businesses alike.
One of the key provisions of the TCJA is the Qualified Business Income (QBI) deduction, which allows a 20% deduction on personal tax returns for owners, shareholders, or partners of pass-through entities (S corporations, partnerships, and sole proprietorships). This deduction is designed to reduce the tax burden on business owners, but it comes with limitations. For instance, certain professional service businesses, such as those in the fields of accounting, legal, health, and financial services, are excluded from the QBI deduction. However, insurance agents and brokers are specifically excluded from the definition of financial services, making them eligible for the QBI deduction.
The TCJA also increased the lifetime gift tax exclusion, doubling the basic exclusion amount under the Internal Revenue Code (IRC) section 2001(c)(3)(C) from $5 million to $10 million, with further adjustments for inflation. This increase in the exclusion amount has opened up new planning opportunities using life insurance. Additionally, the TCJA lowered the maximum corporate income tax rate to 21% and eliminated the corporate alternative minimum tax.
Furthermore, the TCJA introduced new rules for life settlements and life insurance company reserves and deductions. It also amended regulations to allow for the sale of an insurance policy from a retirement plan to a trust, providing individuals with additional options for financial planning. The overall drop in the corporate tax rate is expected to benefit life insurance companies, potentially offsetting changes in the treatment of life insurance.
The TCJA has wide-ranging effects on businesses as well. It changed deductions, depreciation, expensing, tax credits, and other tax items that impact businesses. The act also introduced Opportunity Zones, designed to encourage economic development and job creation in distressed communities. Additionally, the limitations on the state and local taxes (SALT) deduction and the home mortgage interest deduction reduced the amount of principal and limited the types of loans qualifying for the deduction.
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Specified Service Trade or Business (SSTB)
The Specified Service Trade or Business (SSTB) is a term introduced by the 2018 Tax Cuts and Jobs Act (TCJA) to refer to certain service businesses. The Internal Revenue Service (IRS) defines an SSTB as a trade or business where "the principal asset is the reputation or skill of one or more of its employees or owners". The SSTB must be a pass-through entity, which can take the form of a sole proprietorship, partnership, LLC, trust, estate, or S corporation.
The SSTB designation applies to businesses in the following categories:
- Performing Arts: This includes singers, actors, filmmakers, musicians, and other entertainers who earn income from performing services.
- Health: This includes healthcare professionals such as doctors, nurses, dentists, and veterinarians who provide medical services directly to patients.
- Trading: This category covers those involved in trading partnership interests, commodities, securities, and related services.
- Law: This includes lawyers, paralegals, legal mediators, arbitrators, and similar legal professionals.
- Investment Management: This category is for those providing investment and asset management services for a fee.
- Consulting: This includes businesses that provide professional advice and counsel to clients to help them achieve goals and solve problems. It also covers services related to advocacy with government officials.
It is important to note that there are some exclusions to the SSTB designation. For example, traditional banking services, architecture, engineering, health clubs, medical research, and testing services are not considered SSTBs. Additionally, businesses that provide training, educational courses, sales, and economically similar services are also excluded from the definition.
The SSTB determination is crucial for tax purposes, as it impacts the eligibility for the Qualified Business Income (QBI) deduction. The QBI deduction allows owners, shareholders, or partners of pass-through entities to claim a 20% deduction on their personal tax returns, subject to certain income thresholds and limitations.
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Chartered Insurance Practitioner status
The Chartered Insurance Institute (CII) is a professional body dedicated to building public trust in the insurance and financial planning profession. Membership of the CII is open to anyone working in or connected to insurance. The CII offers insurance and personal finance qualifications that cater to all levels of knowledge and experience, from new entrants to seasoned professionals.
The Chartered Insurance Practitioner status is a symbol of technical competence and signifies a public commitment to professional standards. To qualify for Chartered Insurance Practitioner status, candidates must hold the CII Level 6 Advanced Diploma in Insurance, be a member of the CII, and have at least five years of sector experience. The CII Level 6 Advanced Diploma in Insurance can be achieved through various routes, and some qualifications from other bodies may be eligible for Recognition of Prior Learning.
Attaining Chartered status is challenging and demonstrates specialised knowledge and acknowledged professionalism. It places the holder amongst the top professionals within their field and sets them apart from their peers. Chartered status is an effective way to promote one's expertise and credentials to customers, employers, and professional peers.
There are six Chartered titles offered by the CII: five for those working in insurance and one for financial planners. These titles include Chartered Insurance Broker, Insurer, Underwriting Agent, Risk Manager, and Insurance Practitioner.
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Professional services
The insurance industry is a service industry, and insurance agents and brokers can benefit from the QBI deduction. However, it is important to note that the proposed tax regulations specifically excluded real estate and insurance agents and brokers from the definition of financial services.
Additionally, general liability insurance is another type of professional service in the insurance industry. It covers physical risks, such as bodily injuries, property damage, and personal and advertising injuries. This type of insurance is essential for professionals who interact with clients face-to-face and visit their offices or homes, as it can provide legal defence and settlements in case of third-party claims.
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Frequently asked questions
SSTB is a business designation that is recognized by the Internal Revenue Service (IRS). It includes professional service businesses like accounting, legal, health, actuarial science, performing arts, financial and brokerage services.
A qualified business trade or service is any trade or business that is not a specified service trade or business (SSTB) or those performing services as an employee.
A qualified business trade or service can deduct 20% of their income from that tax year, whereas an SSTB is taxed at a higher rate than other businesses.
Insurance agents and brokers are specifically excluded from the definition of SSTB. However, the Treasury Department and the IRS note that financial services provided by insurance agents, such as wealth management and financial advising, are generally not considered qualified services if they are ancillary to the commission-based sale of an insurance policy.
