The Treasury Department has issued proposed guidance that clarifies eligibility for the Qualified Business Income, or QBI, deduction under Internal Revenue Code Section 199A. Prior to the proposed guidance, there was some confusion over whether insurance brokers would be considered a specified service business, subject to additional QBI deduction limitations. Treasury has proposed that the full 20 percent deduction for pass-through businesses be made available to a broad spectrum of small businesses, including insurance agents and brokers. This is welcomed news.
The Treasury’s guidance on the tax deduction was necessary because the language of the Tax Cuts and Jobs Act (TCJA) indicated that the full tax break would not be available to certain specified service trades or businesses but left some question whether insurance businesses were considered part of that group. Treasury and the Internal Revenue Service have now proposed that insurance agents and brokers, as well as real estate agents and brokers, not be included in the definition of the specified businesses that face limits on their eligibility.
The deduction — also referred to as the Section 199A deduction — is available for tax years beginning after Dec. 31, 2017. Eligible taxpayers can claim it for the first time on the 2018 federal income tax return they file next year. Qualified business income includes domestic income from a trade or business. Employee wages, capital gains, interest and dividend income are excluded.
The 20 percent QBI deduction was designed to target small businesses that don’t benefit from the new tax law’s reduction in the top corporate income tax rate from 35 percent to 21 percent.
While these proposals are subject to further review and could change, this guidance may be relied upon until final regulations are published in the Federal Register.
Warning: the QBI/Section 199A deduction rules are extremely complex and....algebra may be involved in the tax planning process!