In a major win for PIA National and small-business insurance agencies across the country, final regulations were issued on Friday, January 18, by the U.S. Treasury and the Internal Revenue Service (IRS) saying that, for the most part, insurance agents are permitted to take the 20 percent pass-through deduction provided by the tax law passed at the end of 2017. Specifically, the regulations state that “insurance cannot be considered a financial service” for the purpose of taking the 20 percent pass-through tax deduction.
PIA National lobbied for the passage of the tax bill at the end of 2017 largely because of its improved treatment of S corporations, also known as pass-through corporations. After the bill was signed into law, however, it soon became clear that the law was ambiguous as to the application of the pass-through provision to insurance agents. There was the possibility that the owners of independent insurance agencies who file as S corporations might not be able to take advantage of the deduction created by the law. PIA National immediately sprang into action, meeting with congressional offices to ask that they weigh in with the administration on behalf of agents. PIA National provided comments to Treasury and the IRS encouraging them to issue a regulation that would clarify agents’ opportunity to take advantage of the pass-through provision.
The final regulations state that specified service trades or businesses, including “financial services,” are not permitted to take the deduction. These final regulations state that, in general, “financial services” do not include insurance, and therefore that insurance agents are permitted to take the deduction. This interpretation supports PIA National’s position on this issue.
Please note, however, that Treasury and the IRS declined to issue a categorical exclusion of all services provided by insurance agents from the definition of “financial services,” because they recognized that some agents do engage in activities (such as managing wealth, advising clients with respect to finances, etc.) that are considered “financial services” for the purpose of this law. Those agents engaged in activities that are classified as “financial services” pursuant to the tax law are not eligible for the deduction.
The timing of the final rule makes it possible for pass-through entities to take advantage of the deduction in their 2018 tax filings.