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Paul Zimmerman
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The Tax Cuts and Jobs Act: Do Insurance and Real Estate Brokers Benefit?

Due to the double taxation of C-Corporations and their shareholders, most small business usually prefer flow-through entities such as S-Corporations, LLC’s and Partnerships for the operation of their businesses. Section 199A of the new Tax Cuts and Jobs Act provides that owner(s) of these flow-through entities may be entitled to take a deduction equal to 20% of the entity’s "qualified business income" (“QBI”) earned from the business. Qualified business income can best be described as the ordinary, non-investment income of the business, less any business expenses. QBI excludes passive income like interest, dividends or capital gains.

There are however restrictions on a flow-through owner’s ability to obtain the deduction equal to 20% of QBI and therefore further complications. Certain specified trades or businesses are excluded from the benefits of Section 199A, these specified trades and business are:

"any trade or business involving the performance of services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its owners or employees (excluding engineering and architecture), or any business that involve the performance of services that consist of investment and investment management, trading or dealing in securities, partnership interests or commodities."

This prompts a question: do these prohibited trades or businesses include insurance and real estate brokers? That’s something of a complicated query, made a bit more straightforward by 182 pages of proposed regulations under Section 199A recently published by the IRS (the Regulations). Before diving into those, however, it should be noted that even if a company owner’s income is derived from a prohibited trade or business, he or she can still claim the 20% Section 199A deduction, provided taxable income is less than $315,000 for married filers filing jointly, or $157,500 for single filers.
Within the Regulations as proposed, the IRS provides some guidance as to what kind of business falls within the “specified trades and businesses” that do not benefit from the Section 199A deduction and which fall outside the excluded trades and business and so can benefit from the deduction. The Regulations include limited guidance for insurance brokers and clear guidance for real estate brokers.

Generally, financial and consulting services are ‘excluded specified services’ and do not qualify for the Section 199A deduction. However, the Regulations define services involving transactions between a buyer and a seller or between a person who arranges transactions between a buyer and a seller as eligible for the deduction. This means that the category of excluded services does not include service provided by insurance agents and brokers, when they make a placement of an insurance contract on behalf of a client. However, it is not the case that insurance agents and brokers are always outside the definition of ‘specified trades and businesses,’ the rules are a lot more nuanced than that. Consulting services are clearly ‘excluded specified services’ as are financial services. Consulting services are broadly defined in the Regulations and income from such services will not qualify for the 199A deduction. Insurance agents and brokers who charge their clients for financial and insurance advice will find that this consulting income does not qualify for the Section 199A deduction unless such consulting services are a material part of placement of a product to a client and not billed to that client separately from the placement.

The position of real estate brokers is much clearer under the Regulations as real estate broker do not generally provide consulting services but act mainly as intermediaries between real estate seller and buyers. Real estate brokers therefore get the 199A deduction, subject to meeting the other requirements of the Section and Regulations. This illiterates a trend in the Regulations which seem designed to favor the real estate industry.

It is important to remember that the Regulations are only in proposed form and are subject to further clarification and change following public consultation. Even so, the leanings of the IRS seem clear – in fact, abundantly clear where real estate brokers are concerned. In terms of insurance brokers, there can be no doubt that there is a fine line between insurance placement and insurance consulting services. Negotiating that line with federal income tax consequences in mind can save substantial amounts of money.

The best advice is to consult with your tax advisor or attorney who can weigh the benefits of your business’s structure. For more information on this topic or for assistance, please feel free to contact the corporate and tax specialists at Michelman & Robinson, LLP: Ian Shane (ishane@mrllp.com), Michael Poster (mposter@mrllp.com), Eric Simonson (esimonson@mrllp.com) or Peter Cifichiello (pcifichiello@mrllp.com).

This blog post is not offered as, and should not be relied on as, legal advice. You should consult an attorney for advice in specific situations.