Claiming Section 199A Deduction For Insurance Advisors

Executive Summary

Included with the passage of the Tax Cuts and Jobs Act, was a new 20% tax deduction for “Qualified Business Income” (QBI) for pass-through entities, which was intended to give a tax break to small business owners and encourage them to hire more employees. The caveat, however, was that Congress also made sure that the deduction didn’t extend to high-income professionals whose primary source of income was from their own personal labors.

Accordingly, Congress carved out a new group of professionals in certain “Specified Service Trade or Businesses” (SSTB) whose qualification for the QBI deduction would be phased out above certain income levels.

Unfortunately, businesses in the financial services industry were included in the definition of SSTBs, particularly financial services, brokerage services, as well as “any trade or business which involves the performance of services that consist of investing and investment management, trading, or dealing in securities.”

Interestingly, however, Congress seems to have gone out of their way to specifically exclude from that list insurance producers, brokers, and agents, who are treated as being in the business of selling their company’s products, rather than their personal services.

In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1 PM EST broadcast via Periscope and guest hosted this week by Jeff Levine, we examine questions surrounding the QBI deduction for professionals who sell insurance products and want to retain the benefits of the QBI deduction, but are also involved in brokerage services and/or are RIA owners with SSTB income not eligible, and explore when/whether it’s better to run multiple businesses to preserve the deduction where permitted… and if so, at what cost?

The strategy of separating out QBI-eligible insurance business from non-QBI-eligible brokerage commissions and advisory fees is complicated by the fact that, in recent proposed regulations on the QBI deduction, the IRS declared that single businesses with multiple business lines and total revenues under $25 million, the entire business is considered to be a specified service trade or business if more than 10% of their income results from investment-related activities. Which means, for instance, that for someone with 89% of their income from their insurance-related activities and the rest from investment-related activities, their entire business will be considered an SSTB if they operate it as a single business (which means none of their 89%-of-revenue insurance commissions would be eligible for the deduction)!

Accordingly, the question then becomes: “When/how would it be better to split out the insurance production into a different business line, and effectively run multiple businesses?” Unfortunately, there’s no easy answer, because not only does running multiple businesses create a whole new layer of complexity and expense due to the potential need to keep separate books and records, but it also requires the business owner to allocate how much of their overhead costs apply to both the QBI-eligible insurance revenue and non-QBI-eligible other revenue. Which in turn raises the specter of potential IRS audits, since the business owner might be tempted to attribute as much expense as possible to the (not-QBI-eligible) financial services business income (which is SSTB income), while trying to minimize the expenses (and maximize the income) derived from the non-SSTB (QBI-eligible) insurance business line.

Ultimately, the good news is that it is theoretically possible to separate out and preserve the QBI deduction for insurance commissions, even for advisory firm business owners with a mixture of insurance and non-insurance business. But the aggregation rules of the recent QBI regulations mean that doing so will require a whole new layer of complexity for financial advisors to actually run two bona fide separate businesses, one for their insurance income (and expenses), and a second one for everything else. Which is a challenge because in the process of splitting up the business lines in order to qualify for the QBI deduction, the reality is that, after you factor in all the added expense and work involved, it just may not be worth it in the end unless there is a substantial amount of insurance commissions on the table!

(Michael’s Note: Today’s #OfficeHours features Jeffrey Levine, CPA/PFS, CFP®, CWS®, MSA. Jeff is the Director of Advisor Education at You can follow Jeff on Twitter @CPAPlanner. The video below was recorded using Periscope, and announced via Twitter. If you want to participate in the next #OfficeHours live, please download the Periscope app on your mobile device, and follow @MichaelKitces on Twitter, so you get the announcement when the broadcast is starting, at/around 1PM EST every Tuesday! You can also submit your question in advance through our Contact page!)

#OfficeHours with @MichaelKitces Video Transcript

Good afternoon, everyone, and welcome to Office Hours with Michael Kitces. Obviously, again, I’m not Michael Kitces. But today we’re going to be taking a few moments to talk about how hybrid insurance producers, in other words, insurance producers who are also either RIAs or brokers, registered representatives, can preserve the QBI deduction, particularly if they’re high-income.

Now, as a bit of background, last December, as you all know, Congress, as well as the President, signed into law the Tax Cuts and Jobs Act, ushering in really the biggest changes to the tax code we’ve seen in more than three decades. And while there were a lot of provisions baked in there, one of the very interesting provisions in there, especially from a business perspective, was the Section 199A QBI or qualified business income tax deduction. That’s that 20% deduction that applies to pass-through income.

Now, one of the key elements of that rule is that we need to separate specified service businesses, known as SSTBs for short, from non-specified service businesses. And the reason is that specified service businesses, once a person is high-income, meaning they’re over their particular threshold, for single filers it’s a $157, 500 and for married couples filing a joint return, it’s $207,500. Excuse me. It’s twice that, $315,000. I apologize. Married couples $315,000, single filers, and actually for that matter all other filers, $157,500 of taxable income.

Once you’re above that and you’re the owner of a specified service business, you begin to see your QBI deduction phased out and then it’s eliminated altogether in short order. Whereas if you are a non-specified service business, a non-SSTB, even if your income is above those markers, you can still get potentially the filled QBI deduction. It just depends at that point on how much wages your business pays and/or how much depreciable property your business owns. But the point here, the key point is that whereas non-specified service businesses can continue to receive a QBI deduction for high-income individuals, specified service businesses, that deduction is gone no matter what once you exceed your phase-outs.

Specified Service Trade Or Business And The Financial Service Industry [02:39]

So how does that relate to our business, right? How does that relate to the financial planning profession? Well, interestingly, the regulations that were put out by the IRS back in August really give us a better idea of what is a specified service business, which is essentially the kiss of death if you’re high-income, and what is a non-specified service business. And things like investment advisors, registered representatives, they actually even have job titles in there such as wealth planner, retirement advisor, all of those jobs are considered specified service businesses. So pretty much anything in the investment world is going to be a specified service business job, and obviously, that’s not good for individuals like us who are business owners and work in that capacity.

However, interestingly, the regulations made very clear that insurance producers, that insurance producers, insurance brokers, insurance agents are not conducting specified service businesses. And so that brings up an interesting question for advisors, many of them who have either an RIA plus insurance businesses or brokerage plus insurance businesses or some that do all three together. Because if you do that, are you really running let’s say one business where you’re a financial advisor who happens to be compensated via, you know, commissions from insurance, commissions from brokerages and registered investment advisory fees or are you running separate businesses? Are you running an investment advisory practice plus let’s say an insurance brokerage or insurance agency? And that’s a real question. Whether you have one business with multiple lines in it or do you have multiple businesses?

Now, why is that so important? There are a couple of reasons. One of the first is the de minimis rule associated with this QBI deduction. And what that says is that if you run a single business with multiple lines then that single business is considered a specified service business if more than 10% of the business income is from a specified service business. That’s actually the number for businesses with revenues of less than $25 million, which frankly applies to most advisors out there. Again, that means that any advisor who is both insurance producer and a registered rep and/or RIA, if they get more than 10% of their revenues, not profits but their revenues from those investment-related activities then the entire business is considered a specified service business.

So you might have 89% of your revenue as an insurance producer and 11% of your revenue as a registered investment advisor or a broker or securities broker, and that means that if you’re operating that as a single business, the entire business is considered a specified service business. And if you’re a high-income individual, which many advisors are, you will see that deduction, that QBI deduction, completely eliminated for all of your income.

Potentially Splitting Business Lines To Qualify For The 199A QBI Deduction [05:52]

So, a better way to go about this would be to potentially split out the businesses, to run multiple businesses and have one brokerage/RIA business and one insurance business. Now, this could be a little bit easier for some individuals than others. For instance, brokers in general, registered representatives, need to have commissions paid to them because you need to be a licensed entity or a person in order to receive brokerage commissions. So unless you’re literally going out to create your own broker-dealer, which would be a licensed entity, you have to have those commissions paid to you as an individual. Similarly, most individuals have insurance commissions paid to them personally as a licensed agent. The only way to get around that would be to have your own licensed agency, okay?

So again, those revenue sources are generally paid to individuals directly as a person. You’re going to be reporting that on your Schedule C. Whereas for registered investment advisors, generally, or a lot of the times, you’ll see those fees paid to the actual advisory firm itself. And if you’re the owner of the advisory firm, you can simply collect the revenue from there. So there are some practical elements here as to how your business is structured, whether you are a registered representative, whether you are a broker, and how you organize yourself in an insurance production capacity. Are you an agency or are you the end agent who’s going to report that on your Schedule C?

Because imagine this from that perspective. Let’s say you get all your income paid directly to you and it’s all Schedule C income, does that mean that you’re going to start filing multiple Schedule C businesses? You’re going to have two Schedule Cs? One for your insurance revenue or one for your insurance business and one for your advisory business or your brokerage business? It’s going to become very complicated. You’re going to need separate books and records for each of those businesses. You’d have to file separate returns. Again, in the case of Schedule C businesses, it might just mean two Schedule Cs, but if we’re talking about entities, it might mean two entity returns. That might add more cost.

The (Im)practical Implications Of Running Multiple Businesses [08:02]

What about actual cost accounting measures that would have to be taken into consideration? For instance, do you split office space, and how much of that office space do you allocate to your insurance business versus to your brokerage or RIA business? Or do you have staff? Do you have staff that’s completely dedicated to just the insurance business? Do you have staff that’s completely dedicated to just your securities business? Or do you have staff more likely that is doing both? In that case, again, how are you going to separate the expenses that are attributable to each of those businesses? It becomes a very challenging situation. Are you going to have multiple W-2s paid from different entities? Again, more complication here.

And of course, from a tax perspective, there’s going to be an incentive here, right? The incentive is going to be to try to throw all the expenses you possibly can into the business that is the specified service business, right? We want to get all the expenses into the specified service business and have as much profit as possible from the non-specified service business because if you’re high-income it’s the only business that is potentially going to be eligible to receive that 199A QBI deduction. So will that raise flags with the IRS? Certainly, it would for me, right? If I saw multiple business returns or especially multiple Schedule Cs, could that become an audit risk for people? We just don’t know yet because we haven’t even filed a single one of these returns yet.

And at the end of the day, you have to ask, with all this additional complication and potential audit risk, would splitting businesses out like this even be worth it? Would it even be worth it? For instance, let’s say you separated your insurance business from your brokerage business and your RIA business and that insurance business at the end of the day produce $200,000 of net profit. Well, that could get you a deduction of potentially 20% of that amount or $40,000. If you’re at a 40% combined federal and state tax bracket, that means your net actual value to you in terms of dollars becomes $16,000, 40% of the $40,000 deduction, right? So at $16,000, how much time and effort did it take? How much additional cost did it take you in terms of your time? How about your staff in terms of their time? In terms of accounting for things separately? Paying your accountant for multiple returns. Is it possible? Yes. But unless you have a lot of revenue coming in from your insurance practice, it very well may not be worth all the extra work it takes to do it.

So that’s all the time we have today for Office Hours with Michael Kitces. Again, obviously, I’m not Michael Kitces. But if you have questions, email them to us at Follow us at @MichaelKitces or @CPAPlanner. And we’re looking forward to seeing you for our next Office Hours real soon. Take care, everyone, and have a great day.

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