Election may determine fate of tax break important to small brokerages

"The tax cut was like putting gas on the fire in terms of wanting to grow"

Election may determine fate of tax break important to small brokerages

Insurance News

By Mark Schoeff Jr.

The election could help determine the fate of a tax break for small businesses that benefits many insurance brokerages, giving brokers an economic stake in the result of the vote.

The 2017 Tax Cut and Jobs Act implemented a 20% tax deduction for owners of companies who pay their business taxes through their personal tax returns. The tax break is one of several provisions of the law that is set to expire at the end of 2025.

The tax break for so-called pass-through businesses joins a litany of other sunsetting tax policies from the 2017 law – such as lower personal rates and estate-tax limits – that Congress will wrestle with next year. 

Renewing them could cost the government $4.6 trillion, according to an estimate from the Congressional Budget Office, and could become one of the highest-profile debates of the year. Its outcome will depend on who wins the White House and controls the House and Senate after the November elections.

The tax cuts were a signature of the Trump administration. If former President Trump is elected again this fall, many lobbyists and other observers expect him to make renewing them a priority. If Republicans hold on to the House and achieve a Senate majority, it will make the path toward approving a renewal much easier.

The Independent Insurance Agents and Brokers of America, or the Big I, is advocating that Congress make the small-business tax-deduction -- known by the shorthand “199A” for the section in which it appears in the tax code – a part of tax law forever.

“We’re optimistic under a Trump administration and Republican-controlled Congress that 199A would be made permanent,” said Nathan Riedel (pictured above, left), Big I senior vice president for federal government affairs.

If he obtains a second term, Trump is likely to put renewal of the 2017 tax cuts on a fast track. “There’s a good chance a Trump administration would tackle tax policy in the first 100 days,” Riedel said.

President Biden has criticized the 2017 tax package as favoring the wealthy. His administration has promised to raise taxes on the high-earners and corporations to pay for tax cuts for the middle class. Biden has vowed not to raise taxes for anyone making less than $400,000.

It’s not clear whether Biden would support renewal of the pass-through tax break.

“We’re a little more skeptical under a Biden administration,” that the provision would be renewed, Riedel said.

Lack of GOP unanimity on expiring tax breaks?

The election could be the decisive variable for the corporate tax deductions, such as the one for pass-throughs, said Jimi Grande (pictured above, center), senior vice president for federal and political affairs at the National Association of Mutual Insurance Companies.

“It’ll certainly be affected by who the president is and depend even more on who holds the majority and by how much,” Grande said in a statement. “President Biden has promised to let those provisions expire should he win in November, and while it’s likely a second Trump administration would do what it could to preserve them, that will not be unanimous within the GOP. The politics of today and within the GOP have changed greatly since 2017 and some will look to increase the corporate rate to help lower the small business rates or pay for the individual side.”

An insurance broker said he’s paying close attention to how the pass-through tax break could be affected by the election outcome.

“People are kind of preparing for it,” said Will Lemanski (pictured above, right), owner of Meiers Lombardini Lemanski Insurance, an eight-employee firm in East Lansing, Mich. “I know it’s at the top of a lot of business owners’ minds.”

Lemanski has structured his brokerage, which he co-owns with his wife, as a pass-through. The revenue from business operations is added to the couple’s gross adjusted income, and they pay their business tax through their personal return. The 20% tax break essentially lowers their business tax to a level similar to the current 21% tax on traditional corporations.

Tax cut bolsters brokerage’s growth

Over the past few years, Lemanski said the tax deduction has bolstered his brokerage’s finances and allowed him to hire additional staff, upgrade its technology and expand employee benefits.

“The tax cut was like putting gas on the fire in terms of wanting to grow,” said Lemanski, who is a Big I member. “Taking it away would be like dousing the flame.”

Riedel said that about 70% of Big I’s approximately 25,000 members structure their businesses as pass-throughs. Lemanski attended Big I’s legislative conference in April, where the organization sent more than 600 members to Capitol Hill to talk to lawmakers and congressional staff about its legislative priorities, including a bill – The Main Street Tax Certainty Act – that would make the pass-through tax deduction permanent.

A Senate version of the bill has 32 co-sponsors, all Republicans, while a House version has 177 co-sponsors, 175 of whom are Republicans. With so little Democratic support, the bill is not likely to advance in the current session of Congress, where Republicans and Democrats control the House and Senate, respectively, by slim margins.

‘Big negotiation’ next year in Congress

That means renewal of the tax breaks will have to be taken up by the new Congress that’s seated in January after the election.

“There’s going to be a big negotiation that goes on,” Rep. Josh Gottheimer, D-N.J. and a co-sponsor of the pass-through-deduction bill, said at the Big I conference. “There are a lot provisions that are sunsetting that I think are really important, like [the small-business deduction]. We’re going to have to figure out how we get rid of the bad stuff and keep the good stuff that’s very important to economic growth.”  

If the election outcome sends lawmakers to Washington who are not inclined to renew the pass-through tax break, his firm would “slow down in 2026” in terms of expansion, Lemanski said. But it would adapt to a new tax code.

“As a business owner, you have to adjust to the environment you live in,” Lemanski said.

Summary: Pass-Through Tax Provision under the TCJA

  • Introduction
    • The Tax Cuts and Jobs Act (TCJA) introduced a 20% deduction for qualified business income (QBI) for pass-through entities.
    • This provision is effective from 2018 to 2025.
  • Eligible Businesses
    • Pass-through entities include sole proprietorships, partnerships, S corporations, LLCs, and LLPs.
    • These businesses do not pay taxes themselves; profits are passed through to owners who report them on individual tax returns.
  • Qualified Business Income (QBI)
    • QBI is the net income from a pass-through business after regular deductions.
    • Includes rental income (if it qualifies as a business), income from publicly traded partnerships, REITs, and qualified cooperatives.
    • Excludes capital gains, dividends, interest income, wages to S corporation shareholders, guaranteed payments to partners or LLC members, and income earned outside the U.S.
  • Calculation of the Deduction
    • Owners can deduct up to 20% of their QBI from their taxable income.
    • Deduction cannot exceed 20% of total taxable income, excluding the deduction itself.
    • Deduction phases out for high-income earners and is subject to specific limitations.
  • Thresholds and Limitations
    • For 2023, the taxable income threshold is $364,200 for joint filers and $182,100 for single filers.
    • Income exceeding these thresholds involves complex calculations and additional limitations.
    • Specified service businesses (health, law, accounting, etc.) face stricter phase-outs and potential elimination of the deduction at higher income levels.
  • Non-Service Businesses Over Threshold
    • Deduction limited to the greater of 50% of W-2 wages paid or 25% of wages plus 2.5% of depreciable property’s unadjusted basis.
    • Example: A couple with $500,000 taxable income and $400,000 in QBI could have a deduction limited to $75,000 based on wages and property.
  • Service Business Phase-Out
    • Deduction phases out completely at $464,200 for joint filers and $232,100 for single filers.
    • Example: A consultant with $394,200 taxable income would have a phased-out deduction of $35,000 based on wages paid.
  • Claiming the Deduction
    • The QBI deduction is a personal deduction on Form 1040.
    • It does not reduce adjusted gross income (AGI) and only affects income tax, not Social Security or Medicare taxes.

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