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With tax season set to start as soon as the holidays are over, agents and brokers in the US should refresh their understanding of the overhaul to the US tax code that came into effect at the start of 2018. One of the key updates to the tax code was a significant cut to the corporate tax rate, affecting those businesses organized as Subchapter C Corporations.
“The tax bill was great for our members that are C-Corps, lowering the corporate rate to 21%,” said Wyatt Stewart, senior director of federal government affairs at the Independent Insurance Agents & Brokers of America (IIABA or the Big “I”), adding that around one-third of Big “I” members are C Corporations. “That’s the number one biggest win for our agents in the tax bill regarding C-Corps.”
However, corporations that receive dividends from other corporations can now only deduct 50% of the dividend, whereas 70% of the dividend was previously deductible. If the company that receives the dividend owns between 20% and 80% of the company paying the dividend, the deduction is now 65% of the dividend received, versus the 80% that was once deductible, according to the Big “I”. The corporate alternative minimum tax has also been repealed.
Most Big “I” members are organized as Subchapter S Corporations, Partnerships, and Sole Proprietorships, known as pass-through entities for federal tax purposes. They, too, have seen benefits from the revamped tax code.
“There was a 20% deduction for pass-throughs in the bill and when the bill was first passed, there was a bit of uncertainty as to who would be able to take advantage of the 20% deduction and who wouldn’t, based on whether or not you were defined as a specified service,” explained Stewart, though in August, the US Department of the Treasury and Internal Revenue Service proposed regulations “that made it clear that independent insurance agents and brokers are not considered a specified services business, so that means they are able to take advantage of this new 20% deduction regardless of their income level.”
Whether the deduction of qualified business income can be used depends on the annual taxable income of the agency owner or shareholder. The Big “I” recommends that its members consult their accountants, lawyers, and other relevant professionals to determine how they will be affected by the reformed tax bill based on their individual circumstances.
Selected business deductions, exclusions and credits also saw some changes. Agents and brokers who seek to impress clients and partners with food and entertainment should especially take note.
“The meals and entertainment deduction was scaled back a bit and that’s a deduction that will make a difference with our members,” said Stewart. Before the tax reform, employers were able deduct 50% of the costs of business-related meals and entertainment expenses, but today, no deductions are allowed for entertainment expenses, though the 50% deduction for meals still stands.
Most of the changes to the tax code have nonetheless been welcomed by Big “I” members.
“Overall, our members are very happy with the way that the tax bill has come out, both from the standpoint of the C-Corp rate being lowered and from the small business deduction that they’re able to take advantage of,” said Stewart, who’s also optimistic that the results of the midterm elections, where Democrats took control of the House, won’t bring about further upheaval of the tax code. “With Republicans still in control of the Senate and President Trump still in control of the executive branch, I don’t see significant changes afoot regarding the tax code.”
