PRESERVE THE SECTION 199A DEDUCTION FOR PASS-THROUGH ENTITIES
BACKGROUND
In 2017, The Tax Cuts and Jobs Act (TCJA) was signed into law, marking one of the largest tax overhauls in decades. Among the TCJA’s changes was a permanently lowered corporate tax rate of 21% for businesses organized as C corporations.
However, 95% of businesses in the United States are not C corporations and are organized as pass-through entities, which can include sole-proprietors, S corporations, and partnerships. These businesses have their business profits “passed through” to the individual owners who pay taxes on those profits on their individual tax returns. As a result, these individually- and family-owned businesses, which employ 58% of all private sector workers, can be taxed at the higher 37% individual marginal tax rates, and do not benefit from the TCJA’s reduced corporate tax rate.
In addition to reducing the top marginal individual tax rate, the TCJA included the Section 199A deduction to allow pass-through entities to take an extra 20% deduction from their qualified business income each year. In effect, the Section 199A deduction reduces the effective tax rate for these businesses to provide parity with the reduced corporate tax rate for C corporations.
Section 199A also includes safeguards to prevent high-income entities and certain trades or businesses from claiming the deduction. In 2019, Treasury’s final regulations affirmed that businesses involved in insurance brokerage services are eligible for the Section 199A deduction.
THE ISSUE
Like many provisions of the TCJA, Section 199A is set to expire at the end of 2025 and the top marginal individual tax rates are set to increase. Without Section 199A, pass-through entities will face significantly higher tax rates, placing them at a competitive disadvantage vis-à-vis C corporations, and preventing them from reinvesting in their employees, increasing wages, or improving their systems and facilities.
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The Council of Insurance Agents & Brokers is the premier association for the top regional, national and international commercial insurance and employee benefits brokerage firms worldwide. Council members are market leaders who annually place 90 percent of U.S. commercial property/casualty premiums, and 70 percent of all employee benefits business in the U.S.
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