August 8, 2018

Red Alert: IRS Issues Proposed Regulations on Section 199A;
Brokerage Services Carved Out of Services Exemption

The Internal Revenue Service issued proposed regulations on August 8 for a new provision allowing many owners of sole proprietorships, partnerships, trusts and S corporations to deduct 20 percent of their qualified business income.

As outlined on page 62, “Proposed §1.199A-5(b)(2)(x) uses the ordinary meaning of “brokerage services” and provides that the field of brokerage services includes services in which a person arranges transactions between a buyer and a seller with respect to securities (as defined in section 475(c)(2)) for a commission or fee. This includes services provided by stock brokers and other similar professionals, but does not include services provided by real estate agents and brokers, or insurance agents and brokers.”

This means that insurance agencies are NOT included in the service trade or business exception, and therefore, Council members fully qualify for the tax benefits of the pass-through deduction for “qualified income.”

This is a big win for many Council member firms, and something The Council has been working on since the legislation was under consideration. Please see this letter to members of the US Senate from November 2017 and this memo to Council members from December 2017.

Click here for FAQ that were discussed during today’s technical briefing, hosted by the IRS.

The new deduction—referred to as Section 199A—was created out of the Tax Cuts and Jobs Act. The deduction is available for tax years beginning after Dec. 31, 2017. Eligible taxpayers can claim it for the first time on the 2018 federal income tax return they file next year.

Other items of note:

  • Retirement services and related advice are defined as service trades or businesses. For firms with less than $25 million in revenue, they can derive up to 10 percent of their revenue from that and not lose the pass-through benefit; for firms with more than $25 million in revenue, they can derive up to 5 percent of their revenue from such activities without losing the benefit.

Other than that, brokerage services will be treated like every other beneficiary of the benefit (and will be subject to those rules/requirements; details to come).

Comments on the proposed regulations will be due in approximately 45 days, with a public hearing scheduled for October. The Council will be submitting comments supporting our treatment.

In the meantime, please contact Joel Wood at joel.wood@ciab.com, Joel Kopperud at joel.kopperud@ciab.com or Blaire Bartlett at blaire.bartlett@ciab.com with any questions.