On August 8, 2018, the IRS issued Proposed Regulations explaining new Section 199A of the Internal Revenue Code, which is the provision allowing for a 20% deduction for certain income from sole proprietorships and pass-through entities.
On the positive side, the IRS has clarified that the business of selling life insurance products is an activity which will qualify for the 199A deduction (i.e., it is not a “Specified Service”), regardless of the income from the business, but subject to the other statutory limits, such as the wages paid by the business, discussed below.
On the negative side, the IRS confirmed that the provision of other wealth planning and financial services, including the sales of securities and wealth management fees for doing so, are a “Specified Service” such that taxpayers whose income levels exceed the applicable thresholds will not be eligible for the 199A deduction.
Taxpayers engaged in both insurance and other financial service activities may be treated as being in two separate businesses or in one business, depending on the applicable facts and circumstances.
By way of background, for those who earn more than $157,500 for the year ($315,000 for married filing jointly) the Section 199A deduction is limited to the lower of (i) 20% of a taxpayer’s taxable income or (ii) 50% of the W-2 wages paid by the taxpayer. Accordingly, the applicable 199A deduction for higher income earners may be limited by the W-2 wage limitations imposed under Section 199A.