Main Street Park City by Olivia Hutchinson
Americans for Tax Reform urges the Trump Treasury Department to issue guidance allowing independent financial advisors to fully qualify for the 20 percent small business deduction.
The Working Family Tax Cuts passed by the Republican Congress and signed into law by President Trump delivered historic, permanent tax relief for small and individually owned businesses through the 20 percent Deduction for Qualified Business Income (199a).
The Section 199A Small Business Deduction
The Working Family Tax Cuts permanently extended the tax deduction for Qualified Business Income (199a) for small businesses (partnership, S corporation, sole proprietorship, etc.) at 20 percent. The bill also eases the impact of previous limitations by increasing the phase-in range from the previous $50,000 (non-joint returns) and $100,000 (joint returns) amounts to $75,000 and $150,000, respectively. The tax cuts also introduced a more generous inflation-adjusted minimum deduction of $400 for taxpayers who have at least $1,000 of QBI from one or more active trades or businesses in which the taxpayer materially participates. This ensures small business owners with a certain QBI level are entitled to an enhanced baseline deduction.
Current Rule-Making Inadvertently Excludes Independent Financial Advisors
While this deduction was intended to provide broad-based tax relief for individually owned businesses, subsequent regulatory restrictions have inadvertently excluded thousands of independent financial advisors from qualifying for the deduction.
As economist Stephen Moore points out:
“These independents add value to investors and senior citizens by building longstanding personal relationships and offering first-hand financial advice tailored to the client’s personal situation. But now they face an unfair and unreasonable additional hurdle: tax rates higher than Congress intended. Instead of having their top marginal income tax rate cut from 39.6% to 29.6%, like other small businesses, they face a 37% rate because Treasury Department bureaucrats excluded them from the full benefit of the small business tax deduction.”
This higher taxation on these small business owners will lead to higher costs for consumers and reduce the ability of independent financial advisors to provide financial advice and services for American families.
Tax Code Shouldn’t Pick Winners and Losers
Section 199A was created in the 2017 Trump Tax Cuts to create parity in the tax treatment between pass-through businesses and their corporate competitors benefiting from the reduced corporate income tax rate.
However, the current characterization of independent financial advisors as specified service trade or businesses (SSTBs) places these small business owners at a competitive disadvantage and paying higher taxes than other small businesses offering similar services, such as insurance brokers.
The government should not pick winners and losers in the marketplace. Inequitable treatment in the tax code should always be corrected through lowering taxes and regulatory burdens to provide equal treatment for competition.
Thankfully, President Trump’s Treasury Department can correct the tax treatment of these small business owners by correcting Treasury guidance that characterizes independent financial advisors as specified service trade or businesses (SSTBs) and allow them to fully qualify for the 20 percent small business deduction.
