On Monday, the Big “I” submitted a comment letter to the Department of Treasury and the Internal Revenue Service (IRS) in support of a draft regulation issued earlier this year. The regulation addresses a key provision of the 2017 tax law (26 U.S.C. §199A) that allows for a 20% deduction on “qualified business income” for owners and shareholders of pass-through businesses.
Under the draft regulation, owners and shareholders of insurance agencies and brokerages can take full advantage of a new tax deduction on business income—regardless of their taxable income levels—because the IRS does not consider insurance agents and brokers to be a “specified service trade or business.” Owners and shareholders of specified service businesses cannot use the deduction if their taxable income exceeds a certain amount.
For more information on the specifics of the regulation and how it impacts Big “I” members, view this webinar recording.
While the regulation is only in draft form, the IRS has stated that taxpayers can rely on it for tax planning purposes. Before the draft was released, it was unclear whether insurance agencies and brokerages would be considered specified service businesses. In addition to advocating before its release, the Big “I” has now requested that the final regulation maintain the current treatment of agents and brokers.
The Big “I” also suggested that the IRS consider minor adjustments in a “de minimis” rule contained in the regulation. Overall, this provision is necessary to prevent small amounts of specified service activity within a trade or business from making the entire trade or business ineligible for the deduction.
However, as currently drafted, the regulation creates a situation where a slight variance in revenues or business activities in any year could result in a dramatic change in taxes owed. The Big “I” recommended revising the rule to allow some flexibility and avoid this potential outcome.
The Big “I” also recommended other technical changes to the rule. Final regulations are expected before the end of the year.
On Wednesday, the IRS also issued transitional guidance confirming that companies can still deduct the cost of business-related meals under the new tax law. The 2017 tax law scrapped a long-standing deduction for entertainment expenses but allows businesses a 50% deduction for the cost of meals.
According to the guidance, if food and beverages are purchased or billed separately from the entertainment, they may be deducted. For example, a meal purchased after a round of golf would be deductible, but box tickets to view a baseball game that include food and drink would not, unless the food and drink were billed separately.
The IRS plans to propose regulations on how the new rules will work and requested public comment.
Jennifer Webb is Big “I” federal government affairs counsel.