Can a Financial Advisor Qualify for The 20% Business Taxable Income Deduction?

Just this month, the IRS and Treasury proposed a regulation named Tax Cuts and Jobs Act which aims to give entrepreneurs a 20% qualified business income deduction. However, most financial advisors are wondering whether or not they qualify for the said tax break. Here’s what the experts have to say.

The Tax Break

According to the said regulation, entrepreneurs can take a 20% deduction on their business income if they have a taxable income less than $157,500 for individuals or $315,000 for married couples. Once an entrepreneur exceeds the threshold, the governing body will evaluate whether your specified business or service is eligible in their limitation. For example, doctors and lawyers cannot be eligible for a deduction if their taxable income exceeds $207,500 for an individual or around $415,000 for married couples.

According to financial experts, the rules are a little different for businesses and firms that don’t fall into any of these categories

For example, an entrepreneur may receive a reduced deduction even if their taxable income exceeds the $157,500/$315,000 brackets but still less than $207,500/$415,000. The break these firms get is limited to 50% of the salary they pay to their employees. This makes the self-employed ineligible since they have no paid employees yet they exceed those two thresholds.

The Proposed Regulation

Aside from the said tax break, the IRS also implements other aggressive planning strategies to help small business qualify for the deduction. Despite the good news the new regulations bear, unfortunately, its implementing guidelines left the financial advisory industry in uncertainty. According to TD Ameritrade Trust Co. President Skip Schweiss, he said some of their larger advisory firms were upset when they discovered they couldn’t avail of this deduction.

Schweiss reiterates that the professionals who help manage and protect their clients’ money and wealth should be eligible for the said tax break. According to Troy Lewis of Brigham Young University, the financial advisors deserve to avail of these tax breaks after helping most Americans in managing their finances and wealth. He reiterates its rare to find a stockbroker who doesn’t seek any advice in managing their portfolio, investments, and assets from a financial advisor.

The Uncertainty

The IRS clarified the issue though that financial advisors, wealth managers, and stock brokers may still be eligible for the tax break since their industry belongs to the “specified businesses or service trades”. This means that a financial advisor must keep their taxable income below the threshold, then they can claim their tax deduction. However, these advisors might need to run their own businesses to qualify for the said tax break according to IRS. They shouldn’t claim it as an employee since the regulation only applies to entrepreneurs.

However, this section gets a little tricky according to the financial advisors, since they offer more than just one product to their clients.

The IRS says that independent insurance agents or brokers, on the other hand, are qualified to take some deductions even if their taxable income breaches the threshold. But most insurance brokers also deemed themselves as financial advisors, so this could mean they’re entitled to avail of the tax break without limiting it based on their employees. This left most financial advisors in confusion on how to organize or reorganize themselves, especially since most of them have licenses to sell insurance, mutual funds, and stocks according to Lewis.

The Financial Advisor’s Frustrations

According to Schweiss, this confusion made most financial advisors frustrated, especially since the IRS unintentionally favored and rewards agents who sell insurance. Even large advisory firms like LLC couldn’t get this deduction while the independent insurance agents get a deduction. As of this writing, more than 1,000 advisors have reached out and joined TD Ameritrade’s advocacy to include financial advisors in availing of the deduction.