Senate bill would expand pass-through tax deduction to advisers

Legislation introduced Tuesday by the Senate’s top tax policy writer would make brokerages and investment advisory firms eligible for a small-business tax break established by the 2017 tax reform law. However, the bill also would limit the benefit to people earning less than $400,000.

Sen. Ron Wyden, D-Ore. and chairman of the Senate Finance Committee, wrote the bill, the Small Business Tax Fairness Act, in part to expand the number of businesses set up as so-called pass-throughs — such as partnerships and sole proprietorships — that qualify for a 20% tax deduction.

Under the 2017 bill approved by a Republican Congress, certain business categories, including financial services, accounting and law, were ineligible for the deduction. Real estate and insurance brokers can use it. The Wyden bill would eliminate those restrictions.

Investment adviser and brokerage trade associations pushed for a clarification of the 2017 tax bill that would allow their members to qualify for the deduction.

Neil Simon, vice president for government relations at the Investment Adviser Association, liked what he saw on first glance at the Wyden bill.

“Investment advisers are predominately small businesses and many would benefit from being made eligible for the pass-through deduction,” Simon said. “The IAA strongly supports efforts to make advisory firms gain this benefit.”

Under the legislation, the tax break would start to phase out for individuals making more than $400,000, according to a summary. It also would simplify the calculations related to the deduction.

Although removing restrictions on business categories gives the tax deduction more reach, the $400,000 limit restricts those who can use it.

“That’s the carrot,” Andy Howlett, a member at the law firm Miller & Chevalier, said in reference to allowing all small businesses to qualify. “The stick is we’re going to put in this phase out beginning at $400,000. If you own a financial services firm and make $375,000 a year, you’d look at this and say that’s pretty good.”

The current law already allows some advisers to qualify for the deduction if their income is below about $157,000 for individuals and about $357,000 for married couples, said Leon LaBrecque, chief growth officer at Sequoia Financial Group.

Although LaBrecque likes the principle behind Wyden’s bill, he said it won’t make too big a difference.

“He thought he was giving something to small businesses, but in reality, he wasn’t,” LaBrecque said. “Right church; wrong pew.”

Wyden asserted that too much of the benefit of the 2017 provision — 61% — went to wealthy Americans.

“Few policies showcase Republicans’ commitment to giveaways to the top 1 percent like the pass-through deduction created in their 2017 bill,” Wyden said in a statement. “Half the benefit of the pass-through deduction goes to millionaires, and because the benefit is so skewed toward the top, many Main Street small business owners are excluded. The mega-millionaires get to write-off 20 percent of their income while middle-class accountants are cut out.”

Limiting the benefit to taxpayers making less than $400,000 would “help finance priorities like child care and education,” Wyden’s office said in the statement.

Wyden is pushing for the measure to be included in a $3.5 trillion social spending package that Democrats will try to approve later this year in a parliamentary procedure that sidesteps a Senate filibuster.

Simon acknowledged that the $400,000 phase out would limit the number of advisers who could benefit from the bill. But he said across the whole range of the advisory landscape — including smaller state-registered advisory firms — many would get a boost.

“Is it everything we would want? Certainly not,” Simon said. “But is it a significant step in the right direction? It certainly is.”