Several financial firms and trade associations are pushing for legislation that would make financial advisers eligible for a small-business tax break included in the 2017 tax-reform law.
The tax measure provides a 20% deduction on qualified business income for so-called pass-through businesses, such as partnerships or sole proprietorships. Many brokerage and advisory firms are set up in these arrangements.
But the tax law excluded most professional services — including brokers, financial planners and investment advisers — with incomes above a certain threshold from taking advantage of the tax break.
In a Dec. 18 letter, a coalition of firms and groups representing the advice sector urged leading tax policy lawmakers to write “clarifying legislation” that would allow financial advisers to qualify for special pass-through tax treatment.
“The current statutory language unfairly and unintentionally disadvantages financial advisors, financial planners and investment advisers and diminishes their ability to invest in and build their businesses,” states the letter, which was signed by Cetera Financial Group, Commonwealth Financial Network, Financial Planning Association, Financial Services Institute, Investment Adviser Association, LPL Financial, National Association of Personal Financial Advisors and Raymond James.
The letter was sent to House Ways and Means Committee Chairman Richard Neal, D-Mass., Senate Finance Committee Chairman Chuck Grassley, R-Iowa, and the highest-ranking members of the minority party on each panel.
So far, Capitol Hill Republicans have been reluctant to reopen the 2017 tax law to make changes, such as restoring the deduction for state and local taxes. It’s not clear whether legislators will have an appetite to pursue rifle-shot changes like the one being sought for financial advisers.
Neil Simon, vice president of government relations at the Investment Adviser Association, said it’s imperative to get the issue in front of Capitol Hill tax writers.
“It is highly likely — it may not be this Congress, it may be a future Congress — that they are going to take another look at several provisions of the tax cuts act,” Mr. Simon said. “It’s important that we work to ensure that this is a provision that gets attention from Congress.”
Congress approved tax extenders legislation last year and may want to do more, said Jorge Castro, a member at the law firm Miller & Chevalier.
“Both sides are going to come back this year looking to enact another tax bill,” said Mr. Castro, a former tax counsel for Democratic lawmakers and aide to IRS commissioners.
Service professionals, such as advisers, accountants and lawyers, were originally denied access to the pass-through tax breaks as a way to narrow the provision’s focus on businesses that make capital investments. It was also a way to lower the cost of the tax break.
But real estate and insurance brokers were made eligible for the pass-through deduction.
“While we recognize that financial advisors, financial planners and investment advisers are regulated differently than real estate and insurance, as small business owners, they face the same burdens and challenges,” the letter states. “Congress should not pick winners and losers.”
The brokers and advisers are making a point that might persuade lawmakers, according to Mr. Castro.
“They have a legitimate argument,” he said. “I think they’re going to consider it seriously. This may open up the lane for other groups that feel they were unintentionally excluded. Congress is going to have to grapple with that question.”
The breadth of the coalition seeking the pass-through tax break will help the lobbying effort, Mr. Simon said.
“Because of the fairly wide range of groups, it makes it that much more likely that it will have an impact,” he said.
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