Advisor industry bands together for pass-through deduction parity

A collective of financial services organizations is urging Congress to extend and expand the Section 199A tax deduction, arguing that it currently disadvantages independent financial advisors relative to other small business owners.

The coalition of advocates – which includes the Investment Adviser Association, the Financial Planning Association, the Financial Services Institute, the National Association of Personal Financial Advisors, CFP Board, LPL Financial, and Raymond James, among others – called for changes to the deduction in a letter to the House Ways and Means Committee and the Senate Finance Committee.

The letter explained that under Section 199A of the Tax Cuts and Jobs Act, owners and shareholders of certain pass-through businesses, including S corporations and sole proprietorships, are allowed to deduct 20 percent of their qualified business income as a way to encourage economic growth.

However, it placed financial advisors, investment managers, and brokers under the umbrella of specified service trades or businesses. Based on guidance from the Treasury Department, that meant they could only claim the deduction if their taxable income is below certain thresholds. In contrast, insurance brokers could take advantage of the 20 percent pass through deduction no matter how much they earn because of an exemption carved out in Section 199A under the definition of "brokerage services."

"We believe that this disparity is clearly unfair because financial services professionals and insurance brokers, although providing similar products and services to retail clients, face the same financial and regulatory burdens and challenges that all small business owners must deal with," the letter read, emphasizing a point that plagued advisors even during the Covid pandemic.

The letter also highlighted the economic impact of financial planners, retirement planners, investment advisors, and financial advisors. It pointed out how many advisors, whether they're independent contractors or local entrepreneurs, play a vital role in supporting clients and spurring employment, among other activities.

“In addition to being drivers of the economy, financial advisors, financial planners, investment advisers, and retirement planners are a vital solution to the retirement savings crisis that America currently faces,” the coalition said.

The coalition is asking Congress to extend Section 199A, which is set to expire in 2025, and clarify that independent financial advisors should be categorized as qualified trades or businesses rather than SSTBs.

"We look forward to continuing to work with you and serving as a resource on this significant issue," it said.