Some brokerage firms are concerned that the tax overhaul could lead to upheaval, pushing their employees to set up their own shops or switch firms to lower their tax bills.
At the heart of the issue is how the business is organized. Some brokers set up partnerships, while others work as independent contractors affiliated with a firm. Those advisors all stand to gain under a tentative deal reached Wednesday between House and Senate tax negotiators. Because they’re considered pass-through owners, they may be able to deduct as much as 20% of their income before paying taxes.
But at other firms, like those owned by big banks, brokers are employees. They won’t be able to take advantage of the break and would continue to face ordinary income tax rates on all of their compensation.
“We are very concerned at the impact this could have on the ability of firms in the industry to offer different business models,” said Christopher Iacovella, who runs the Equity Dealers of America, a trade association for regional brokerages including Janney Montgomery Scott, D.A. Davidson Companies and Raymond James Financial Inc. “Both should be treated equally under the law.”
The group has been raising the potential problem on Capitol Hill in recent days. Earlier this week, Iacovella sent a letter to House and Senate lawmakers who are part of the conference committee responsible for hammering out a final tax plan, urging them to fix the “unintended consequence” that opens the potential for “tax arbitrage.”
The pass-through measure is one of many provisions included in the tax revamp that could have unforeseen effects once they’re applied in the real world. Republican lawmakers have rushed to get a tax bill completed before the end of the year — in what would be their first major legislative victory in 2017. The Senate released the 515-page text of its sweeping tax legislation just nine working days before holding a floor vote.
The window may be closing for any changes though — the tentative agreement reached Wednesday would include the 20% deduction for owners of pass-through businesses, along with a top individual tax rate of 37% and a corporate rate of 21%. Details still remain fluid. Final text along with additional details may be released as soon as Friday. GOP leaders are planning to hold a vote on the legislation early next week.
The tax treatment of pass-throughs, such as partnerships, limited liability companies and sole proprietorships, has been one of the main points of contention between the House and Senate. The Senate tax bill approved Dec. 2 would have allowed deductions of 23% for business income, but phased those deductions out for single taxpayers making more than $250,000 or married couples making more than $500,000.
The House version of tax legislation approved last month called for a top rate of 25%, but placed limits on who could qualify for the rate. Most service professionals — which would have included brokers — were exempted.