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Life Insurance Is NOT a Financial Service: New IRS 199A Tax Deduction Regs

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The Internal Revenue Service has released final regulations that should help life insurance agents get a big new federal income tax deduction — by classifying life insurance as not being a financial service.

The IRS says it generally will exclude sales of commission-based insurance policies when deciding whether a business owner can qualify for a new “qualified business income deduction.”

(Related: New Tax Deduction Might Favor Life Agents Over Retirement Advisors)

But the final regulations leave open the possibility that agents and brokers who generate large amounts of fee revenue from selling life insurance or annuities could end up losing access to the new deduction.

IRC Section 199A, Life Insurance and Investments

The new qualified business income deduction was created by the Tax Cuts and Jobs Act of 2017 (TCJA).

One part of the TCJA added Section 199A to the Internal Revenue Code (IRC).

IRC Section 199A provides a deduction of up to 20% of profits for “qualified business income from a U.S. trade or business operated as a sole proprietorship or through a partnership, S corporation, trust, or estate.”

Because of an exclusion included in the IRC Section 199A statutes, owners of businesses involved in “investing and investment management” may not get to use the new TCJA business income deduction.

Marc Cadin, the chief executive officer of AALU, had asked the IRS to declare that the sale of life insurance is not “investing and investment management” for purposes of the new TCJA deduction, and that life insurance products are not investments for purposes of interpreting that deduction.

The IRS and its parent, the U.S. Treasury Department, “decline to define investment for purposes of Section 199A,” officials say.

Officials emphasize that they will exclude commission-based insurance sales from the definition of “investing and investment management,” but they don’t say anything about fee-based sales, and they don’t refer directly to annuities in the provisions talking about how they expect to treat life insurance.

The IRS also released new proposed 199A regulations that deal with how the rules for the new deduction interact with the rules for trusts and annuities.

IRC Section 199A and SSTB Maze

The TCJA drafters wanted to give many business owners a tax break, but they also wanted to keep rich owners of some types of especially glamorous or lucrative businesses from getting the deduction.

In an effort to keep rock stars from benefiting much from the deduction, drafters have set much tougher rules for owners of “specified service, trade or business” (SSTB) firms than for other types of businesses.

The IRC Section 199A statute defined SSTB to include a business that “involves the performance of services that consist of investing and investment management, trading, or dealing in securities,” and to a class of businesses already defined in IRC Section 1202(e)(3)(A).

IRC Section 1202(e)(3)(A) refers to “any trade or business involving the performance of services in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees.”

Existing federal law also defines a separate class of businesses that includes “any banking, insurance, financing, leasing, investing or similar business.”

The 199A deduction limit for SSTB profits, which will be indexed for inflation, will start at $207,500 for individual business owners and $415,000 for married business owners filing jointly.

Agent groups have argued that, although the common definition of “financial services” might include banking and insurance, the definition now built into IRC Section 199A does not.


The existing federal SSTB definition includes owners of actuarial firms.

The new final regulations do not appear to provide any SSTB definition help for actuaries. Owners of actuarial firms may not get the new TCJA deduction.


Officials say taxpayers can rely on the draft regulations released in August when doing their taxes for taxable years that ended in 2018.

Unless otherwise stated, taxpayers can apply the final 199A regulations for taxable years ending on dates after the official Federal Register publication date for the final regulations. At press time, the official Federal Register publication date was not yet available.


A preview copy of the new 199A final regulations is available here.

A preview copy of the proposed regulations is available here.

The federal government’s docket folder for the proposed regulations that were released in August is available here. (To see public comments, make sure the “Public Submissions” box is checked.)

The preamble to the preliminary final regulations list Vishal Amin, Frank Fisher, Robert Alinsky, Margaret Burow and Wendy Kribell as the final regulation contact people.

— Read Pass-Through Tax Planning to Boost New QBI Deduction Valueon ThinkAdvisor.

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