AGENCY OPERATIONS
LEARN HOW OBBBA TAX PROVISIONS HELP YOUR INSURANCE AGENCY
Written by AgencyEquity
The major federal tax and budgetary legislation approved by the Congress and the president recently contains several measures that will help independent insurance agencies.
Many of the tax changes that were enacted in 2017 were scheduled to expire at the end of this year. One major purpose of the new law was to prevent that. Expiration would have resulted in significant tax increases on many small businesses, insurance agencies included.
Probably most significant was the 20 % deduction for pass-through entities. This tax provision was one that was due to expire; the new law made it permanent. According to the Independent Insurance Agents & Brokers of America( IIABA,) 86 % of agencies are organized as pass-through entities, meaning that they pay income tax at the individual rate rather than the corporate rate. The provision enables taxpayers to deduct 20 % of“ qualified pass-through business income” from their taxable incomes.
Businesses will also be able to take advantage of more generous asset depreciation deductions. The prior law permitted businesses to write off depreciation equal to 100 % of assets’ values in 2022, with that number gradually declining through 2024. The new law makes the 100 % level permanent, subject to a higher maximum deduction of $ 2.5 million that is indexed for inflation. The deduction begins to phase out at levels of greater than $ 4 million. Agencies that upgrade their technology will be able to reduce their tax bills by writing off depreciation more quickly.
Owners of some agencies organized as“ C” corporations have enhanced tax exclusions for gains made when they sell the stock. The law continues the current tiered system for excluding gains from the sale of“ qualified small business stock” – 50 % for stock held at least three years, 75 % for stock held four years, and 100 % for stock held for five years or more. It increased the maximum exclusion from $ 10 million to $ 15 million and indexed it for inflation. This means that an agency principal who has owned all the stock in his agency for at least five years may be able to exclude up to $ 15 million in capital gains when he sells the agency.
16 KANSAS INSURANCE AGENT & BROKER