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How FAs and Their Business-Owning Clients Stand to Win With Senate Tax Proposal

December 12, 2017

The Senate’s tax plan for pass-through businesses would benefit both clients and financial advisors more than the tax bill passed by the House, experts tell InvestmentNews.

The House bill would exclude service businesses, including financial advice firms, from being able to pay a lower 25% tax rate on a portion of their income, according to the publication. An amendment to the bill applies a 9% tax rate to the first $75,000 of income for companies whose owners earn under $150,000, InvestmentNews writes.

The Senate bill, on the other hand, would apply a 23% deduction on income for any business whose income is under $250,000 for individuals and $500,000 for married couples, InvestmentNews writes. The deduction would be capped at 50% of income from wages above those limits, according to the publication.

Pass-through businesses, which include partnerships, sole proprietorships and S corporations, are currently taxed at rates as high as 39.6%, according to the publication.

Deductions are likely to be worth more than a lower rate, Paul Samuelson, chief investment officer and co-founder of asset management outsourcing company LifeYield, tells InvestmentNews. In addition, the Senate approach would be better for people with less income and is simpler, according to Samuelson. Tim Steffen, director of advanced planning at Robert W. Baird & Co., agrees the Senate’s treatment of pass-throughs is easier and says it’s also “more friendly” to service businesses specifically, according to InvestmentNews.

Leon LaBrecque

What’s more, because the effective tax rate for small businesses as proposed by the Senate would be around 30%, it will change the valuation of advice practices set up as pass-throughs, Leon LaBrecque, managing partner at LJPR Financial Advisors, tells the publication.

A conference committee still has to resolve the variations between the Senate and House bills, which the GOP hopes to do before the end of the year, InvestmentNews writes. Steffen tells the publication the House is likely to make more concessions than the Senate.

By Alex Padalka
  • To read the InvestmentNews article cited in this story, click here.