Advisers should be able to use the pass-through deduction

LPL Financial CEO and President Dan Arnold wrote a letter to legislators that is currently being shared on Capitol Hill by LPL’s government relations team. In it, Arnold advocates for clarifying legislation to enable independent financial advisers to be able to fully benefit from the 20% pass-through deduction afforded under Internal Revenue Code Section Section 199A. As it stands, there is a threshold on taxable income in order to qualify for these tax benefits. Arnold argues LPL independent financial advisers, and many other independent advisers, are small business owners affected by the current economic conditions. These entrepreneurs are helping to drive our economy, and now is the time to clarify this provision and level the playing field.

An abbreviated version of the letter follows:

As Congress continues to contemplate priorities for a fourth relief package in order to address the economic consequences of the novel coronavirus pandemic, I would like to urge you to provide relief to independent contractor financial advisers by designating them, via clarifying legislation, as “qualified trades or businesses” under Internal Revenue Code Section 199A. This would allow them to fully benefit from the 20% pass-through deduction. During this period of unprecedented economic disruption, independent contractor financial advisers are among the body of small business owners adversely impacted.   

As you are aware, the COVID-19 pandemic has precipitated a pernicious public health and economic crisis affecting millions of Americans. Many are worried about how they will be able to afford retirement and keep their businesses afloat. During this uncertain time, financial advisers have served as an essential resource to their communities, providing much needed financial and emotional guidance. Additionally, independent contractor financial advisers are instrumental in helping their clients, many of whom are also small business owners, navigate the complexities of various stimulus programs currently available. Financial advisers enable small business owners to benefit from these programs by helping them select the most suitable program, showing them how to apply, and developing a holistic financial plan. This critical guidance will allow these businesses to maintain their employees, amid federal and state lockdowns, and afford to reopen.  

A key provision within the Tax Cuts and Jobs Act of 2017 created a 20% deduction on “qualified business income” for owners/shareholders of pass-through businesses, such as S corporations, partnerships and sole proprietorships. A significant number of our advisers are organized as pass-through entities, and we believe it is sound policy to allow these hard-working business owners to benefit from the deduction in whole. Under Section 199A, owners and shareholders of certain types of businesses – “specified service trades or businesses” – are limited in their ability to apply the 20% deduction if their overall taxable income exceeds certain thresholds. Unfortunately, financial advisers currently fall under this definition.

Financial advisers associated with LPL adhere to an independent contractor business model. As small business owners, they are engines of value creation within their communities and employ tens of thousands of people. LPL advisers devise essential financial strategies to enable their clients to: buy their first home, send their child to university and save for retirement. In the wake of the COVID-19 crisis, independent financial advisers are helping millions of families across the country cope with the anxieties of economic turbulence, while also contending with the strains of maintaining their workforce.

Excluding independent advisers from the full benefits of the pass-through deduction diminishes their ability to invest in and build their businesses. This disadvantage becomes even more heightened in the context of the COVID-19 crisis. Advisers are working diligently to ensure that their clients remain resilient through this crisis and into the future. Congress has a critical role to play in providing independent contractor financial advisers with much needed tax relief.

I urge you to provide clarifying legislation to designate financial advisers as “qualified trades or businesses” rather than “specified service trades or businesses” under Internal Revenue Code Section 199A. Taking this specific action will better position these small business owners to weather the economic fallout of the pandemic.

Dan Arnold is president and CEO of LPL Financial.