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On Friday, the IRS issued final regulations governing Section 199A of the tax code. The rule confirms that owners and shareholders of insurance agencies and brokerages organized as pass-through entities are eligible for a tax deduction of up to 20% on “qualified business income”—regardless of taxable income level. The deduction is available for taxable years 2018 through 2025.
The new deduction reduces the top effective tax rate on pass-through income to approximately 29% from 37%. For those in the 24% bracket, it can reduce the rate to as low as 19.2%.
The regulation is a significant government affairs victory for Big “I” member agencies. Since passage of the 2017 tax reform law, the Big “I” has been aggressively advocating before Congress and the Trump Administration to ensure that insurance agencies and brokerages organized as pass-through entities fully benefit from tax reform.
The final regulation is substantially similar to a draft regulation released in August. Under the regulation, owners and shareholders of insurance agencies and brokerages where the owner or shareholder’s annual taxable income does not exceed $315,000 for joint filers and $157,500 for single filers in 2018 can take a 20% deduction on qualified business income.
For insurance agencies and brokerages where the owner or shareholder’s annual taxable income exceeds these levels, the deduction is available for qualified business income derived from the sale and servicing of insurance products. However, the deduction may be limited on income derived from consulting or financial services activities if that non-traditional income exceeds certain de minimis thresholds. Additionally, above these same income levels, the total amount of the deduction cannot exceed 50% of employee W-2 wages, or 25% of W-2 wages plus 2.5% of capital assets, such as tangible property purchased for the business—whichever is greater.
Owners and shareholders of insurance agencies and brokerages organized as pass-through entities can take full advantage of the 20% deduction, no matter their taxable income levels, because the IRS does not consider the sale and servicing of insurance products to be a “specified service trade or business.” Other professions such as doctors, lawyers, accountants, stock brokers and certain consulting and financial advisory activities are a “specified service trade or business” under the regulation.
Owners and shareholders of “specified service trades and businesses” with annual taxable income between $315,000 and $415,000 (joint) and $157,500 and $207,500 (single) will slowly see the deduction phased out. Those above $415,000 (joint) and $207,500 (single) are prohibited from utilizing the new deduction.
While a major victory Big “I” members, the regulations are complex. The Big “I” encourages members—especially those who derive income from non-traditional activities—to consult a tax professional to determine how the new deduction specifically impacts their businesses.
Jennifer Webb is Big “I” federal government affairs counsel.
A few days before his official swearing in, Gov. DeWine made appointments to fill nearly his entire cabinet. All cabinet appointees are new to their roles, with the exception of Jillian Froment, who DeWine reappointed to continue to serve as the Director of the Ohio Department of Insurance.
Director Froment has spent the past eight years at the Ohio Department of Insurance in several high-level positions including Assistant Director, Chief Administrative Officer and Deputy Director. In May of 2017, Gov. Kasich appointed her Director.
In addition to serving as the head of ODI, Froment serves in prominent leadership roles for two national insurance organizations focused on consumer protection and the modernization of state insurance regulation. In November, it was announced that she was re-elected chair of the Interstate Insurance Product Regulation Commission as well as secretary-treasurer of the National Association of Insurance Commissioners Midwest Zone.
Gov. DeWine also appointed Stephanie McCloud to head the Ohio Bureau of Workers’ Compensation. McCloud is a veteran executive with a diverse background that includes 20 years of experience in public administration and workers' compensation. She most recently served as senior vice president at Sedgwick Claims Management Services while managing her private Columbus law firm, McCloud Law LLC.
McCloud began her career as a staff attorney at BWC before serving as legal counsel to both former Governor George Voinovich and the Ohio Department of Transportation. She later joined the office of former Attorney General Jim Petro, first as senior deputy attorney general before advancing to chief counsel.
In addition to these developments, Larry Householder was elected earlier this month to serve as the Speaker of the Ohio House of Representatives. Given this change, it is not yet known who will be named to lead the House Insurance Committee. Senate legislative committee announcements are also forthcoming from Larry Obhof, who was re-elected by his peers to serve once again as the Senate President.
What’s ahead in 2019?
As is the norm in the start of a new General Assembly, the first order of business will be the next two-year budget.
As for insurance issues, another attempt will likely be made to pass legislation to help OIA members who write group health insurance by requiring health insurance companies to provide claims data to those with fifty or more enrolled employees in their group. Unfortunately, Senate Bill 227, which would have achieved this, failed to make it across the finish line in December before the end of the last legislative session – mostly due to running out of time.
OIA supports this initiative, along with other groups such as the Ohio Association of Health Underwriters and the National Federation of Independent Business, because allowing risk advisors and employers access to claims data will help Ohio employers to properly assess their health care options and make better coverage decisions.
In addition, guidance and rules are yet to be developed by the Ohio Department of Insurance for the new insurance-specific Ohio cyber law. This law has several provisions, including investigation and breach requirements that all agencies, regardless of size, will be required to comply with should they learn that a cybersecurity event has or may have occurred. In certain instances, notification of a breach may even be required to the Ohio Department of Insurance.
Large agencies will also be required to develop and maintain a comprehensive written cybersecurity plan and exercise due-diligence requirements over third-party service providers.
An effective date is not yet available for Senate Bill 273, but it will likely be around mid-March. Stay tuned -- OIA will continue to keep you informed on these new cyber requirements as more information becomes available.
Learn more about SB 273.
Yesterday’s election generated great interest among voters, with voter turnout at 54.3%, the highest for a gubernatorial election year since 1994.
The public polls were once again wrong leading into yesterday’s election. Many anticipated that the Democrats could pick up some statewide offices, including that of governor. Instead, Republicans swept all the statewide executive offices.
Mike DeWine (R) defeated Richard Cordray (D) 50.66% - 46.45%
Dave Yost (R) defeated Steve Dettelbach (D) 52.42% - 47.58%
Auditor of State
Keith Faber (R) defeated Zach Space (D) 49.93% - 46.06%
Secretary of State
Frank LaRose (R) defeated Kathleen Clyde (D) 50.92% - 46.73%
Treasurer of State*
Robert Sprague (R) defeated Rob Richardson (D) 53.53% - 46.47%
What this means for OIA: The next leaders of the Ohio Department of Insurance and the Ohio Bureau of Workers’ Compensation will be picked by the DeWine/Husted team. This team’s business-friendly approach should result in sound picks for both state agencies.
Also of note is that DeWine, Faber and LaRose will play key roles following the 2020 census when Ohio draws new maps for Congressional and Statehouse districts that will last for a decade. While Ohio recently passed redistricting reform, the governor, secretary of state and auditor will still sit on the redistricting commission that draws the Statehouse districts and also may engage in the Congressional mapping if needed.
Ohio Supreme Court
Judge Melody Stewart defeated Justice Mary DeGenaro 53-47% and Judge Michael Donnelly beat Judge Craig Baldwin 61-39%. Unfortunately, DeGenaro and Baldwin failed to benefit from the momentum the Republicans had, as voter drop off in these races was high, with more than 900,000 Ohioans skipping these races. The makeup of the court beginning in January will be 5-2, which will quite possibly result in more split decisions and could impact which cases the Court chooses to accept and which cases it rejects. Furthermore, with two seats lost this election, the 2020 election takes on increased importance as two seats will be up for election on the Court, and should Justices French and Kennedy fail to retain their seats, the philosophical makeup of the Court could be dramatically altered to be more activist in nature.
Ohio House of Representatives
All 99 seats for the Ohio House were on the ballot. At this point, it looks like the Democrats likely picked up four seats. This would reduce the Republican majority in the House to 62-37. Of significance here is that the House Republicans supermajority (which carries with it veto override authority) remains intact.
The Senate Republicans likely picked up another seat, further strengthening their veto proof supermajority. Heading into next year, the Republicans will control 25 of the states 33 senate districts.
OIA PAC Results
This year, OIA PAC contributed just under $57,000 to candidates, with a significant amount of this going to statewide candidates (just under $30,000). Overall, OIA PAC supported 37 candidates this year. Of these candidates, 30 won their races and seven lost.
With the election now over, legislators will be getting back to work in what is anticipated to be an extremely busy lame duck session. Look for more information to come on legislative activity that is likely to take place in the coming weeks as the year winds down.
As always, don’t hesitate to contact me with any questions!
When should the statute of limitations begin on an insurance agency negligence claim?
That’s the question the Supreme Court of Ohio will answer in London Insurance vs. LGR Realty – a case that could have a major impact on the entire insurance industry.
LGR Realty filed a complaint against Frank & London Insurance Agency, an independent agency in Columbus, alleging that they received an unsatisfactory insurance policy.
This allegation arose after a third party filed a claim against LGR Realty and the commercial policy carrier, Continental Casualty Company, refused to defend and indemnify.
Frank & London Insurance argues that the statute of limitations clock began running when the policy was issued. However, LGR Realty argues that it was a “delayed-damages” situation and the statute of limitations clock began when Continental Casualty Company refused to defend or indemnify on the third-party claim.
The trial court ruled in favor of Frank & London Insurance Agency, citing that the case was time-barred. LGR Realty appealed this decision, and the 10th District Court of Appeals overturned the trial court ruling.
Recent Supreme Court of Ohio professional negligence cases have nearly rescinded the court’s decision in Kunz v. Buckeye Union Insurance Co., which approved the delayed-damages rule regarding statute of limitations. However, this decision has not been expressly overruled.
The Supreme Court of Ohio will soon determine whether the delayed-damages rule in Kunz v. Buckeye Union Insurance Co. will remain valid.
LGR Realty’s argument rests on the logic that it is unrealistic to expect a policyholder to know the extent of their coverage until harm is suffered. Therefore, the Court should rule that the statute of limitations began when Continental refused to indemnify LGR when they were sued by a third party.
However, Frank & London Insurance argues that since a cause of action in a professional negligence claim begins when the wrongful act is committed, the statute of limitations in this specific case began when LGR Realty purchased their policy.
Additionally, Frank & London Insurance argues that since the Kunz v. Buckeye Union Insurance Co. case, there have been other professional negligence claims where the court held that the statute of limitations begins when the act is committed, not when the discovery of the tort occurs.
A decision by the Supreme Court of Ohio is expected to be issued soon. Stay tuned for more updates!
Independent agent Brad Lamoreaux is running for the 7th district seat in the Ohio Senate next year.
Lamoreaux, who has an agency in Hamilton, Ohio, was recently featured in a Cincinnati Enquirer article about the primary race for this seat.
We encourage member agents make a difference in their communities by getting involved!
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