Restore Advisory Fee Deductibility and Gain Pass-Through Tax Treatment

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Two provisions of the Tax Cuts and Jobs Act (TCJA) unfairly disadvantage investment advisory firms and their clients. For this reason, the IAA is working to persuade Congress to restore the deductibility of investment advisory fees as an itemized deduction and to allow advisory firms to benefit from the 20 percent deduction for pass-through businesses.

The TCJA’s repeal of the investment advisory fee deduction has the unintended consequence of effectively increasing the cost of advice to investors whose itemized deductions exceed two percent of their adjusted gross income. It also puts advisers – which are almost exclusively fee-based – at a tax disadvantage relative to commission-based broker-dealers.

The pass-through provision has serious detrimental consequences as well. Owners of advisory firms that are pass-throughs are allowed to deduct 20 percent of their income only if they make less than $157,500 filing an individual tax return or $315,000 if they file jointly. Above that income threshold, the deduction is not available to investment advisers as they are deemed to be ineligible “specified service” businesses. This provision erroneously penalizes the many successful investment advisory firms with bona fide profits over and above wage income and may lead to difficulty in their attracting capital, decreased valuations, succession planning challenges, and incentives to convert to more complex structures.

This provision also deserves reconsideration since this pass-through deduction was intended to spur the creation of new employment opportunities and the investment advisory industry is a powerful provider of high-quality jobs to the economy. In fact, investment advisers now employ some 780,000 non-clerical workers, a 10 percent increase over the past four years.

Congress must act to restore the deductibility of advisory fees and to make the 20 percent pass-through deduction available to advisory firms. Contact Congress Now.