Investment Advisers Call for Extension and Expansion of Section 199A Pass-Through Deduction, Raise Concerns Over State and Local Tax Deduction

June 18, 2025

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The Honorable Mike Crapo
Chair
Senate Finance Committee
Washington, D.C. 20515

The Honorable Ron Wyden
Ranking Member
Senate Finance Committee
Washington, D.C. 20515

Re:      Concerns Regarding the 199A Pass-Through Deduction and PTE State/Local Tax Deduction

Dear Chair Crapo and Ranking Member Wyden:

The Investment Adviser Association (IAA)[1] appreciates the Committee’s leadership in crafting policies that support economic growth and the global competitiveness of the United States. As part of our ongoing efforts to advocate for policies that support a healthy and competitive U.S. capital market, we wish to express our concerns about the unfair exclusion of investment advisers from the full benefits of the Section 199A 20% pass-through deduction (Small Business Deduction) and the elimination of the ability for all pass-through entities, including investment advisers, to deduct state and local taxes at the entity level.

I. Expand the Small Business Deduction to Include Independent Investment Advisers

While we appreciate the Committee’s support for expanding and extending the Small Business Deduction, which benefits many of our members’ clients, we want to emphasize that investment advisers play a vital role in helping millions of Americans save for their future. Like other small businesses, investment advisers face significant challenges, including complex hiring and operational issues. Moreover, as a heavily regulated profession, investment advisers must deploy significant resources to remain compliant with ever-changing regulations.

Investment advisers should be entitled to the same tax benefits as other small business owners. We urge the Committee to take action to ensure a level playing field. The IAA calls on Congress to clarify that investment advisers are eligible for the full Small Business Deduction. Doing so would provide equal support for small businesses and enhance the financial security of American families.

The Small Business Deduction is crucial for empowering small businesses, including investment advisers, to invest in their employees and communities. Expanding this deduction is essential for the continued success of these businesses and for strengthening the broader economy, as small investment advisers are the backbone of the adviser industry.

The IAA, as a member of the Financial Services Coalition for 199A Fairness,[2] has drafted legislative text (attached below) to address this disparity.

II. Impact of Tax Bill on Pass-Through Entity Tax (PTET)

The IAA also takes this opportunity to highlight another important issue, which is separate from our advocacy to exclude independent investment advisers from the definition of specified service trades or businesses (SSTBs) to allow them to fully benefit from the Small Business Deduction. This issue, namely the ability for pass-through entities to deduct state and local taxes at the state level, affects many IAA members. We appreciate the Committee’s decision to preserve the ability for all pass-through entities to deduct state and local taxes at the entity level.[3] The House-passed One Big Beautiful Bill Act (OBBBA) eliminates this deduction for SSTBs, which includes investment advisers and other professionals. As a result, investment advisers across the country will face a tax increase.

The PTET deduction for state and local taxes has largely ensured parity between corporations and pass-through entities. However, the OBBBA targets professionals based solely on their occupation, penalizing them for choosing the corporate structure that best suits their business needs. We believe that this is discriminatory and unfair. At a time in which tax reform is focused on job creation and economic growth, this will have the opposite impact. In fact, an analysis by the non-partisan Tax Foundation shows that the OBBBA language eliminating the deduction for SSTBs will reduce GDP by 0.2 percent.

If the House provision is signed into law, investment advisers across the country will be worse off, as they will face a significant tax increase that could undermine their ability to grow their businesses, reduce the capital available for their clients, and create an uneven playing field in an already complex regulatory environment. The OBBBA provides neither simplicity nor fairness to millions of pass-through businesses that are job creators in our local towns and cities. As the Committee considers tax reform in the Senate, we want to thank you for retaining the current ability for pass-throughs to deduct entity-level state and local taxes. We urge you to maintain this provision as you move forward with the reform process.

* * *

Thank you for your leadership in developing policies that support economic growth and the global competitiveness of the United States. We appreciate your consideration of the IAA’s concerns regarding the Small Business Deduction and PTET, and we look forward to collaborating with you to ensure that U.S. tax policy continues to foster investment and job creation. Please do not hesitate to contact the undersigned at (202) 507-7214 if we can be of further assistance.

Respectfully Submitted,

William A. Nelson
Director of Public Policy and Associate General Counsel

cc:
The Honorable Jason Smith, Chair, U.S. House Ways and Means Committee
The Honorable Richie Neal, Ranking Member, U.S. House Ways and Means Committee

[1] The IAA is the leading organization dedicated to advancing the interests of fiduciary investment advisers. For more than 85 years, the IAA has been advocating for advisers before Congress and federal, state, and global regulators, promoting best practices and providing education and resources to empower advisers to effectively serve their clients, the capital markets, and the U.S. economy. The IAA’s member firms manage more than $35 trillion in assets for a wide variety of individual and institutional clients, including pension plans, trusts, mutual funds, private funds, endowments, foundations, and corporations. For more information, please visit www.investmentadviser.org.

[2] Includes organizations such as the American Securities Association, Cetera Financial Group, CFP Board, Commonwealth Financial Network, Financial Planning Association, Financial Services Institute, LPL Financial, National Association of Personal Financial Advisors, and Raymond James.

[3] While the Senate version introduces new limits on deductibility for all taxpayers – specifically, allowing PTET deductions up to the greater of $40,000 plus any unused $10,000 base limit, or 50% of the PTET – we appreciate that the bill no longer provides preferential treatment for non-SSTBs in this area.

Proposed Legislative Language

SECTION [X]. EXCLUSION OF INDEPENDENT FINANCIAL ADVISORS SERVING INDIVIDUAL RETAIL CLIENTS FROM SPECIFIED SERVICE TRADE OR BUSINESS DEFINITION UNDER SECTION 199A

Amendment to Section 199A(d)(2)

Modification of Specified Service Trade or Business Definition

Section 199A(d)(2) is amended by adding subparagraph (C):

“(C) Exclusion of Certain Investment-Related Services.— The term ‘specified service trade or business’ shall not include any trade or business that provides investment advisory, financial planning, or brokerage services to individual retail clients (as defined in paragraph (4)), provided by an independent financial advisor.”

Definition of Independent Financial Advisor

Section 199A(d) is amended by adding at the end the following new paragraph:

“(4) Independent Financial Advisor Definition .— For purposes of paragraph (2), the term ‘independent financial advisor’ means any individual or entity that—

(A) is registered as an investment adviser under the Investment Advisers Act of 1940 (15 U.S.C. 80b-1 et seq.), registered with a State securities authority, or is a registered representative of a broker-dealer registered with the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA);

(B) derives at least 90% of its gross income from investment advisory or financial planning services fees, brokerage commissions, insurance agent commissions, retirement asset advice, or any combination thereof provided to individual retail customers, defined as a natural person, or the legal representative of such person, or entity that receives a recommendation with respect to the purchase, sale, or exchange of a security or to engage in any strategy involving investment in securities, and uses the recommendation primarily for personal, family, or household purposes; and

(C) does not provide investment advice or services to hedge funds, private equity funds, other pooled investment vehicles, or institutional investors, except as incidental (less than 10% of its gross income) to its primary business of serving individual retail clients, as defined in subsection (3)(B).”