Financial professionals, including investment advisers and insurance agents, that hold personal contracts with their broker/dealer or insurance companies may no longer "attribute" this income to their LLC or SubChapter "S" corporation. This strategy has been widely used by financial professionals to avoid self-employment tax on a portion of their income.
Under SubChapter "S" taxation, which is available to corporations and LLC's alike, only the amounts deemed as salaries or wages paid from the corporation/LLC to the financial professional are subject to employment taxes - with any residual profits distributed to the LLC/Corporation owner totally free of employment taxes which generally run 15% or more. These employment taxes are for Social Security and Medicare taxes and are in addition to normal income taxes.
In the case of Fleischer (TC Memo 2016-238), the U.S. Tax Court held that because the income resulted from a personal contract the financial consultant had with two unrelated insurance companies, it could not be "attributed" to his Sub Chapter "S" corporation. Unfortunately, most financial institutions that pay commissions to financial professionals will only contract with licensed individuals - not the entities formed by them.
For now, anyway, this case appears to be the death knell for this tax strategy. If you have been employing this strategy in prior years, it would be wise to abandon it and consider other options.
Please do not hesitate to contact me regarding this matter or any other tax planning ideas you would like to pursue.
