On April 9, 2021, the IRS released Private Letter Ruling (“PLR 202114002”), addressing whether a corporation operating in the insurance field meets the Section 1202 / QSBS criteria of being a “Qualified Trade or Business”. PLR 202114002 has important implications for businesses in the insurance, brokerage services, and FinTech industries.
As described in PLR 202114002, the subject company:
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helps customers obtain property, casualty, surety, personal, medical, worker’s compensation, employee benefits, and professional practice insurance.
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has contracts with insurance companies to sell a product, but also to perform administrative services such as reporting, recordkeeping, and claims investigation, adjustment and settlement services.
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has contracts with insurance wholesalers.
1202(e)(3) specifically excluded “brokerage services” from identification as a qualified trade or business. Given that 1202 did not define “brokerage services” and the legislative history lacked clarification on the matter, PLR 202114002 applied the common definition of a broker or brokerage:
“an agent who negotiates contracts of purchase and sale (as of real estate commodities or securities).”
However, PLR 202114002 specifically noted that:
Business’s role is not that of a mere intermediary. Contracts with insurance companies require Business to perform a number of administrative services beyond those that would be performed by a mere intermediary facilitating a transaction between two parties. For example, Business must promptly report all known incidents, claims, suits and notices of loss to the insurance company or its designated claims adjuster and cooperate fully to facilitate any investigation, adjustment, settlement and payment of any claim. It also must keep true and complete records and accounts of all transactions and correspondence with the insureds at its principal office, which records and accounts must be open to examination, inspection, verification and audit by the insurance company upon reasonable notice.
In light of the additional administrative services beyond its role as an intermediary provided by the company the IRS determined that the business “was engaged in a qualified trade or business as defined in Section 1202(e)(3).”.
PLR 202114002 has significant implications for businesses in the insurance, brokerage services, and FinTech industries. Specifically, as noted above, the ruling clarifies that businesses providing administrative services beyond those that would be performed by a mere intermediary may be considered a qualified trade or business for purposes of Section 1202. This determination was made even though the business had contracts with insurance companies to sell their product. As a result, companies that provide tools, technologies, administrative services, or other services beyond those of a mere intermediary for financial services firms and banks may now be able to argue that their additional services enable them to qualify as a qualified trade or business for QSBS purposes.
Consider, for example, a FinTech company that acts as an intermediary but generates its revenue from a SaaS business model. If in the provisioning of services, the FinTech provides tools or administrative services to financial services firms and banks beyond that of a mere intermediary, the FinTech may qualify under IRC 1202(e)(3) as a Qualified Business in the wake of PLR 202114002.
Similarly, insurance and brokerage services companies may also benefit from this ruling. If a company provides services such as claims investigation and adjustment services, even if it is also an intermediary, it may be able to argue that it qualifies as a qualified trade or business for Section 1202/QSBS purposes. This could provide these companies with significant tax benefits for their owners.
In addition to providing potential tax benefits, the ruling may also create new opportunities for collaboration and growth within the insurance, brokerage services, and FinTech industries. Companies that provide administrative services may be able to partner with insurance companies, financial services firms, and banks to offer more comprehensive solutions that qualify for Section 1202/QSBS benefits. This could lead to increased collaboration and innovation within these industries and create new opportunities for growth and expansion.
In sum, the recent Private Letter Ruling by the IRS regarding the qualification of a corporation operating in the insurance field as a “Qualified Trade or Business” under Section 1202/QSBS criteria has significant implications for businesses in the insurance, brokerage services, and FinTech industries. Companies that provide administrative services may be able to argue that their services qualify as a qualified trade or business for Section 1202/QSBS purposes, providing significant tax benefits and creating new opportunities for growth and expansion. However, businesses in these industries should consult with qualified tax professionals to determine whether their specific administrative services qualify them as a qualified trade or business under Section 1202/QSBS criteria.
How can Eton help?
Ensure your business is well-positioned to take advantage of the recent Private Letter Ruling 202114002 and its implications for the insurance, brokerage services, and FinTech industries. Trust Eton Venture Services to help you navigate the complexities of Section 1202 / QSBS criteria and assess the potential impact on your business. Our team of experienced professionals is ready to guide you through the process, ensuring your company is well-prepared to maximize the benefits and seize new growth opportunities arising from this groundbreaking ruling.
Don’t miss out on the tax benefits and collaboration possibilities that this ruling could unlock for your business. Contact Eton Venture Services today to learn more about how we can assist you in determining whether your business qualifies as a “Qualified Trade or Business” under Section 1202/QSBS criteria and help you explore the potential advantages this classification could bring. Let us be your trusted partner in unlocking your business’s full potential.
