Restoring the 20% Pass-Through Tax Deduction: A Pathway to Wealth Equity, Small Business Growth, and Economic Strength for Ethnically Diverse and Underserved Communities.

Restoring the 20% pass-through tax deduction for independent financial advisors and planners would not only create a fairer tax code but also serve as a transformative step in promoting wealth equity, fostering small business growth in ethnically diverse communities, and strengthening the U.S. economy. The current exclusion has significantly impacted independent financial advisors and planners. Below are a few examples highlighting its unintended consequences:

1. Increased Tax Burden: Financial advisors operate under a "Specified Service Trade or Business" (SSTB) designation, which makes them ineligible for the 20% deduction on qualified business income if their taxable income exceeds certain thresholds. As a result, they are subject to higher effective tax rates compared to other business owners who qualify for the deduction. This reduces their net income and cash flow, leaving them with less money to reinvest in their business or save for retirement.

2. Competitive Disadvantage: Other professionals or business owners in non-SSTB industries (e.g., real estate, engineering, or architecture) who can claim the deduction enjoy a tax advantage. This discrepancy could make financial advisory careers less attractive in comparison, as advisors effectively take home less income for the same level of business success.

3. Pressure on Pricing: Financial advisors may face pressure to maintain competitive pricing for their services despite higher tax burdens. Passing along higher costs to clients could risk losing business, so many advisors absorb the tax impact themselves.

4. Incentive to Change Business Structures: To mitigate the tax burden, some financial advisors might explore alternative business structures, such as switching from sole proprietorships or partnerships to C-corporations, which are taxed at a flat 21% corporate tax rate. However, this comes with its own complexities, including double taxation on dividends.

5. Potential Client Impact: The lack of access to the deduction may indirectly affect clients. Financial advisors may have fewer resources to invest in technology, staff, or continuing education, potentially impacting the quality or scope of their services.

Benefits of restoring the 20% pass through Tax deduction for Independent Financial Advisors and Planners:

Generally speaking, establishing or starting an independent financial advisory company involves several costs, which can vary based on the business model, geographic location, and services offered. In addition to startup expenses, independent financial advisors face ongoing operational costs such as regulatory compliance, software subscriptions, office expenses, and marketing. However, in general, here is a breakdown of the major cost categories and estimated ranges of associated costs:

1.      Licensing and Registration Costs

2.      Technology and Software

3.      Office Space and Equipment

4.      Insurance

5.      Marketing and Branding

6.      Memberships, Certifications, and Continuing Education

7.      Staff or Outsourced Services*

8.      Miscellaneous Costs

Estimated Total Startup Costs

Low Range (Solo Advisor, Remote Setup): $10,000 - $20,000.

Mid-Range (Basic Office Setup): $20,000 - $50,000.

High Range (Full-Service Firm with Staff): $50,000 - $100,000+.

Ongoing Costs: These costs typically range from $5,000 - $20,000+ per year for a solo practitioner and more for multi-advisor practices.

Reinstating this tax deduction could help independent financial advisors from diverse ethnic backgrounds—who often start small and serve underrepresented communities — cover critical expenses, like those highlighted above. The result of this reinstatement could lead to greater industry diversity and expand access to financial advice for underserved populations.

Three Benefits Of Reinstatement Include:

1. Promoting Wealth Equity in Ethnically Diverse Communities

a)      Bridging the Wealth Gap: Many financial advisors from Black, Latinx, Asian, and Native American communities focus on serving their own communities, which have historically faced systemic barriers to wealth accumulation. Restoring the 20% deduction would allow these advisors to expand their businesses and offer affordable, culturally relevant financial advice to underserved populations.

b)      Expanding Access to Financial Literacy: Ethnically diverse communities often lack access to high-quality financial guidance, contributing to wealth inequities. By reducing the tax burden on advisors, this policy empowers them to dedicate more resources to outreach, education, and pro-bono services, helping families and small businesses in these communities achieve long-term financial stability.

c)      Building Generational Wealth: Advisors are critical in helping families plan for retirement, save for education, and navigate generational wealth transfers. Enabling financial advisors to flourish in diverse communities ensures more Americans can participate in and benefit from the nation’s economic growth.

2. Fostering Small Business Growth in Ethnically Diverse Communities

a)      Attracting Diverse Talent to the Industry: Restoring the deduction would reduce the financial burden of starting an independent financial advisory business, making the field more accessible to professionals from underrepresented backgrounds. This would encourage a new generation of diverse advisors to enter the industry, bringing fresh perspectives and reaching communities traditionally underserved by financial services.

b)      Supporting Minority-Owned Businesses: Many minority financial advisors operate small, independent practices, often serving as cornerstones of economic empowerment in their communities. By offering a fair tax advantage, these businesses can reinvest in growth, hire staff, and contribute to the economic vibrancy of their local areas.

c)      Breaking Down Barriers to Entrepreneurship: Systemic challenges—such as limited access to capital—disproportionately affect entrepreneurs of color. Tax relief through the pass-through deduction would provide critical financial support, enabling these advisors to navigate startup costs, invest in tools and technology, and build sustainable businesses that strengthen local economies.

3. Increasing the U.S. Economic Bottom Line and Contributing to Making America Great Again

a)      Boosting Economic Growth: Financial advisors are small business owners who reinvest their earnings into their firms and local economies. By restoring the deduction, advisors would have more resources to hire employees, purchase services, and expand their reach—fueling job creation and economic growth across the country.

b)      Improving Retirement Readiness and Reducing Reliance on Government Programs: Advisors help clients prepare for retirement, reduce debt, and achieve financial independence, reducing dependency on programs like Social Security and Medicare. This contributes to a stronger, more self-reliant America.

c)      Strengthening Small Business Infrastructure Nationwide: Financial advisors are trusted partners for small businesses, helping them with tax planning, succession strategies, and investment decisions. A thriving financial advisory industry creates a ripple effect of economic stability, empowering countless small businesses to grow and succeed.

d)      Ensuring Fairness and Equity in the Tax Code: By restoring the deduction, financial advisors would be treated equitably with other small business professionals—like architects and real estate agents—reinforcing a tax system that supports the entrepreneurial spirit at the heart of America.

Example of Reinstatement Impact

Without the Deduction: An ethnically diverse independent financial advisor with $100,000 in taxable income pays approximately $24,000 in federal taxes (assuming a 24% rate). This leaves $76,000 to cover business costs and reinvest.

With the 20% Pass-Through Deduction: An ethnically diverse independent financial advisor can deduct $20,000 from taxable income, reducing it to $80,000. Federal taxes now amount to $19,200 (24% of $80,000), saving $4,800 in taxes. These savings can be reinvested into business growth, compliance, or client service enhancements.

 At Practice Management Consultants, LLC - our perspective is, restoring the 20% pass-through tax deduction is about empowering small business, uplifting communities, and unleashing economic potential. It directly supports small business growth, strengthens the middle class, and encourages financial independence—all core principles of Making America Great Again. The elimination of deductions for independent financial advisors under the TCJA has had far-reaching consequences, disproportionately affecting marginalized communities. Reinstating this deduction can provide ongoing tax savings as the business grows, compounding its impact. For example, the deduction could offset startup expenses like office leases or professional liability insurance. Over time, savings could fund growth initiatives, such as hiring employees or opening additional locations, creating jobs and contributing to the local economy.

In enabling ethnically diverse financial advisors to thrive, the U.S. will foster wealth equity, drive entrepreneurial growth, and ensure that more Americans have the tools to participate in our nation’s economic success.

About PMC-LLC

PMC-LLC, founded in 2019, is an award-winning consulting and training firm specializing in Supplemental Professional Development, Coaching, and Training (SPDC&T) for diverse financial advisors and leaders. Over five years, PMC-LLC has coached 800 licensed ethnically diverse financial advisors generating 4,962 hours of training via masterclasses and 1:1 sessions. Our firm emphasizes confidence, cultural competence, and leveraging diversity as a sales strength.

 References For Article:

1. Tax Cuts and Jobs Act of 2017 (Public Law No: 115-97)

2. National Association of Personal Financial Advisors (NAPFA)

Advocacy for fairness in tax policy for financial advisors and planners. NAPFA Policy Insights

3. Small Business Administration (SBA) Statistics

Highlights the economic importance of small businesses, which include many independent financial advisors. SBA Small Business Profile

4. U.S. Census Bureau: Racial and Ethnic Diversity in the Workforce

Provides data on the diversity gap in financial services and how policy changes can support inclusion. Census Workforce Reports

5. Center for Financial Planning, CFP Board

Reports on the barriers to entry for diverse financial planners and the importance of inclusion. Diversity in Financial Planning Research

6. Economic Policy Institute (EPI): Wealth Gaps in America

Provides insight into the financial disparities faced by diverse communities, reinforcing the need for tax fairness. EPI Wealth Gap Data