By MARCY GORDON
AP Business Writer
WASHINGTON (AP) — Architects and engineers are still in. Accountants, doctors and lawyers remain out — mostly.
New rules floated by the Trump administration lay out what kinds of businesses are allowed by the new tax law to take a 20 percent deduction against their income taxes.
Before issuing new proposed rules on Wednesday, the Treasury Department and the IRS had worked for six months to bring clarity to Congress’ blueprint for the tax law. But as is true for many parts of the sweeping law, which Republicans hustled through Congress last year, the requirements that millions of “pass-through” businesses must meet in order to secure generous tax breaks are stunningly complicated.
Business owners can be excluded, for instance, if they earn more than certain amounts. That’s also true for companies that are organized in certain ways or that lease their equipment rather than own it.
“They’ve attempted to draw lines that are clearer than the language” of the tax law, said Andrew Howlett, a lawyer at the law firm Miller & Chevalier who specializes in tax issues. “There are still questions that remain to be answered for taxpayers.”
Steven Rosenthal, a senior fellow at the nonpartisan Urban-Brookings Tax Policy Center, said the new regulations “allow a lot of different businesses the 20 percent deduction. … They allowed a lot of latitude for businesses to claim it.”
At the same time, Rosenthal found the protections in the rules against abuse by businesses of the special tax break to be inadequate. “I think there’ll be a lot of gaming of the rules,” he said.
There is concern, for example, that to qualify for the deduction, individuals would quit their jobs and then contract their services back to their former employers as independent contractors. Now the government appears to have prohibited that in the new rules, said Kyle Pomerleau, director of the Center for Quantitative Analysis at the conservative Tax Foundation.
The new rules affirm a requirement found in the tax law stipulating that certain business owners such as lawyers, accountants, doctors and consultants can’t qualify for a full deduction if their annual income exceeds $157,000 and they’re single filers or $315,000 and they’re filing jointly. The amount of a deduction that can be claimed will decrease as taxpayers’ income rises. The same is true for interior designers, investment managers, therapists and others.
Many small-business owners around the country have been yearning for months to know whether they’ll be pass-through winners or losers. Even with the new regulations, many owners will still most likely be turning to tax accountants and other specialists to help them clear up some perplexities
Millions of businesses — from mom-and-pop grocery stores or florists to big law firms, hedge funds and the sprawling Trump Organization — are organized as pass-throughs in which company profits are pipelined into their owners’ personal tax buckets. The owners pay individual, not corporate, tax rates on their incomes. The vast majority of U.S. businesses, big and small, are taxed this way.
The Republican architects of the tax plan and President Donald Trump have portrayed the new pass-through tax break as a boon to small businesses and to entrepreneurs. Yet with lucrative partnerships and limited liability companies, or LLCs, among the pass-through crowd, the lower taxes could also enable some rich Americans to consolidate their wealth.
Before the tax-law changes, the majority of pass-through owners were taxed at top individual tax rates, according to the Tax Foundation. When Republican lawmakers were working on their $1.5 trillion tax-reduction plan, they insisted that small-business owners would share in the benefits as much as corporations and the wealthy.
At the same time, though, the tax law, as passed, offers only modest reductions to most low- and middle-income families and individuals.
“This 20 percent deduction will lead to more investment in U.S. companies and higher wages for hardworking Americans,” Treasury Secretary Steven Mnuchin said in a statement.
The deductions will reduce small and mid-size businesses’ tax rates to the lowest levels seen since the Depression years of the 1930s, Mnuchin said.
Sen. Ron Wyden of Oregon, the senior Democrat on the Senate Finance Committee, wasn’t impressed. The rules, he said in a statement, “confirm that the fortunate few win and Mom-and-Pop shops lose under Trump’s tax law.”