1/ Under tax bills, how to pay 20% on labor earnings using a c-corp? How to be a “partner,” not employee and get pass through rate? New report from tax experts across country on games, roadblock, and glitches in new legislation: ssrn.com/abstract=30841…
2/ Bills were written quickly with lots of special preferences and complex rules to govern. Result = mess that is likely to result in substantially more revenue loss than now expected generally benefiting well off and advisors.
3/ Here’s a run through of some of the more egregious problems we catalogue:
4/ Don’t want to pay the top income tax rate of ~40% on earnings? Form a C-corp. Get taxed at 20%. Stick the corp stock in a Roth retirement account. No further tax. Or pass on to heirs—no further tax.
5/ And, don’t try this at home. Get a tax lawyer. There are lots of existing rules to work around to pull this off. But, the protections are shot through with holes.
6/ How about if associates in a law firm would like to get the benefit of the Senate’s loophole for pass throughs—effectively lowering tax rate by 23%?
7/ Associates should be spun off into Associates, LLC—even as they keep working just like before. Then partners in the new firm receiving “profits,” not “wages.” So long as taxable income for associate <$500K (for married couple), possible gets the special rate.
8/ Then there’s the athlete like described in Washington Post: washingtonpost.com/news/wonk/wp/2…
9/ In theory, highly paid athletes don’t get special rate for services. But, they have a way out—form a separate pass-through owning their brand. Get special pass through rate under provisions in both houses!
10/ Under Senate bill, that separate entity owning brand would need to pay enough employee wages. Seems easy. Make it an S-Corp, with an employee. The athlete. Pay enough wages to get full benefit of low pass through rate.
11/ Now we get to int’l provisions. Lots to discuss here. But, take this one--the Senate’s export subsidy. Get special low rate for income on exports associated with intangibles in US.
12/ So, let’s say you make high priced phones in US based on IP here. If you want low rate, sell them to an unrelated distributor abroad. It’s an export! Then, they can export them right back into the U.S. Low rate for a roundtrip.
13/ But, let’s say the IRS cracks down on that. Maybe worse. US corp in that case shouldn’t fully manufacture in U.S. Instead, should export unfinished products abroad to be finished there and sent back to U.S.
14/ And, it’s not just mistakes that give away $. There are mistakes that haphazardly raise taxes. Like the Senate’s keeping corporate AMT at last minute and blowing up the structure of their reform (and accidentally raising a lot more $).
15/ Problem = corporate AMT will drop out according to all reports. What about everything else?
16/ This is urgent. The overall structure of the bill is flawed but its bad execution will aggravate damage. Most provisions effective start of 2018. Congress needs to spend the time, and get this right the first time. (End--For now!)
