The tax reform bill introduced by House Republicans doesn’t give the low 25 percent income tax rate for pass-through businesses to accounting firms and other professional service firms, and the rules for getting around it are complicated.
“The anti-abuse provisions for the reduction in the pass-through rate appear to be very complicated, so professional services firms will get no break,” said Bill Smith, managing director at CBIZ MHM and leader of the firm's National Tax Office. “If you’re not a professional services firm, it appears you have an election. You can treat 70 percent as wages, and 30 percent subject to the beneficial rate, or you elect to come up with a ratio based on your capital investment, and I believe that is going to be extremely difficult to implement.”
Accounting firms aren’t the only types of businesses that won’t get as low a rate.
“They basically cut them out and they’re not going to allow them to benefit from the 25 percent rule,” said Dean Zerbe, a former senior counsel to the Senate Finance Committee and currently national managing director of alliantgroup. “Lawyers, accounting firms, service firms, performing artists, engineering, consulting—it’s a pretty broad sweep that they’re not putting in there. They do the same, which I thought was interesting, at the corporate level. They also said corporations are going to have two different rates. They have a 20 percent rate for manufacturers, and then a 25 percent rate for other. I don’t know how happy folks are going to be about that, but it is what it is.”
“The other thing that they’re talking about is having a cap on the tax rate for self-employed people who pass-through S corps and partnerships, and they’re going to put salaries in there,” said Edward Mendlowitz, a partner at WithumSmith+Brown and a columnist for Accounting Today. “It’s going to make the work much more complicated.”
Treasury Secretary Steven Mnuchin recently warned that accounting firms might not qualify for as low a tax rate as manufacturing companies, and the new tax reform bill appears to follow through on that warning (see Mnuchin proposes to not cut taxes for accounting firms).
Accounting firms are sure to be called upon to help their clients qualify for the lower tax rates, perhaps by reclassifying themselves as management companies (see A juicy tax break—and the rules to keep everyone from taking it). Accountants will also need to advise clients on their year-end tax planning for this year.
“They kept the net investment income tax, so any planning that you were doing with respect to the net investment income tax would still apply,” said Smith. “Mostly the traditional year-end planning would continue to apply because most of the changes are in rates as opposed to substantive changes.”
But in the years ahead, there will be plenty of tax planning topics to discuss.
“They will have a lot of things to talk about with their clients going forward to help them,” said Zerbe. “The 179 expensing as well as the general increase in expensing that’s allowed, the 100 percent expensing, they’re going to put that into service September 27. I want to make certain that was a little bit more set, but I think you would want to be ready for that as well on these effective dates. I think they’ll try to have them stick, but I want to see the whites of their eyes before I wrote the check for the big machine, 3D printer or whatever. The expensing and the 179 expensing would be very much something that accountants would want to talk to their clients about. As advertised they didn’t do too much on the Roth IRAs, so that was useful. The estate tax, we’ll see. They’ve got the doubling of the credit. I think that’s probably more likely to stick. I don’t know about repeal, but that’s certainly very good news for a lot of the family-owned businesses. That should really take care of a lot of them.”
Mendlowitz believes multinational corporations will see big increases in their profits if the repatriation provisions are passed. “An unintended consequence, which is going to affect the stock market, is the corporate rate goes down, which it probably will, so all of the deferred income taxes, the deferred tax liabilities are going to decrease, and it’s going to raise the income,” he predicted.
He pointed to the example of Warren Buffett’s company, Berkshire Hathaway. “They’re going to have more income from recognition of the reduction of the deferred tax liability than they make in an entire year,” he said. “That’s going to have a big effect on the stock market.”
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