The tax reform bill that’s due for a vote this week in Congress will leave lots of tax loopholes for taxpayers and tax practitioners to strategize around for years to come.
The hastily drafted bill contains arcane provisions about the tax rates for pass-through businesses and multinational corporations. While it eliminates a host of deductions, many are still preserved and have new complications.
“Companies will need to move quickly to respond to the vast changes expected in the Tax Code and the layers of new rules that will become effective at different times,” said Jeffrey C. LeSage, Americas vice chairman-tax at KPMG LLP. “Of particular importance, if the bill is enacted before year-end, calendar-year companies will need to reflect it in fourth quarter and year-end financial statements.”
Taxpayers in high-tax states like New York and California could find themselves on the short end of the stick, however. The conference committee bill limits the state and local tax deduction to $10,000 for a combination of income taxes, property taxes and sales taxes. Among the strategies reportedly under consideration, at least in California, are for states to reclassify tax payments as charitable contributions, allowing states to award tax credits instead to taxpayers.
Some businesses may decide to reclassify themselves as corporations to take advantage of the lower corporate tax rate, while some high-income individuals may decide to set up pass-through businesses to qualify for their lower tax rates.
“There is a loophole for people who are currently employees to become businesses to lower taxes,” said Fred Slater of MS1040 LLC. “It does nothing for the economy but increases the profits of the very, very wealthy and very large businesses.”
Some accountants may even need to skip the holidays to help public companies handle the required disclosures about the possible impact of the new tax legislation on their corporations. Many firms will also be helping their clients with end-of-year tax planning to take advantage of last-minute tax breaks before they disappear.
“As tax professionals, it is a unique once-in-a-career opportunity to be part of a major restructuring of the U.S. Tax Code,” said LeSage. “We haven’t seen major tax reform in the U.S. since 1986, and the opportunities for us all to learn, grow and serve our clients will be many and varied. Given the legislation’s timing, we are preparing to help our clients over the holidays to meet the challenges related to the legislation and seize the opportunities that the new landscape will hold.”
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