Accountants wouldn't get lower rate under House bill

The tax reform bill passed by the House on Thursday doesn’t align with the Senate proposal in the way they tax pass-through businesses such as accounting firms.

“Service industries including accounting firms, engineering firms and other firms do not get the benefit of the lower 25 percent tax rate,” said Brent Lipschultz, a tax partner in PricewaterhouseCoopers’ personal financial services practice in New York. “If you look at U.S. GDP, it comprises mostly service industries in the United States. This was just a way to appease the small business group out there. In general, partners at accounting firms will not get the benefit of the lower rate.”

However, the Senate version of the Tax Reform and Jobs Act, which was still being debated and marked up in the Senate Finance Committee on Thursday, provides somewhat more leeway.

“There’s a little different treatment in the House bill than under the Senate bill,” said Mark Nash, a tax partner at PwC. “Service businesses are allowed to calculate an alternative allocation percentage in terms of how much income comes from capital. Service organizations can qualify for the 17.4 percent deduction, but only if your income is below a certain threshold amount. They tweaked this so service organizations can benefit from the lower rate.”

The benefit for pass-through service businesses phases out for individuals with incomes above $75,000 and couples who earn over $150,000 a year.

PwC has released a tax and wealth planning guide to help upper-income taxpayers. “The message we’re taking to our clients is don’t take too many consultations with your clients until you know how they’re impacted,” said Nash. “We encourage you to ask questions about the rate changes, and the changes to the estate and gift rules. One of the big changes is the change to business income, defining it as qualified business income. They’ve billed much of this as simplification. Indeed much of this is simplification on the low end, but if you’re on the high end of the income scale, you don’t see a lot of simplification. If you’re in a situation with flow-through income, it gets very complicated.”

“It is clear that it is complicated for the high-net-worth people, especially those that own pass-through businesses,” said Lipschultz.

Brent Lewin/Bloomberg