The passage of 2017’s late December tax reform was swift and aggressive, prompting rapid change that left many corporate tax teams scrambling to keep up. The new tax plan came with an overhaul of many standards affecting business, and offered up the allure of some hefty deductions and tax breaks – a seemingly good thing, at least on the surface. The problem? Unclear wording.
This confusion is particularly true in the case of a highly touted pass-through deduction for eligible companies. And yet, even after three months of work under the new rulings, thousands of U.S. companies still can’t figure out if they are permitted to claim a piece of the savings available.
Defining the New Pass-Through Deduction
The Tax Cuts and Jobs Act came with a lot of new opportunities and challenges, especially for business owners. The so-called pass-through deduction falls somewhat into both categories.
This 20% deduction, which is described but not defined in the body of the Act, refers to business owners who report their business income and loss on their personal tax returns. This is only possible for businesses operating as pass-through entities, like sole proprietorships, LLCs, S-Corps, and partnerships. As the ruling is currently written, pass-through business owners earning under $157,500, or $315,000 for a married couple, are eligible no matter what. Over this threshold, however, is where things get fuzzy.
The Problem With the Law
The issue with this particular policy is related to the specific kinds of businesses that qualify. With the understanding that many wealthy individuals utilize these kinds of entities in organizing their businesses, like doctors, lawyers, and hedge fund owners, Congress attempted to write language that barred these kinds of operations from taking advantage of this tax break. However, in doing so, they failed to specify how literally the language used in the bill is to be interpreted.
For example, the new tax laws specify that entertainers, presumably meaning high-paid actors or musicians, are not eligible to claim this deduction. Unfortunately, the term “entertainer” is not at all specific, leaving many less affluent individuals in performance careers wondering if they’re included in this bucket. Healthcare careers are also mentioned, but to whom does this apply? Is the limitation restricted to doctors, or are hired caregivers and home nurses disqualified as well? Is care for animals included under this umbrella?
The cost of this particular deduction to the government will depend entirely on how the IRS rules. A lax interpretation could potentially result in $415B in tax breaks – a result that pleases businesses but will significantly decrease the revenue expected under the Tax Cuts and Jobs Act.
The Wait for a Decision
So far, no official word has been released, leaving potentially eligible businesses waiting and wondering. This may seem merely inconvenient, but a delay may also be costly: businesses with no clear ruling won’t be able to plan ahead for tax time and may end up making inadequate estimated payments that can trigger an underpayment penalty. The IRS claims it will have a ruling by June, but industry experts expect this deadline to be delayed.
If you’re struggling to understand the ins and outs of the new tax laws and how they apply to you, you’re not alone. Klein Hall CPAs is happy to help, offering tax guidance that can keep your small business on the right track, no matter the final ruling on this complex issue. Contact us today to learn more!