What the GOP tax revamp actually does for pass-throughs
WASHINGTON – Bobby Jenkins doesn’t run his business out of a gleaming downtown office tower. His company, ABC Home & Commercial Services, isn’t listed on any stock exchange. His payroll doesn’t cover thousands of employees.
And yet his Austin-based handyman company, which operates in North Texas, might stand at the center of the business relief that Congress OK’d last month as part of a $1.5 trillion tax revamp.
“Intuitively, anyone would say that it’s going to be good for business,” Jenkins said.
For all of the attention to how the GOP’s tax overhaul is affecting corporate giants like AT&T, American Airlines and others, lawmakers reached a far wider swath of the business world by providing a 20 percent tax break to “pass-through” operations like Jenkins’.
Income: Those partnerships, sole proprietorships and S-corporations, which account for the vast majority of businesses, are so named because they pass through income to their owners’ personal returns.
And while Republicans are staking that high-dollar tax cut on helping smaller businesses — with Jenkins, among others, planning to invest in facilities and hire more workers — the overall impact remains murky for many individual owners and the economy at large.
Critics point out that most pass-through income and, thus, most of the tax break, flows to the wealthy few. The new approach, which affects companies both big and small, could be rife for gaming. And the rules have added complexity that many businesses are still untangling.
“I can’t say for sure if this tax bill is going to help this business or not,” said Blake Woodard, the majority owner of Woodard Insurance in Fort Worth.
Most of the GOP’s business focus in the tax debate went toward slashing the rate for “C-corporations” to 21 percent from 35 percent. Republicans are banking on that measure to drive substantial economic growth, though Democrats and some economists remain skeptical.
But such relief also spurred demand for a similar boost for millions of pass-through businesses.
Deduction: Even though those entities already had the advantage of not facing the two levels of taxation that corporations can see, lawmakers pressed for more. And the GOP settled on a 20 percent deduction on most pass-through income, a break that came on top of cuts in the individual rates.
The perk exists for all such businesses with taxable income of $315,000 or less for joint filers. Above that threshold, the perk starts phasing out for doctors, attorneys and other service businesses. Other high-income operations face limits based on wages paid and capital assets owned.
The measure, which expires after 2025, stacks up well against the corporate cut.
“Some of my clients who are currently C-corporations, it may be worth electing S-corporation status for the first time,” Dallas financial planner Lora Hoff said. “Because if you do a side-by-side, it’s a lot better.”
So much of the pass-through debate gets shorthanded to small business.
Texas Rep. Kevin Brady, the House’s top tax writer, refers to the cut as a “small business deduction.” The powerful National Federation of Independent Business celebrated the tax bill’s passage, thanks in part to big pass-through relief, as a “historic day for small business.”
And it’s true that more than 90 percent of U.S. businesses are pass-through entities, with small businesses making up the lion’s share, according to the conservative-leaning Tax Foundation.
Among them are Woodard’s six-person insurance business. And Saretta Fuchs’ two-person optometry office at a Sam’s Club in Lewisville. And Jenkins’ growing outfit of some 700 employees who handle everything from pest control to air conditioning repair.
“If those rates come down, we’re able to invest in the future of the business,” said Jenkins, whose success may be causing his family-owned business to outgrow its “small” status.
Not so simple: But the overall pass-through landscape isn’t so simple.
Some massive businesses, including President Donald Trump’s real estate empire, organize as pass-throughs. And more than half of pass-through income flows to the select few who earn more than $500,000, according to a Tax Foundation analysis that has been echoed by others.
That dynamic has pushed the stakes far beyond mom-and-pop operations.
Democrats say the break shows how the GOP’s bill favors the rich. Critics seized upon some last-minute changes that favored real estate developers and others. And two tax experts who served in the Obama administration called the measure “one of the largest loopholes in decades.”
“Some of the richest Americans will get richer,” wrote Lily Batchelder and David Kamin, both now professors at the New York University School of Law.
Republicans sought to blunt that criticism by installing guardrails to prevent gaming of the system. But those safeguards are mostly untested and could create other problems.
One restriction, for instance, focuses on businesses where the “principal asset” is the “reputation or skill of one or more of its employees or owners.” That definition has sent business owners, financial planners and accountants scrambling for clarity on what exactly it means.
And hardly anyone — including those backing the break — would argue that the pass-through part of the code has become any simpler.
“I’m not feeling like we’ve now got a code where everybody says, ‘I get it,’” said Jenkins, the ABC Home & Commercial Services owner.
Tough to measure: All of that makes it difficult to ascertain the broader impact of the new pass-through break.
Fuchs, the Lewisville optometrist, will able to “keep more money in our pockets at the end of the year,” said her husband, Ryan, who is a financial planner who has been studying the provision. But, he added, it’s “not going to have much effect” on the eye office’s business.
Andy Ellard, owner of Manda Machine in Dallas, said it’s too early to discern what the pass-through deduction will mean. But he said the business atmosphere is “unbelievable” and that his phone is ringing off the hook from customers who are benefiting from the corporate rate cut.
And then there is Woodard, the owner of the Fort Worth insurance company.
He said he’s thankful for any kind of tax cut. But he added that he “didn’t pop any champagne when that bill got signed.” That’s because the potential savings, if there end up being any, won’t likely amount to more than a “couple weeks of revenue,” he said.
“It’s nice,” he said. “But it’s not so much money that it’s at all going to change your business’s year.”