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On December 22nd, President Trump signed into law the Tax Cuts and Jobs Act, finalizing a once-in-a-generation overhaul of the existing Code and leaving the once-burdensome tax law so simple, we’ll all be preparing our returns on postcards come the spring of 2019.

Simple. That’s rich. I’ll make a deal with you: how about we spend some time diving into just one aspect of the bill — the new deduction bestowed upon owners of sole proprietorships, S corporations, and partnerships — and then you decide for yourself just how simple this all will be?

For those of you who are familiar with the format of a “Tax Geek Tuesday,” you know what to expect. For those of you who are new to this space, what we do here is beat the heck out of a narrow area of the tax law. In great, painstaking, long-form level of detail. The hope, of course, is that we can accomplish what Congress can’t: making the law more manageable for those who need to apply it. Let’s get to it.

Entity Choice Under Current Law

If you want to operate a business, there are four main choices for doing so:

  1. C corporation
  2. Sole proprietorship
  3. S corporation partnership

Owners of a “C corporation” are subject to double taxation. When income is earned by the corporation, it is first taxed at the business level, at a top tax rate of 35% under current law. Then, when the corporation distributes the income to the shareholder, the shareholder pays tax on the dividend, at a top rate of 23.8%. Thus, from a federal tax perspective, owners of a C corporation pay a combined total rate on the income earned by the business of 50.47% (35% + (65% * 23.8%)).

Of course, you don’t have to operate as a C corporation. Instead, you can operate a business as a sole proprietorship. Or as an S corporation. Or as a partnership. And what do these three business types have in common? They all offer a single level of taxation: when income is earned at the business level, it is generally not taxed at that level; rather, the income of the business is ultimately taxed only once, at the individual level.

Continue reading on, Forbes.com

Authored by Tony Nitti, Withum Partner and writer for Forbes.com.

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Neither snow nor rain nor crippling deficits nor a monumental upset in Alabama stays these Republicans from the swift completion of passing a tax bill that few understand and even fewer seem to want.

That’s right; undeterred by nonpartisan proof from the Joint Committee of Taxation that the $1.5 trillion in proposed tax cuts will not “pay for themselves,” and unwilling to wait for Doug Jones, the new Democratic Senator from Alabama, to take his seat and possibly jeopardize their goals, the GOP continues its spirited yet shameful sprint towards the most comprehensive overhaul of the tax law in 31 years.

Let’s review: Last month, the House of Representatives went from proposing 479 pages of legislation in the form of HR 1 — the Tax Cuts and Jobs Act — to passing the bill in a mere two weeks. Not to be undone, the Senate managed to surpass the hilariously-harried pace set by its counterparts in the House, taking its version of HR 1 to a floor vote just days after the 429 pages of legislative text were made available.

The making of many things — from movies to marriages to mac and cheese — can be rushed without adverse consequences. Not so with the tax law. It’s very nature – a complex morass of provisions that interact with one another in nuanced and often unanticipated ways — requires a deliberate approach; something the Senate, in particular, refused to acknowledge. In fact, in such a hurry was the Senate to pass its bill that it asked its 100 members to vote on a piece of legislation that had been radically redesigned just hours earlier; quite famously, the “final” version of HR 1 was replete with margins full of hand-written text and multiple strikethroughs and redactions.

The results were predictably hilarious. While the bill passed by a 51-49 margin, as a result of the numerous 11th-hour negotiations, the Senate managed to make a $289 billion mistake in its drafting of the legislation; inadvertently killing off a tremendously popular incentive — the research and development credit — that it had intended to keep.

Continue reading on, Forbes.com

Authored by Tony Nitti, Withum Partner and writer for Forbes.com.

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After a dizzying few weeks, tax reform enters its final stages. At present, the House has passed its Republican-led bill, while the Senate has done the same with its GOP-led version of HR 1. Now, the two sides will come together, crafting a final piece of legislation that — once it passes the House and Senate a second time — will be signed into law by the President.

As the two chambers go to conference, you may be confused as to which bill to root for. After all, there are a lot of moving parts (many of which you can read about here). Ultimately, unless you have a rental empire, you probably won’t love either option in its entirety; instead, your allegiance will be determined at a more granular level. You’ll pick your preferences à la carte, taking item A from the House bill, item B from the Senate bill, and so on.

But one thing is clear: if you are a fan of education — whether its getting one or giving one — you will be praying for the House bill to die a quick, painful death, because the House’s version of HR 1 declares what can only be described as a war on education.

Let’s take a look at how the House appears to go out of its way to strip every imaginable tax break currently afforded to students and teachers, at every step in the educational life cycle.

Continue reading on, Forbes.com

Authored by Tony Nitti, Withum Partner and writer for Forbes.com.

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As late Friday night gave way to early Saturday morning, the Senate floor was home to quite the celebratory scene. They were all there: Mitch McConnell and Orin Hatch, Rand Paul and John McCain, Randolph and Mortimer Duke, an army of Republican leaders doling out congratulations faster than corporate lobbyists can line pockets, lauding the passing of a bill that paves the way for the largest tax cuts in 31 years.

But don’t let the smiles fool you…the GOP’s work is not done. You see, the Senate’s passage of HR 1 by a 51-49 margin last Friday did not mark the end of the process; rather, the Senate bill must now be merged together with a companion bill that was crafted by and passed in the House several weeks earlier. The two chambers will soon break bread and try to agree on a final bill, which can then be sent to the President, who will formally tweet it into law.

While the GOP’s vision of tax reform is largely uniform between the House and Senate bills, there are some significant differences that will need to be ironed out. Here are a just a few of the items that will have to be reconciled.

Continue reading on, Forbes.com

Authored by Tony Nitti, Withum Partner and writer for Forbes.com.

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As tends to happen this time of year, I awoke this morning to find that a friendly Elf had mysteriously manifested itself in my living room. Only this time, Oscar wasn’t alone. He was toting along something else that, like Oscar, wasn’t here when I went to bed, but that had miraculously became a reality as I dozed: 479-pages of brand new tax law.

That’s right…in the wee hours of the night, as visions of corporate cuts and repealed death taxes danced in Paul Ryan’s head, the Senate overcame the last big hurdle as it speeds towards the most significant tax reform in 31 years, passing its version of HR 1 by a 51-49 vote.

The work is not technically done, however, as the House and Senate must agree on a bill. And while there may be some sticking points — the treatment of pass-through businesses, education incentives, and medical expenses to name a few — the path is cleared for the President to achieve his signature legislative victory and sign a $1.5 trillion tax cut package into law, just in time for Christmas.

Here are a few highlights of the plan:

  • The top individual rate is reduced from 39.6% to 38.5%, and the threshold at which the top rate kicks in is increased from $418,000 for a single/$480,000 for married filing jointly to $500,000/$1,000,000. Further down the brackets, rates are reduced as well, for full detail, see here.
  • The top rate on the income earned by owners of “flow through” businesses — S corporations and partnerships — is reduced from 39.6% to a shade below 30%.
  • The standard deduction is doubled from $6,350 for a single/ $12,700 if married to $12,000/$24,000.
  • Deductions for personal exemptions are repealed, but the child tax credit is increased from $1,000 to $2,000.

Continue reading on, Forbes.com

Authored by Tony Nitti, Withum Partner and writer for Forbes.com.

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If the current state of tax reform were a football game, it would be the 1987 AFC Championship. The GOP would be the Cleveland Browns, driving to certain victory in a tied-up tilt with the Denver Broncos. The passage of the House bill leaves the GOP with 1st and goal from the 8, and all that’s left for the Senate to do is pound the ball into the end zone and start packing for the Super Bowl.

But if you think that advantaged position leaves a GOP triumph assured, I’d suggest you Google the name “Earnest Byner.”

Up to this point, nothing has slowed the tax reform train, largely because opponents have been given neither the opportunity nor the time to do so. With Republican control of the House, passage of the House bill was assured on a strict party-line basis. And even if some Republicans had unvoiced concerns, the process moved from publishing of proposed legislation (November 2nd) to mark-up by the House Ways and Means Committee (November 6th) to a full vote (November 16th) so quickly, that few had a chance to fully absorb the ramifications of the bill.

That pace, of course, was no accident. The House wanted to get the bill passed as quickly as possible; yes, in part to take a major step towards the legislative victory that has eluded the GOP since President Trump took over in January, but perhaps more importantly, because the sooner the bill was passed, the less likely that information would become available regarding the plan that would make it more difficult to justify voting for.

Things are different in the Senate, however. Republicans don’t enjoy the same comfortable majority that thy do in the House; in fact, Republicans currently control only 52 seats, and using the streamlined budget reconciliation process, 51 votes are needed to get a tax bill through the Senate. As a result, the GOP can afford only two defections (a 50-50 tie would lead to Vice President Pence voting the deciding “yea” vote), meaning if tax reform is going to fall apart, it was always going to fall apart in the Senate, rather than the House.

Perhaps more troubling for the Senate, however, has been the pace. A vote is not scheduled until next week at the earliest, and based on what most tax pundits have learned about the bill, time is its biggest enemy. Because with time, the many faults of the proposal become public, putting pressure on three Republican Senators to cast reform-killing “nay” votes.

Continue reading on, Forbes.com

Authored by Tony Nitti, Withum Partner and writer for Forbes.com.

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When it comes to tax reform, the political posturing may dominate the news — What’s in? What’s out? Who wins? Who loses? — but what really matters is the math. That’s certainly the case under the current climate, where unilateral control of the White House, House and Senate gives the GOP an opportunity to pass its vision of tax reform without a single vote from a Democrat in the Senate. If, that is, the Republicans can get the math to work.

Specifically, the 2018 budget reconciliation process will allow a tax bill to pass the Senate with a simply majority — rather than the standard 60 votes — only if that bill does not provide for more than $1.5 trillion in tax cuts over the next ten years. Go over that amount, and the GOP will need Democratic buy-in.

But big promises have been made. President Trump declared this THE BIGGEST TAX CUT IN HISTORY. (It is not). Individual rates are going to be slashed. So is the corporate rate. And the rate on business income. The estate tax and alternative minimum tax will be no more. You get the idea…lots of big tax cuts are coming, but how do you get that to fit into a $1.5 trillion-sized box?

You start by adding back as many deductions as politically palatable. But that’s the tricky part of tax reform; for every deep-rooted preference you try to extract from the law, a powerful special interest group will tug just as hard in an effort to keep it in place.

Continue reading on, Forbes.com

Authored by Tony Nitti, Withum Partner and writer for Forbes.com.

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