Taxes

Accountants, Lawyers Find New Loopholes in the GOP’s Tax Cuts

JM Ashby
Written by JM Ashby

When former Kansas Governor Sam Brownback signed legislation to eliminate taxes on businesses, it led to a wave of thousands of state residents declaring themselves businesses so they would no longer have to pay taxes.

Congressional Republicans did not pass legislation to completely eliminate taxes on businesses, but they did pass special tax cuts for certain types of business that will yield a similar result.

Bloomberg reports that accountants and other tax professionals have identified new ways of acquiring lower tax rates for pass-through income that weren't possible before.

One strategy being discussed is to combine diverse businesses into a single entity. Let’s say you’re an accountant who also invests in real estate, managing hotels and other properties. Depending on how the IRS writes the regulations, it might make sense to put everything in one company, according to Richard Kollauf, director of business advisory at BMO Private Bank.

Instead of appearing to the IRS to be an accountant -- a service-based profession that wouldn’t qualify for the pass-through break over the income limit -- you look more like a real estate magnate, who would qualify because of large capital investments.

Or, if your business makes the majority of its money through your service profession, the opposite strategy could work. By breaking different businesses apart, service business owners could have at least some of their income qualify for the pass-through deduction. A medical practice might do a fair amount of debt collection or other back-office support. Those divisions could be spun off into a separate “management company,” which could qualify for the break.

Taking it a step further -- service professionals may also consider buying new real estate and adding it to their business portfolios. That’s an option under consideration by Nicholas Sher, a certified public accountant, with offices in midtown Manhattan. Sher said he’s thinking about buying an office condo through a new entity -- which would then lease it back to his firm, Sher & Associates. He could then try to take the 20 percent deduction through the condo entity.

Needless to say, these kinds of arcane exploits aren't available to the average person. You have to be wealthy to begin with to take advantage of a tax code that rewards people for having access to professional accountants and tax lawyers to reclassify and reorganize multiple revenue streams.

These exploits and loopholes are a good example of why the total cost of the tax cuts has probably been wildly underestimated; because for every potential loophole we're learning about now there are probably dozens of others we won't know about for years.

Even the Congressional Budget Office's estimate that the deficit will top $1 trillion this year is probably wrong. Congress has reached a deal to increase spending by nearly $300 billion over the next two years and tax receipts will almost certainly be lower than they anticipate.

If Democrats do regain control of either chamber of Congress in November, they're going to inherit a shitstorm and you can bet Republicans and pundits will suddenly remember the deficit exists.

  • muselet

    Between the unseemly haste with which the Rs passed their tax plan and the Rs’ perennial desire to advantage wealth and certain types of white-collar income, it was inevitable that such exploits are possible. Feature, not bug.

    Forgive the crudeness, but finding loopholes in the Rs’ tax deform (as ever, not a typo) legislation is like finding shit on a pig farm.

    –alopecia

    • Badgerite

      Yes but it is simpler. You can fit it on a postcard. “The rich get richer and you, middle class, get screwed.”
      Pretty simple.

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