{"id":4858,"date":"2018-03-13T01:52:15","date_gmt":"2018-03-13T01:52:15","guid":{"rendered":"https:\/\/live-journal-of-law-and-public-policy.pantheonsite.io\/?p=2334"},"modified":"2018-03-13T01:52:15","modified_gmt":"2018-03-13T01:52:15","slug":"who-gets-the-big-199a-tax-loophole","status":"publish","type":"post","link":"https:\/\/publications.lawschool.cornell.edu\/jlpp\/2018\/03\/13\/who-gets-the-big-199a-tax-loophole\/","title":{"rendered":"Who Gets the Big 199A Tax Loophole?"},"content":{"rendered":"In December 2017, Congress signed the <\/span>Tax Cuts and Jobs Act (TCJA)<\/span><\/a> into law. It was largely <\/span>unpopular for most Americans<\/span><\/a> but has left some people and companies quite pleased\u2014the ultra wealthy ones like the <\/span>Koch Brothers<\/span><\/a> and <\/span>Pfizer<\/span><\/a>.<\/span>\n\nThe <\/span>TCJA<\/span><\/a> has lowered the individual income tax from 39.6% to 37%, lowered the corporate income tax from 35% to 21%, and doubled the estate tax\u2019s exemption to $11 million per person and $22 million per couple.<\/span>\n\nOne of the most glaring issues with the TCJA comes from a loophole created in the Internal Revenue Code section 199A Qualified Business Income. Corporate income is a type of <\/span>business income<\/span><\/a> that is taxed twice federally, once at the corporate level and once at the shareholder level. However, <\/span>pass-through<\/span><\/a> income is a type of business income that skips the corporate level tax and jumps straight into the owner\u2019s personal tax returns. Section 199A potentially allows a major tax deduction for certain \u201cqualified\u201d pass-through income. One question is who will qualify for this deduction, the majority of Americans or only the wealthiest among them\u2014my pennies are on the latter.<\/span>\n\n199A\u2014Some of What is Known<\/b>\n<\/strong><\/strong>\n\nThe new law offers a <\/span>20% deduction<\/span><\/a> for pass-through entities, such as S corporations, sole proprietorships, partnerships, <\/span>real-estate investors<\/span><\/a>, real estate investment trusts (REITs), and qualified cooperatives on their qualified business income. 199A does not offer a deduction for the performance of service <\/span>as an employee<\/span><\/a>. The pass-through deduction has been available since <\/span>January 1, 2018<\/span><\/a> and is only available <\/span>until December 31, 2025<\/span><\/a>. Only <\/span>taxable income<\/span><\/a> (not gross income) that is subject to ordinary tax rates and considered qualified business income will be counted for the deduction. Also, 199A\u2019s <\/span>tax savings<\/span><\/a> are equal to the deduction (whatever it may be) multiplied by the taxpayer\u2019s top tax-bracket rate\u2014so if the taxpayer ends up getting a $100,000 deduction and falls in a tax bracket that has a 12% tax rate, they will save $12,000 of tax. To qualify for 199A, single taxpayers earning more than $157,500 and married taxpayers filing joint returns making more than $315,000 need to either <\/span>hold depreciable property or pay wages<\/span><\/a> to get the deduction.<\/span>\n\nWho is qualified for the 199A deduction?<\/b>\n\nNot all service businesses are treated equally. 199A disallows some \u201c<\/span>white collar\u201d professionals<\/span><\/a>\u2014such as<\/span> doctors, lawyers, and accountants\u2014from claiming the deduction by decreasing linearly the deduction allowed for income between $157,500 and $207,500 for individuals and between $315,500 and $415,500 for joint filers. So, if you are in this group and your income is above either $207,500 as an individual or $415,500 as a joint filer, your deduction is entirely phased out. This phase-out rule applies to professions including musicians, athletes and investment bankers, as well. If your income is below the phase-out threshold or you are not categorized in one of those disallowed groups, you might qualify for 199A, unless you fall into the vague disallowed <\/span>catchall<\/span><\/a> described in Internal Revenue Code section <\/span>1202(e)(3)(A)<\/span><\/a>: income does not count as qualified business income if it comes from a \u201ctrade or business where the principal asset of such trade or business is the reputation or skill of 1 or more of its employees.\u201d What does \u201cprincipal\u201d mean? Whose reputation is not the principal asset of such trade or business? Your guess is as good as any.<\/span>\n\nWho benefits from the 199A deduction?<\/b>\n\nLily Batchelder<\/span><\/a> (a professor at NYU Law) asserts that the <\/span>sure winners<\/span><\/a> from 199A are some current pass-through companies with lots of physical assets or employees. For example, someone like President Trump, who has more than 500 large pass-through real estate firms, will likely <\/span>benefit<\/span><\/a> from this new rule. In fact, the country\u2019s highest earners (the top 1%) earn <\/span>more than 50%<\/span><\/a> of the country\u2019s pass-though business income.<\/span>\n\nWhat about low-income and middle-class workers? Since employees do not qualify for the 199A deduction, can workers drop their employee status and become independent contractors to get the pass-through benefits? It is possible, but it may be more burdensome than beneficial for low- and middle-class taxpayers. First, the TCJA meagerly describes how workers can qualify for the deduction\u2014most taxpayers <\/span>will not know until later in the year<\/span><\/a> when the Treasury has come out with some regulations to clarify how workers can get the 199A deduction. Second, switching to an independent contractor probably means dropping employee benefits, such as health insurance and a pension plan because one major factor the IRS uses to determine if a worker is <\/span>an independent contractor or an employee<\/span><\/a> is through the benefits that the worker receives. In addition, now the worker <\/span>will have to pay<\/span><\/a> the payroll tax that her employer would normally pay. Does this sound like a favorable tradeoff? Probably not for most Americans working to make ends meet.<\/span>\n\n199A also disallows deductions for \u201c<\/span>reasonable compensation<\/span><\/a> paid to the taxpayer by any qualified trade or business of the taxpayer for services rendered with respect to the trade or business.\u201d So, depending on how the Treasury defines what the TCJA means by that, the worker might have to creatively argue that what she is being paid is \u201cunreasonable\u201d as an independent contractor in order to get any deduction. One can only speculate what the Treasury regulations will decree.<\/span>\n\nConclusion<\/b>\n\nIf you are wondering how to use 199A to your advantage, you should talk with a tax attorney or <\/span>strategist<\/span><\/a>. However, even this is more proof that 199A primarily benefits wealthy individuals, since the wealthy are usually the only ones who have the money to pay for quality tax advice. As it stands now, 199A does not seem like it was designed to help lower taxes for low- and middle-class taxpayers, and I doubt the Treasury regulations will change that.<\/span>\n\n \n\nSuggested citation: Michael Chou, Who Gets the Big 199A Tax Loophole?<\/em>, <\/span>Cornell J.L. & Pub. Pol\u2019y, The Issue Spotter<\/span>, (Mar. 13, 2018), https:\/\/live-journal-of-law-and-public-policy.pantheonsite.io\/who-gets-the-big-199a-tax-loophole\/.<\/span>","protected":false},"excerpt":{"rendered":"

In December 2017, Congress signed the Tax Cuts and Jobs Act (TCJA) into law. It was largely unpopular for most Americans but has left some people and companies quite pleased\u2014the ultra wealthy ones like the Koch Brothers and Pfizer. The TCJA has lowered the individual income tax from 39.6% to 37%, lowered the corporate income…<\/p>\n","protected":false},"author":1,"featured_media":2335,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[14,15,16,18,19,27,28],"tags":[70,400,552,826,1157,1500,1504,1506,1666],"class_list":["post-4858","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-archives","category-authors","category-blog-news","category-feature","category-feature-img","category-recent-stories","category-student-blogs","tag-199a","tag-corporations","tag-employee","tag-income","tag-pass-through","tag-tax-exemption","tag-taxes","tag-tcja","tag-wealth"],"acf":[],"_links":{"self":[{"href":"https:\/\/publications.lawschool.cornell.edu\/jlpp\/wp-json\/wp\/v2\/posts\/4858","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/publications.lawschool.cornell.edu\/jlpp\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/publications.lawschool.cornell.edu\/jlpp\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/publications.lawschool.cornell.edu\/jlpp\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/publications.lawschool.cornell.edu\/jlpp\/wp-json\/wp\/v2\/comments?post=4858"}],"version-history":[{"count":0,"href":"https:\/\/publications.lawschool.cornell.edu\/jlpp\/wp-json\/wp\/v2\/posts\/4858\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/publications.lawschool.cornell.edu\/jlpp\/wp-json\/wp\/v2\/media\/2335"}],"wp:attachment":[{"href":"https:\/\/publications.lawschool.cornell.edu\/jlpp\/wp-json\/wp\/v2\/media?parent=4858"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/publications.lawschool.cornell.edu\/jlpp\/wp-json\/wp\/v2\/categories?post=4858"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/publications.lawschool.cornell.edu\/jlpp\/wp-json\/wp\/v2\/tags?post=4858"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}