Originally published on Forbes.com
You really can have fun studying the Tax Cuts And Jobs Act. Trust me. First I need to give you some boring instructions.
he Boring Instructions
We now have a Conference Agreement for the Tax Cuts And Jobs Act. Assuming the bill passes as reported out by the Conference Committee, the Conference Report will be an important historic document. I still have the Conference Report for the Tax Reform Act of 1986 in my small professional bookcase. I consult it every other year or so. The bookcase is small because physical books are so twentieth century.
If you are hardcore, you will read the actual text of the bill. If you haven’t memorized it you will need the Internal Revenue Code by your side to make sense of it, since the bill expresses itself as amendments to the Internal Revenue Code of 1986. If you are less hardcore, but prefer original sources material skip the first five hundred pages (no kidding) and scroll to the Contents of the Joint Explanatory Statement of the Committee Conference. You can scan that for the bits that you find of interest and go to that page (The pagination starts over at that point). And I’ll give you a useful shortcut.
The Shortcut
Each section is divided into four parts. Present Law, House Bill, Senate Amendment and Conference Agreement. Skip to the Conference Agreement. That will give you an explanation of the actual bill that the House and Senate will be voting on. In some cases, it will refer you back to either the House Bill or the Senate Amendment, then you have to roll back. Or you may be curious enough to roll back anyway to see the different thinking of the House and the Senate. Sometimes the Conference Agreement has no provision and then you can roll back and see what people were thinking about that did not make it into the final bill.
Let’s Have Some Fun
I’m going to share with you the bits that I found interesting or amusing regardless of whether they are of any practical significance. Go to Forbes reporter Kelly Erb if you want a summary of what is important to most regular people.
The other thing I need to warn you about is that this method is self-taught and idiosyncratic. I’m a CPA and frankly CPAs are less literate than lawyers. I didn’t get a Masters in Taxation, because they were going to simplify taxes so much back in the early eighties. I went with Applied Mathematics/Computer Science. Regardless, the point is that I may be doing tax research all wrong because nobody ever taught me the right way to do it, but my way is fun, which is why I am sharing it.
Qualified Business Income
I treated Qualified Business Income at length yesterday. This is the relief for flow-through income that you may have heard about. The original rationale was that the corporate rate was being cut, which would disadvantage entities that had to make distributions to owners so that the owners could pay their taxes. If you study the whole discussion, you will see that the House version favored the non-working rich and did very little for small business. The conference ends up with something that treats the non-working and working rich the same, although somewhat less generously than the House Bill and is fantastic for the little guys – like me for example.
It happens that I have a kind of boutique practice and I could plausibly be on somebody’s payroll doing what I do, which I am not going to get into. Because I am in business for myself in principle I get a 20% deduction on the lesser of my taxable income or my qualified business income. Since money doesn’t pay interest any more, all I have is QBI so it is my taxable income. If I was less of a slacker and made a bit over two hundred grand, I would get nothing because accounting is on the list of disfavored professions. I can’t blame them for that, but really physicians are really important and they are the list too. And they, quite deservedly, tend to make more money than accountants, so more of them will get nailed by that rule.
It doesn’t even make good nonsense, but I’m not complaining and not only because it saves me money . QBI is an entirely different category of income that will have to be defined and clarified. And there will be lots of opportunities to game the system and even just being in compliance will be challenging. It creates consulting opportunities and in the future lots of blog fodder. Reilly’s Third Law of Tax Practice – Any reasonably complex tax matter involving significant dollars, regardless of whatever else it might be, is a white collar jobs program.
The threshold on the special restrictions is high enough ($157,500 for singles twice that for married), that the message for most people is that employment income deserves to be taxed at a higher rate than income from self-employment. Not that I am a fan of the idea that everything was worked out in the 18th Century, but I think this notion contradicts the thinking of one of our Founders. After our Constitution was drafted Thomas Jefferson found himself helping one of the heroes of our Revolution draft a new founding document in light of another revolution in a country more plagued by inequality and special privilege than ours (Well if you ignore slavery, which they mostly did then. They kicked that can down the road). Jefferson collaborated with Lafayette on the Declaration of the Rights of Man and of the Citizen. The Declaration says this about taxes:
A common contribution is essential for the maintenance of the public forces and for the cost of administration. This should be equitably distributed among all the citizens in proportion to their means.
Dogs That Don’t Bark
There are quite a few provisions in the House Bill that just get kicked out. The Senate is less gerrymandered than the House, so I’m thinking of things like the Credit for the Elderly and the Disabled, the Credit for Plug-in Electric Drive Motor Vehicles and the Credit for Interest on Certain Home Mortgages, Deduction For Student Loan Interest. I picture the Koch brothers as the Balrog and Gandalf there in the Senate yelling “You shall not pass”
Excess Business Losses
This is actually a really important provision that seems to have gotten little notice. The goal of the provision, which comes from the Senate, appears to be the ending of large scale sketchy tax shelters. It adds to the Code 461(l) – Limitation of Excess Business Losses of Noncorporate Taxpayer. It only affects really big shelters.
An excess business loss for the taxable year is the excess of aggregate deductions of the taxpayer attributable to trades or businesses of the taxpayer (determined without regard to the limitation of the provision), over the sum of aggregate gross income or gain of the taxpayer plus a threshold amount. The threshold amount for a taxable year is $250,000 (or twice the otherwise applicable threshold amount in the case of a joint return). The threshold amount is indexed for inflation.
I have a piece that I wrote in 2011 about the five hoops that you have to jump through to post a negative number on the first page of Form 1040. Well now there are six. This new one comes at the end after the passive activity loss rules of Code Section 469.
Graduate Schools Will Not All Close
This one was a big relief. The House bill was going to tax the tuition reductions that graduate students get for doing all the actual work of teaching undergraduates. That’s gone and good riddance.
State Income Taxes
This one is a big deal- limiting the total deduction for state and local property, income and sales tax to $10,000. Thanks to this provision a lot fewer people will be able to itemize. Simplistically, you have to be pretty charitable or really sick to itemize. There is an obvious scheme that at least one of my high school buds came up with. Pay your state income tax for the next five years. Reilly’s Third Law of Tax Planning squashes that wicked plan – Any clever idea that pops into your head probably has a corresponding rule that makes it not work.
The conference agreement also provides that, in the case of an amount paid in a taxable year beginning before January 1, 2018, with respect to a State or local income tax imposed for a taxable year beginning after December 31, 2017, the payment shall be treated as paid on the last day of the taxable year for which such tax is so imposed for purposes of applying the provision limiting the dollar amount of the deduction. Thus, under the provision, an individual may not claim an itemized deduction in 2017 on a pre-payment of income tax for a future taxable year in order to avoid the dollar limitation applicable for taxable years beginning after 2017.
Nothing about property taxes though – HMMMM!
Regardless you should probably pay your state fourth quarter estimate in December and increase it, if you expect to have a balance due in April.
To Be Continued
I’m getting to two thousand words, so I will break here. Stay tuned, we have a few hundred more pages to enjoy. Here is the next chapter.