Originally published on Forbes.com.
If you are reading this, you may be feeling a little bit frustrated as you want to know what is in the Tax Cuts And Jobs Act and you have already looked at numerous pieces that have told you about the things in the bill that that writer thinks you should know or would like to know. There is a decent chance that some of what they told you is wrong. Well, rest easy. I’m going to tell you what you need to read. But let’s not spoil the suspense.
All That Commentary
There is all the commentary on who the bill is good or bad for. There might be comments from experts. There is some chance that the expert might be somebody who has actually read the bill, but the more prestigious the firm the expert is associated with, the more likely the comment is derived from the expertise of someone in the firm who is kept in a back room and not allowed to talk even to clients much less the press. Much of what comes directly from the House Ways and Means Committee is propaganda of a sort
The Tax Cuts and Jobs Act will deliver real tax relief to Americans across the country – especially low- and middle-income Americans who have been struggling for far too long to earn a raise and get ahead. With this bill, a typical middle-income family of four, earning $59,000 (the median household income), will receive a $1,182 tax cut.
My reaction to that is “Twenty bucks a week, whoopty doo”. Don’t get me wrong, I have a rule that my kids are not allowed to use the word “only” in association with any amount greater than four dollars, but still. Imagine Joe Median saying to himself “Thank you, President Trump, now I can finally take the kids to Disneyworld. ” And then he realizes that a thousand and change would maybe pay for the tickets for three days and he lives a long way from Orlando and does not have any relatives he can crash on. OK OK you want to know what is in the bill, not my thoughts about the Magic Kingdom.
Two Things Worth Reading – One Of Which You Likely Won’t Understand
Really there are only two things worth reading if you want to be thorough. One is the bill itself. You have to be pretty hardcore for that. The bill is stated in terms of amendments to the Internal Revenue Code, so if you haven’t memorized the Code yet, you are going to have to refer to it. Here is an example of what I had to go through yesterday when I was writing about the bill’s Section 1004 – Maximum rate on business income of individuals, which, incidentally gives the lie to the notion that the framers of the bill care much about making the Code simpler. How much if any benefit you get from the special rate depends on what business you are in. The bill says that a disfavored business is one engaged in a “specified service activity”. What is that? Well,
The term ‘specified service activity’ means any activity involving the performance of services described in section 1202(e)(3)(A), including investing, trading, or dealing in securities (as de21 fined in section 475(c)(2)), partnership interests, or commodities (as defined in section 475(e)(2)).
Be careful. That 1202(e)(3)(A) is a section of the Internal Revenue Code, not the Tax Cuts And Jobs Act. You can find it here
any trade or business involving the performance of services in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or any trade or business where the principal asset of such trade or business is the reputation or skill of 1 or more of its employees
If, on the other hand you are relying on the Washington Post you will get:
The GOP bill aims to give some small businesses a rate cut while still ensuring doctors, lawyers, hedge fund managers and other high-earning business owners pay their fair share.
By the way, I can’t find any commentary, other than I would modestly point out my own that indicates that doctors, lawyers and performing artists (among others) who use expensive assets in their business might benefit from the special rate. Of course a lot of them are like me and just need a couple of cheap computers to do their work, but some of those financial services guys have really expensive computers and MRI machines are not so cheap. Regardless of that, just about anybody can own the building they operate from and if you are really high powered you probably need a jet. If your accounting firm, is being run in a $3 million building you own, about $240,000 of your income will get the favorable rate.
So people who get paid to figure out how to game the system actually have to read the bill. The sensible ones will wait until something is actually signed. That’s the lesson I learned thirty years ago when my intense study of the proposals that culminated in the Tax Reform Act of 1986 caused me to be confused from time to time in the next few years as I remembered interesting things, that ended up not in the final bill.
What You Should Read – Besides Posts By Forbes Contributors And Staff
If you are not hardcore enough to read the bill, there is one other thing that is worth reading. It comes from Ways and Means Committee and of everything they put out it is longest on substance and shortest on propaganda. It is titled Tax Cuts and Jobs Act – H.R. 1 – Section-by-Section Summary. It explains each change that the bill makes and includes very helpful commentary on what the law is now. Really, if you want to see what the bill is about, that is what you must read.
To go back to my favorite section of the act, here is how the Section-by-Section Summary explains the exclusion of some businesses from the special rate.
Under the provision, the default capital percentage for certain personal services businesses (e.g., businesses involving the performance of services in the fields of law, accounting, consulting,engineering, financial services, or performing arts) would be zero percent. As a result, a taxpayer that actively participates in such a business generally would not be eligible for the 25-percent rate on business income with respect to such personal service business. However, the provision would allow the same election to owners of personal services businesses to use an alternative capital percentage based on the business’s capital investment.
You might need to read that a couple times to get it, but it does really get the most important information across. It neglects to tell you to buy the building where your practice operates or a jet, but that’s what keeps people like me from having to work in an Amazon warehouse or Walmart. I also need to caution you that the regulations might foreclose those schemes. Never forget Reilly’s Third Law Of Tax Planning – Any clever idea that pops into your head probably has a corresponding rule that makes it not work.
So seriously, if you want to know what is in the bill at least look at the Section-by-Section summary and scan the table of contents, which will let you skip to the parts you care about. At 76 pages, it is really manageable.
On the other hand if you have a short attention span, you can go with the President’s deep analysis that came out on Thursday.
Great Tax Cut rollout today. The lobbyists are storming Capital Hill, but the Republicans will hold strong and do what is right for America!