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IMA Tax Policy Blog

Senate Liberalizes Pass-Through Rate Proposal

by Don Susswein

RSM is an IMA member accountant…

On Nov.14, Chairman Orrin G. Hatch of the Senate Committee on Finance released an updated Chairman’s Mark of the Tax Cuts and Jobs Act which, in part, makes changes to the treatment of pass-through entities.

Similar to the Senate’s Nov. 9 proposal, the modified Senate proposal permits an individual taxpayer to generally deduct 17.4 percent of domestic qualified business income from a partnership, S corporation or sole proprietorship. The original version required the entity to pay a minimum amount of wages and excluded certain service businesses, like law firms, accounting firms and medical practices.

The new proposal would waive both of those requirements, as long as the taxpayer had less than $500,000 of income for a married couple or $250,000 for single filers.

Thus, for example, a married lawyer or physician operating as a solo practitioner with no employees and making $500,000—with no other family income—would be eligible for a deduction equal to 17.4 percent of $500,000. Note that as income increased above $500,000 the benefits would be phased out rapidly.

This is a major departure from many earlier statements regarding the reduced pass-through rate or deduction, which policy-makers originally said should not apply to professionals. On the other hand, it applies only to professionals and other business people whose total family income is within the boundaries of what is generally viewed as ‘middle class’ or upper-middle income; $500,000 is roughly the boundary of the ‘top one percent’ of earners.

In addition to helping taxpayers currently in business as professionals or service-providers, this amendment could lead to salaried individuals seeking to restructure their salaries as fees paid to them as independent contractors. The distinction between employees and independent contractors has been an area of longstanding uncertainty and considerable controversy. This amendment would appear to raise the stakes involved in such determinations.


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