Below is the link to Michael Kitches’ rundown for individual tax planning under the proposed Tax Cuts and Jobs Act of 2014:
Thank you, @MinnesotaDadof3. That is the most comprehensive guide I’ve seen yet.
@emilybee Thanks.
I’ve read through this several times and I am not seeing what the giant loophole is, because it appears the deduction phases out when your income gets over a certain level.
So I must be missing something. It’s full of weaselly lawyer verbiage like “the amount determined under paragraph (2)(B) (determined without regard to this subparagraph) with respect to any qualified trade or business carried on by the taxpayer is less than the amount determined under paragraph (2)(A) with respect such trade or business” that makes it very difficult for me to puzzle out exactly what is going on.
If anyone has something that points to exactly how this loophole saves big landlords a ton of taxes, I’d appreciate it.
The Corker kickback: In the previous House and Senate bills, people who get income from pass-through entities could deduct 20% of the income from their taxable income. But in the previous bills, that deduction was only available if the pass-through entity had a significant payroll-- the company would have to pay out a significant amount to employees as wages.
Real estate pass-throughs don’t have a lot of employees. They would therefore not be eligible for this juicy loophole. However, at the last minute, the conference committee added a provision to extend the 20% deduction to pass-throughs that have a significant amount of income-producing assets (like real estate).
So if your income comes from real estate pass-throughs, congratulations, your taxes will drop by 20% from what they would have been under earlier versions of the bill.
^^Thanks for the explanation, cf. However, I don’t see why this only benefits wealthy landlords. It looks like it benefits all people who are taxed because of real estate income, if they would normally pay higher rates.
It is certainly possible that benefiting the wealthiest landlords was the intent, and the benefits for smaller landlords are merely the crumbs that fall to them.
In the previous Senate version of the bill, the pass-through exemption was already available to anyone with taxable income less than $250,000 (single) or $500,000 (married filing jointly); the 20% deduction was phased out for the wealthy. People with smaller pass-through incomes already had the loophole.
The conference version lowers the phase-out level to somewhere around $140,000/$300,000, but now the phase-out level doesn’t apply to real estate pass throughs.
A significant percentage of medical professionals own two businesses, one for their practice, and one for the real estate where their practice is based.
From what I read, it sounds like they could reduce taxes by jacking up rents and benefiting from the lower taxes on the real estate income, while simultaneously reducing the income on the practice. Or did they think through this loophole already?
If it looks like a a duck and quacks like a duck - it’s a duck.
A rich duck.
Indeed, from what I’ve read, tax professionals are recommending this fine strategy.
We’re talking about “rent” here, not rent, right? That is, the doctors own the building through the real estate building. The real estate business charges “rent” to the doctoring business.
Ah, I found some details.
So if you are under the threshold, you get the deduction no questions asked. If you are above you can deduct 2.5% of the cost of the property, until it’s been fully depreciated.
It’s not clear if you need a business structure to take advantage of this, or if schedule E reporting is sufficient.
Another consequence. Companies are incented to move investment in factories and jobs overseas.
https://www.theatlantic.com/business/archive/2017/12/tax-jobs-overseas/547916/?utm_source=twb
At this point, I don’t know whether to attribute this to malice or stupidity.
Both, I think.
^ The “or 25% of the wages plus 2.5% of capital assets, whichever is greater.” part is the new part, then?
Yes, exactly that.
Yes that part appears to be new. The original Senate plan allowed a deduction against REIT dividend income (and that is still in the bill), which is another bone thrown to real estate investors. Had the 2.5% of assets provision not been added, I bet most large landlords could have restructured as REITs and gotten the deduction that way.
ETA: I don’t see any reason why small landlords can’t take advantage of this, although it might require setting up a different business structure like an S-corp or something.
Has anyone from the conference committee put forward either a policy rationale or a detailed political rationale for the Corker Kickback? Why, from either a policy perspective or a political perspective, was this juicy handout to rich real estate investors tucked into the conference bill?
I mean, I understand the ANWR inclusion, for example. It was put in to get Lisa Murkowski, and drilling in the Arctic National Wildlife Reserve has always been a GOP desire, so from both a political perspective and a policy perspective the move makes sense. This is the way legislation works. Senators get pork for their states.
But, assuming that Corker is telling the truth and he didn’t even know about the Corker Kickback, what’s it for? Why is it there? What’s the exculpatory story here? Who put this in, and why?
The way the original Senate bill was set up is that, once your income was above the threshold, only those businesses that pay significant wage income to employees would be able to take advantage of the deduction.
So they added a way for capital-intensive businesses that have low employee costs to also be able to take advantage of the deduction.
Real estate is one type of business like this. There may be others, although I can’t really think of any for sure. Maybe some energy businesses like solar or wind farms?
Why are they phasing the deduction out at all then? What’s the policy rationale to phase it out, if it shouldn’t be phased out for companies with high payrolls and it also shouldn’t be phased out for real estate developers? Why are the people for whom it is phased out less deserving than those for whom it is not phased out?
This kind of a phase-out, for some people but not others, is a gilt-edged hand-delivered invitation for tax shenanigans. What’s the justification?
If you are referring to when I said “it appears the deduction phases out when your income gets over a certain level”, this was incorrect on my part.
What happens once you get over a certain amount is that the deduction becomes based on the facts of your business. Some get to deduct wages up to a certain point, some get to deduct assets, some lose the deduction (“services” companies, where the income derives directly from the owner’s personal labor, for example).