The Republican tax bill that is likely to pass this week adds a huge incentive for switching to a pass-through corporation. Subject to some limits, 20% of income from a pass-through corporation isn't taxed. This huge tax advantage is on top of the exclusion from the FICA tax. Almost everybody with a business will now switch to a pass-through corporation. Many people who aren't now thought of as self-employed will try to find some way of receiving payment for their work through a pass-through corporation.
What effect will this have on the Social Security trust funds? I haven't seen any estimate but it's bound to have a significant negative effect on the trust funds. Of course, in the long run, it's going to leave many people without the quarters of coverage they need to receive Social Security benefits but it will take longer for that effect to become obvious.
By the way, I can't seem to find out whether professional practices such as law firms are excluded from pass-through corporation treatment. The last I heard was that this was an issue still to be resolved. I can't see a reason why a trucker or construction worker is eligible for this but not a lawyer or architect. Really, I don't see why anyone should be eligible for this. It's a massive, intentionally created loophole at the expense of ordinary working men and women.
By the way, even if professional practices are excluded, that doesn't mean that lawyers and other professionals can't benefit. Let's say a law firm forms a corporation that's not a law firm but a "staffing agency." The lawyers wouldn't be employees of the staffing agency but the firm's non-attorney staff would be. The law firm makes a generous enough payment to the "staffing agency" corporation so that it makes a substantial profit which it then pays out to the lawyer owners. Since the staffing agency corporation isn't a professional practice, 20% of the distributions aren't taxed. I can figure this one out and I'm not a tax lawyer or accountant. We'll see what the experts can come up with.
Update: I can now say that law firms are excluded. (page 39). However, I have seen nothing that would prevent a staffing corporation from qualifying and that could achieve much the same result.
By the way, even if professional practices are excluded, that doesn't mean that lawyers and other professionals can't benefit. Let's say a law firm forms a corporation that's not a law firm but a "staffing agency." The lawyers wouldn't be employees of the staffing agency but the firm's non-attorney staff would be. The law firm makes a generous enough payment to the "staffing agency" corporation so that it makes a substantial profit which it then pays out to the lawyer owners. Since the staffing agency corporation isn't a professional practice, 20% of the distributions aren't taxed. I can figure this one out and I'm not a tax lawyer or accountant. We'll see what the experts can come up with.
Update: I can now say that law firms are excluded. (page 39). However, I have seen nothing that would prevent a staffing corporation from qualifying and that could achieve much the same result.
You alluded to it, but it bears repeating, reductions to zero self employment will mean a loss of credits (quarters) and in extreme cases, mean SS benefits at all. Even if you take care to have enough SE to qualify for RIB/DIB benefits, the reduction in SE over a lifetime will substantially reduce the SS benefits otherwise payable.
ReplyDeleteFor the deluded who think they will never need SS, it will likely a shock to them to find out what their machinations have done. Sort of like the look on clients' faces when they realize that years of under the table or off the books earnings means their SS amounts to peanuts, or doesn't exist at all.
An S corporation owner that works for his S corporation and fails to pay himself a reasonable salary can find himself having problems with the IRS. Only a fool would try to claim a zero salary with a profitable S corporation.
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ReplyDeleteyou're missing how that might effect peoples' feelings toward having RIB, etc. at all. Of course the architects of this want people to have more non-FICA income. The worse people feel about/the less they are tied to or rely upon SS benefits, the easier it is to gut those benefit programs.
You're going to see a lot of younger people gladly skipping FICA to avoid some taxes and pocket a little more income now thinking their Bitcoin plays or whatever path they've dreamed up for their unique version of the deluded American Dream will bail them out just a little down the road. And before the rug is completely pulled out from under them, they'll smugly support cutting or privatizing or killing outright the benefits they believe they don't need.
It's part of the larger trend to push everyone toward 1099 income and to not expect/plan for/etc. employer or government benefits of any kind. You get rid of those private and public benefits or at least the expectation of them for large numbers of people, and suddenly even your poor 1099 crowd is yelling for tax cuts since that's the only way left to materially increase their bottom lines.
Get ready, folks. Late capitalism is going to put on a spectacular show, and we get the bonus of experiencing its wretched death throes and eventual collapse against the backdrop hellscape supplied by climate change. Boy, it's gonna be swell.
I could be misreading it, but doesn't page 39 say only engineering and architecture services are being excluded, and businesses involving the fields of health, law, consulting, athletics, financial services, brokerage services,...that these businesses are specifically not excluded?
ReplyDeleteLaw firms are not totally excluded, but certainly restricted. Deduction phaseout at 157,500 single, 315K couples. https://www.nytimes.com/interactive/2017/12/20/us/politics/small-business-tax-cut-pass-throughs.html
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