I spoke to Laura Davison of Bloomberg BNA about the Senate approach to pass-throughs and how it might evolve as the bill progresses:
Given the time constraints—Republicans hope to pass a bill by the end of the year—there’s not enough time to completely re-write the sections pertaining to passthroughs, so tax writers will likely have to make changes within the regimes that already exist. The Senate measure would provide a 17.4 percent deduction for passthrough income, which is then taxed at the individual rates. The House tax bill would allow businesses to subject 30 percent of their income to a 25 percent rate, or calculate an amount based on their income from capital assets.
“The way things are moving, I don’t know that there will be a chance to start from scratch,” Liam Donovan, a tax lobbyist at Bracewell LLP, said.
The most obvious ways to improve the Senate bill for passthroughs is to increase the deduction amount—now at 17.4 percent—or make the passthrough provisions permanent so they don’t continually need to be extended, Donovan said. The passthrough deduction would expire at the end of 2025, but the corporate cuts would be permanent in the Senate plan.
The Senate bill places very few restrictions on passthrough owners earning less than $250,000 as individuals, or $500,000 as joint filers. Service businesses can take the tax break and aren’t limited in the size of the deduction based on the wages they pay to employees. But imposing more restrictions may not be easy and could generate opposition to the bill.
“It’s not until you move up the scale where most of the growth and employment occurs that the restrictions kick in. I don’t know that there’s necessarily a way to ‘fix’ it, because this was a main feature of the modified mark,” Donovan said. “And part of it is just the inherent trade-off between the simplicity of a deduction versus the complexity of creating a new rate with the requisite qualifiers.”
Read the full piece here.