BNA: Passthrough Revisions Possible as Problems Plague Tax Plan

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.

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BNA: Senate Passthrough Approach Seen as Simpler Than House’s

I spoke to Laura Davison from Bloomberg BNA about the relative merits of the Senate’s approach to pass-through taxation:

“It is certainly a much cleaner approach than the House. If the goal is simplification, that’s a simple way to do it,” said Liam Donovan, a principal at Bracewell LLP.

The 17.4 percent deduction number is “oddly specific,” indicating that the Senate tax writers needed to contain the cost of this provision, he said. The Joint Committee on Taxation estimates the deduction would add about $459.7 billion.

The Senate plan avoids one of the more complicated aspects of the House approach: determining what income should be taxed as wages, and what should be taxed at a preferential passthrough rate. It also isn’t clear whether passive owners—such as investors who don’t work in the business—would get a tax break close to what they would get in the House bill, which would give them a 25 percent rate on all the income they earn from the passthrough.

“It comes down to a choice—do you want a real 32 percent rate, or an inscrutably complex 25 percent rate that only applies to some of your income?” Donovan said.

Read the full piece here.

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Bloomberg: Tax Breaks for Oil, Wind, Electric Cars Survive in Senate Bill

I spoke to Bloomberg‘s Ari Natter about the Senate tax bill’s surprising approach to energy policy:

“From an energy standpoint it’s an epic head fake,” said Liam Donovan, a tax lobbyist at Bracewell LLP. “I don’t think anybody in town would have guessed the Senate mark would be silent on energy, particularly after the waves that were made in the House.”

Read the full piece here.

To be clear, the surprise here was not that the Senate left the production tax credit (PTC) alone–clearly renewables have a stronger constituency within the Senate GOP conference than the house. The shocker was that the Senate failed to restore the orphaned tax credits that were left out of the 2015 phase-down deal. With the House proposal reinstating these credits, the Senate should have been a formality. Instead they chose to forego an energy title altogether.

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