Tax Reform Friday: More Money, More Auditors

Changes in the tax code caused by Pub. L. No. 115-97 have sent tax experts searching for ways to reduce their clients’ tax burdens, and what they found might not have been what the authors of the law intended. The unintended consequences may include new possible tax workarounds, possibly higher state corporate income tax revenue, and the need for more funding at the IRS to deal with the changes to the law.

One idea being promoted is a method to avoid the deduction limit on the lower tax rate applied to income from pass-through entities for certain professionals in health, law, and service profession. The limit under the new law begins to phase out at $157,500 for single filers and $315,000 for joint filers. However, some tax practitioners have noted that another type of business entity—cooperatives—works differently. Pass-through entities can only apply the deduction to net taxable income; cooperatives can apply it to gross income. By forming cooperatives and routing income through them, high-income professionals such as doctors and lawyers would be able to reduce their tax rate, even though they’d be using a business type typically used by farmers.

Professionals might not be the only ones who could see more money as a result of tax reform. As a result of federal changes, states will likely see an increase in tax revenue from corporations. A report released by the Council on State Taxation and Ernst & Young estimates that because of the elimination of many deductions, the treatment of repatriated foreign business income, and other changes, state corporate income tax bases will increase by an average of 12 percent over the next 10 years.

New tax strategies and queries from taxpayers will likely put pressure on the IRS to issue more guidance on the state of tax law. As a result, Treasury Secretary Steven Mnuchin has requested an additional $397 million for the department’s budget to hire more staff and improve their technology.

It’s likely that recent changes to federal tax law will keep tax professionals, within government and without, busy for months and years to come.

Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: What new ways to deal with income taxes have you seen as a result of tax reform?

For more information on the impact of Pub. L. No. 115-97, examine Bloomberg Tax’s Tax Reform Roadmap, showing detailed comparisons between pre-reform law and impending changes, with pertinent cites attached.

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