Hidden blacklist in GOP tax law could hit everyone from LeBron James to doctors
Republicans have created a big tax break for businesses, but not just any businesses.
Their new tax law includes a little-noticed blacklist barring people working in certain fields, and earning more than $157,500, from claiming a new 20 percent deduction for unincorporated businesses called pass-throughs. It could prevent everyone from doctors to tanning salon owners to LeBron James from claiming the break.
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Republicans say they barred some types of businesses because they didn’t want just anyone to benefit from the lucrative break — they wanted it to be reserved for job creators, who employ other people. Some say there were political considerations as well, because lawmakers didn’t want to be seen handing out big tax cuts to wealthy doctors and lawyers, who aren’t expected to make the cut.
But to critics, the list is arbitrary, vague and amounts to picking winners and losers. It includes more than a dozen areas, including “health,” “law” and “consulting.”
It’s up to the Treasury Department and the IRS, charged with implementing the new law, to figure out who exactly belongs on the blacklist.
Officials will have to determine, for example, who is in the business of providing health services. It seems clear doctors will not be allowed to take the break, experts say, but what about someone who owns a gym or a tanning salon? Or someone who sells an X-ray machine to a hospital? What about a doctor (likely banned) who also earns income from owning a parking garage (likely not banned)?
All of that will involve lots of messy judgment calls that promise headaches for Treasury, not to mention confusion for millions of Americans wondering if they can take the break.
“People definitely want to know: Am I in? Am I out?” said Jeff Erickson, a principal at the consulting firm Ernst & Young.
Acting IRS Commissioner David Kautter says his agency is working on fleshing out the deduction, but that the rules won’t be released until late summer or early fall.
“This is one of those tasks that you have to hold your nose and do the best you can,” said Dana Trier, who recently stepped down as Treasury’s deputy assistant secretary for tax policy, where he coordinated the agency’s efforts to implement the new law.
The tax deduction was created to help unincorporated businesses that wouldn’t benefit from Republicans’ big cut in the corporate tax rate. It can substantially reduce the owners’ tax bills, effectively cutting the top marginal tax rate to 29.2 percent from 37 percent. For someone in the 24 percent bracket, it can reduce their rate to 19.2 percent. It’s projected to cost about $50 billion annually.
Despite the importance of the deduction to the overall tax legislation, lawmakers weren’t very specific when it came to who was in and who was out. For instance, the provision excludes trades and businesses “involving the performance of services” in, among other areas, financial services, performing arts, athletics, actuarial science and investing.
Treasury will not only have to parse things like who is providing consulting or brokerage services. It will also have to decide how to implement a vague, catch-all line in the law that also bars businesses “where the principal asset of such trade or business is the reputation or skill of one or more of its employees or owners.”
Experts say it could be interpreted narrowly so that it only includes people like LeBron James or Tiger Woods who are well-known brands. That would amount to allowing more people to claim the deduction, which means it would cost the Treasury more money.