Tax Breaks for Pass-Throughs Leave Experts Scratching Their Heads

Tax Breaks for Pass-Throughs Leave Experts Scratching Their Heads


The Republican tax overhaul creates a 20 percent deduction for pass-through owners, who pay tax on their business income at individual rates. The deduction effectively lowers the top tax rate from 39.6 percent to 29.6 percent for owners of pass-through business such as sole proprietorships and limited liability companies. However, there are limits on who can claim the deduction, based on both income levels and business types, and those limits are causing some confusion among business owners and tax advisers, according to The Wall Street Journal.

“The owner of a successful chain of tanning salons should qualify for a new tax deduction, but someone who makes the same amount from a group of dermatology clinics won’t,” the Journal writes.

The difference in this case is due to the type of business involved. For business owners who earn more than $315,000 (for joint filers), restrictions kick in if the business provides a service — though the rules can seem inconsistent, given that some groups such as architects and engineers are exempt, while others, including doctors and layers, are not.

There are also clauses that could deny the deduction to celebrities, construction firm owners and highly skilled workers, but the rules are ambiguous in many cases. “This stuff is as clear as mud,” Howard Wagner, a managing director at an accounting firm, told the Journal.

Scott Greenberg of the conservative Tax Foundation tweeted his take on Friday: “What a hot mess.”

Many experts agree, and the new rules are expected to be challenged and litigated for years to come.