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You don't get the CTC if you don't owe federal income tax, K-S-U.
Please explain.
You are only eligible for the credit if the credit is less than the amount of taxes you owe.
For example, take an associate at a law firm that makes $200,000. They could be a regular employee and take a $200,000 wage, pay payroll taxes, and have it taxed like it has always been. Or, they could form a partnership to contract with their employer, give themselves a profits interest in that partnership (meaning no wages), and enjoy the passthrough deduction - avoiding payroll taxes and getting 23% (or 20% or whatever it ends up being) essentially tax free.
You would be hard pressed to find a company able to otherwise pay its employees $200k but be willing to go in on a scheme like this. Why not just make everyone a partner with a limited voting interest?
That would also be a solution, and probably a better one, but in my experience most places would rather go in on a scheme like this than have associates be considered partners of any kind, especially when most law firms like my example put a pretty large emphasis on profits per partner.
Yea, but for the same reason I think they'd prefer to keep the profit sharing to themselves and go mostly with paying a tax-deducible wage to their employees. Honestly, if any employee is valuable enough for a company to be willing to work out that kind of a scheme (I'm not sure what it benefits the company) then they probably would just make them a partner.
Sys' "guy at work" strategy is potentially one that will be used to game the new passthrough deduction.
There is technically nothing in the language of the Senate bill that prevents employees from forming their own partnership and having that partnership contract with their employer, allowing them to take the passthrough deduction proposed in the Senate.
For example, take an associate at a law firm that makes $200,000. They could be a regular employee and take a $200,000 wage, pay payroll taxes, and have it taxed like it has always been. Or, they could form a partnership to contract with their employer, give themselves a profits interest in that partnership (meaning no wages), and enjoy the passthrough deduction - avoiding payroll taxes and getting 23% (or 20% or whatever it ends up being) essentially tax free.
Its a risky strategy, and the IRS would likely litigate and there's a decent change you would lose, but considering the IRS is incredibly poorly funded it will probably take them a while, if ever, to notice. I guarantee people will be doing this if that section goes through as it is currently written.
cool then they can also set up their own 401 k (and match it themselves) and get their own health insurance. I'd love that
Sys' "guy at work" strategy is potentially one that will be used to game the new passthrough deduction.
There is technically nothing in the language of the Senate bill that prevents employees from forming their own partnership and having that partnership contract with their employer, allowing them to take the passthrough deduction proposed in the Senate.
For example, take an associate at a law firm that makes $200,000. They could be a regular employee and take a $200,000 wage, pay payroll taxes, and have it taxed like it has always been. Or, they could form a partnership to contract with their employer, give themselves a profits interest in that partnership (meaning no wages), and enjoy the passthrough deduction - avoiding payroll taxes and getting 23% (or 20% or whatever it ends up being) essentially tax free.
Its a risky strategy, and the IRS would likely litigate and there's a decent change you would lose, but considering the IRS is incredibly poorly funded it will probably take them a while, if ever, to notice. I guarantee people will be doing this if that section goes through as it is currently written.
People will try, and they will lose. Because they won't truly be "independent contractors." As I mentioned above, the IRS already has rules against this.
For example, take an associate at a law firm that makes $200,000. They could be a regular employee and take a $200,000 wage, pay payroll taxes, and have it taxed like it has always been. Or, they could form a partnership to contract with their employer, give themselves a profits interest in that partnership (meaning no wages), and enjoy the passthrough deduction - avoiding payroll taxes and getting 23% (or 20% or whatever it ends up being) essentially tax free.
You would be hard pressed to find a company able to otherwise pay its employees $200k but be willing to go in on a scheme like this. Why not just make everyone a partner with a limited voting interest?
Fewer businesses (ESPECIALLY small businesses) are organized as C corporations. If the bill is cutting the corporate tax rate for the sake of creating jobs it makes no sense not to give similar breaks to LLCs and S Corps.
Um, sure it does? Again, s-corps and other pass-through entities already enjoyed a significant tax benefit over c-corps. The pass through entities aren't being double-taxed. They pay personal income taxes on their distributions, which seems fair to me. C-corps get a corporate tax cut to reduce the double taxation, and then still pay personal income tax on the distributions.
Right? So that's why the corporate income tax should be reduced: to lessen double taxation and bring them onto more equal footing with s-corps.
The question I have is why an owner (partner, shareholder, etc.) of an s-corp should pay less personal income tax than a W-2 wage earner. If the goal is to help "small businesses", the vast majority of those won't be impacted by this at all because their marginal personal income tax rate is already less than 25% (that's the proposed max rate for pass-throughs under the house bill). So the rate reduction would only seem to help folks who receive a big enough distribution from an s-corp that their marginal rate would exceed that 25%.
If we are trying to incentivize people to start businesses, seems like the s-corp structure was already a pretty good incentive: open a business and you won't pay any corporate income tax on your profits - you just pay personal income tax on what you take out of the business, same as everyone else.
I understand why Kansas eliminated taxes on s-corps: it was designed to lure businesses to Kansas. But that's a non-issue when implementing nationwide.
At the end of the day, I'm not begrudging anyone getting a better deal than me. I'm already getting a pretty sweet deal. Just seems odd to me that we'd allow two people earning the same amount to pay significantly different rates based on a legal fiction.
S corps and partnerships are taxed on their earnings. Its the distributions that are tax free.
I did not know this. So how's that different from a c-corp?
I also think it is a great idea to help small businesses. But I don't think the proposed rate reduction does that, because most truly small business won't pay a high enough marginal personal income tax rate to hit that max 25%. A better model to help small businesses would be make a certain amount of s-corp income tax free, rather than just imposing a max rate of 25% that most won't ever hit. As things currently stand, this is a nice windfall for the wealthy. I'm all about reducing taxes on the wealthy, but seems like everyone should get the same reduction regardless of whether you're a wealthy w-2 earner or pass-through recipient.
(a) In General.—In the case of a taxpayer other than a corporation, there shall be allowed as a deduction for any taxable year an amount equal to the lesser of—
“(1) the combined qualified business income amount of the taxpayer, or
“(2) an amount equal to 23 percent of the excess (if any) of—
“(A) the taxable income of the taxpayer for the taxable year, over
“(B) any net capital gain (as defined in section 1(h)) of the taxpayer for the taxable year.
Fewer businesses (ESPECIALLY small businesses) are organized as C corporations. If the bill is cutting the corporate tax rate for the sake of creating jobs it makes no sense not to give similar breaks to LLCs and S Corps.
Um, sure it does? Again, s-corps and other pass-through entities already enjoyed a significant tax benefit over c-corps. The pass through entities aren't being double-taxed. They pay personal income taxes on their distributions, which seems fair to me. C-corps get a corporate tax cut to reduce the double taxation, and then still pay personal income tax on the distributions.
Right? So that's why the corporate income tax should be reduced: to lessen double taxation and bring them onto more equal footing with s-corps.
The question I have is why an owner (partner, shareholder, etc.) of an s-corp should pay less personal income tax than a W-2 wage earner. If the goal is to help "small businesses", the vast majority of those won't be impacted by this at all because their marginal personal income tax rate is already less than 25% (that's the proposed max rate for pass-throughs under the house bill). So the rate reduction would only seem to help folks who receive a big enough distribution from an s-corp that their marginal rate would exceed that 25%.
If we are trying to incentivize people to start businesses, seems like the s-corp structure was already a pretty good incentive: open a business and you won't pay any corporate income tax on your profits - you just pay personal income tax on what you take out of the business, same as everyone else.
I understand why Kansas eliminated taxes on s-corps: it was designed to lure businesses to Kansas. But that's a non-issue when implementing nationwide.
At the end of the day, I'm not begrudging anyone getting a better deal than me. I'm already getting a pretty sweet deal. Just seems odd to me that we'd allow two people earning the same amount to pay significantly different rates based on a legal fiction.
1) right, but this clause is in both bills right now.
Did you read the bills to find this or did you read it somewhere else? The reason I ask is that I am very surprised to see this, especially in the house bill. I say that because, a lot of where these Republicans come from, college football is king. This provision would/could effect constituents that I'd think, who would be very vocal. I know college football season ticket holders are a relatively small constituency, but a well connected one.
To me, the best part is the irony. The Senate GOP decided to make the personal cuts temporary in order to fit the bill within procedural rules that allow passage by a simple majority. So, if not for the Democrats' threat of filibuster, they could have made the tax cuts permanent.
Why are the Dems so opposed to letting people keep more of their own money?
This chart!
https://twitter.com/josephlawler/status/930884532043223041
OT tax advice super thread: can I write off (or deduct or whatever) tax penalties as a business expense?No
The institution of slavery ended with hundreds of thousands of dead white men and hundreds of thousands more maimed 150 years ago.
This quote just screams:
https://youtu.be/-sfE0Ev6GYk?list=PLF7937A14F342B47D
Shut the eff up.
