Thursday, November 09, 2017

Too soon for a victory lap

Today Ways and Means Chair Brady sent a letter to Congressman Blumenauer that seemingly - but not actually - puts the question of state and local tax deductibility by pass-through owners to bed.

Distastefully and inaccurately, but unsurprisingly, he blames the entire thing on the Joint Committee of Taxation. First he notes, in accordance with what we already pretty much knew, that the revenue estimate was prepared under the assumption that state and local income taxes incurred by the owners of pass-through businesses would not be allowable as itemized deductions.

As an aside, I suspect that some combination of that and the adverse political effects of public exposure may possibly have played a role in the decision to "clarify" that no itemized deductions would be allowed to pass-through business owners for state and local income taxes. Ways and Means majority staff has done too much communicating of the contrary answer for one to be confident that what he says now was really the intent, before today.

Anyway, back to the letter. He quotes a JCT publication as saying - the added italics are his - "State and local income ... taxes paid or accrued, other than those paid or accrued in carrying on a trade or business or an [investment] activity ... are no longer allowed as an itemized deduction."

Then he says: "We have discussed the italicized language with the JCT staff, and they have confirmed that this language was an error. We intend to correct this mistake in the Committee Report."

Comment 1: While it's inaccurate and unfair for him to blame the JCT, taking unfair blame is part of their job and they know it. You have to be a grown-up to work for that staff, and preferably not too thin-skinned.

Comment 2: I don't think saying something in the Committee Report is sufficient. They need to address the text of the statute, so that it's clear that pass-through owners can't deduct state and local income taxes despite arguably favorable statutory language that a court could decide to interpret differently than the Committee Report.

Comment 3: What about income taxes that a state or local government formally places on the business itself, not the business owner? A case in point is New York City's unincorporated business tax, which I gather many people believe is deductible as a business expense under present law. There may well be wholesale changes in the formal structure of state and local income taxes, to maximize deductibility for resident business owners, if that works. So this too needs to be "clarified," preferably in the statute as well as the Committee Report.

1 comment:

'G said...

Another example of an existing deductible income tax would be California's 1.5% tax (minimum of $800/yr) on income of S-Corporations. The State also charges a minimum tax of $800/yr on limited partnerships and LLC's, and LLC's also pay a graduated "fee" based on their gross receipts.