Does Your Firm Qualify for the New Passthrough Tax Deduction?

Does Your Firm Qualify for the New Passthrough Tax Deduction? PRESENTERS Stephen Dwyer, Esq., general counsel, American Staffing Association James A. Essey, CSP, president and chief executive officer, The TemPositions Group of Cos. Marc J. Gerson, Esq., member, Miller & Chevalier Ed Lenz, Esq., senior counsel, American Staffing Association Toby Malara, Esq., government affairs counsel, American Staffing Association

Disclaimer This presentation is intended as a summary of the issues presented and is not intended to provide legal advice. It is provided for the general information of the attendees. Legal counsel and advice should be sought for any specific questions and before taking any action in reliance on the information presented.

The Tax Cuts and Jobs Act First comprehensive reform of tax code in more than 30 years Congress has been focused on tax reform for the last decade (hearings, discussion drafts, introduced bills, working groups) 2017 turned out to be the “perfect storm” 2016 “Republican sweep” resulted in first Republican control of House, Senate, and administration since 2006 Tax reform was a top priority of both Congress and the president 2017 was viewed as a “window of opportunity” prior to 2018 midterm elections Republicans needed legislative win following failed health care reform efforts Budget reconciliation rules allowed Republicans to pass reform without Democratic support

Major Focus of TCJA—Rate Reduction $1.5 trillion net tax cut over 10 years, primarily through rate reduction Top individual tax rate reduced from 39.6% to 37% (temporary, expires at the end of 2025) Top corporate tax rate reduced from 35% to 21% (permanent) House bill would have reduced the tax rate on passthrough business income, but that was rejected in favor of a new tax deduction for such income

New 20% Deduction for Certain Passthrough Income New tax code § 199A provides deduction equal to 20% of domestic qualified business income (i.e., all domestic noninvestment income) from passthrough businesses such as S corporations Deduction limited to (i) 50% of W-2 wages, or (ii) 25% of W-2 wages plus 2.5% of unadjusted basis in qualified tangible personal property W-2 wage limit does not apply to smaller taxpayers (begins phasing in at $315,000 for joint filers) Provides for a maximum rate of 29.6% on domestic qualified business income (37% individual rate subject to 20% deduction) Expires at the end of 2025

‘Specified Service Trade or Business’ Exclusion Only income received from “qualified trades or businesses” is eligible for deduction Underlying policy is to provide the deduction to capital-intensive businesses (e.g., manufacturing) but not to certain service-oriented businesses, defined as “specified service trade or businesses” “Specified service trade or business” exclusion does not apply to smaller taxpayers ($315,000 for joint filers)

‘Specified Service Trade or Business’ Exclusion “Per se” list of “specified service trade or businesses” Health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services Reputation or skill “catch all” test Any trade or business whose “principal asset” is the “reputation or skill” of one or more of its employees or owners

‘Specified Service Trade or Business’ Exclusion Exclusion language is based on another tax code provision (§1202(e)(3)(A)) enacted in 1993 The scope of the exclusion, particularly the reputation or skill “catch all,” is uncertain As a result, U.S. Department of the Treasury and U.S. Internal Revenue Service have made development of guidance regarding the passthrough deduction a top priority It is uncertain when guidance will be issued, but industries are meeting with Treasury and IRS to discuss the issue

Why Staffing Firms Should Not Be Subject to the Exclusion At its March meeting with Treasury, ASA made two arguments as to why staffing firms should be eligible for the deduction for passthrough income: Staffing is not on the list of “per se” “specified service trade or businesses” (nor should services performed for clients in “per se” businesses be attributed to the staffing firm). Staffing firms’ principal asset is not the reputation or skill of individual owners or employees. Their principal asset is the ability to find and screen candidates quickly to meet specific, variable client needs Pricing, availability of talent, and responsiveness are key Reputation and skill are germane, if at all, only to the staffing firm as a whole, not to individual employees or owners

Next Steps in ASA Advocacy Efforts ASA will remain in close contact with Treasury as proposed regulations are being developed. ASA will submit written comments to the proposed regulations once issued. Until guidance is issued, ASA members should consult their own tax advisers in determining whether they are eligible for the 20% deduction.