For Small Firms, Tax Reform Brings Advocacy Wins With Undefined Benefits

By on April 30, 2018

From AIA:  In December of 2017, the Republican-led Congress passed the Tax Cuts and Jobs Act of 2017. The sweeping reform bill pledged to ease the tax burden on individuals and corporations, slashing the corporate tax rate from 35 to 21 percent while adding an estimated $1.5 trillion in spending deficits over the next 10 years.

The final version of the bill, as signed into law by President Trump, offered a reprieve from what many owners of small to midsized architecture firms feared would be the result of the legislation: They would no longer be able to take advantage of the so-called “pass-through” provision, which exempts businesses such as sole proprietorships, partnerships, and S-corporations from being taxed at corporate rates. Instead, the tax rate “passes through” to the owner, who is taxed at an individual rate. The initial House and Senate bills prevented architecture firms not organized as corporations from taking advantage of this provision, grouping them with service industries like medical and law practices.

Thanks to lobbying by AIA and its members, the final version of the bill allowed smaller firms to take advantage of individual tax rates, which are lower under the new legislation, while taking an additional 20 percent deduction for qualified business income. “We were able to make the case that architects and engineers are a little bit different from doctors and lawyers,” says David Pore, a policy advisor with the Hance Scarborough law firm who worked with AIA’s government affairs team on lobbying efforts ahead of the December passage of the bill. “There is some capital investment; there is benefit to incentivizing growth and hiring of folks.”

As the legislation went through Congress, the Institute worked to improve the outcome for architects without formally taking a position for or against tax reform, aware that any reform of the tax code would inevitably affect architecture firms in different ways. Indeed, many architects see the final bill as an advocacy win but are still waiting to see how the tangible results shake out for their own firms. The tax liability for many firm owners whose companies are taxed at individual rates used to be closely tied to individual deductions and credits. With all personal exemptions eliminated as part of the Tax Cuts and Jobs Act to balance out other changes, some firm owners may not be able to take as large a deduction going forward.

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