Financial advisers who own their own firms and pay their business taxes through their personal returns probably won't see a windfall from the House Republican tax proposal released on Thursday.
Under
the plan, small businesses that operate as so-called pass throughs could be eligible for a 25% tax rate rather than having to pay as much as 39.6% at the top individual level. But by and large, the benefit will go to manufacturing firms, leaving out the service sector, such as law, accounting, consulting and financial services. Only certain dividends of real estate investment trusts would qualify in the financial category.
"Brokers and investment advisers operating through partnerships, limited liability companies and S corporations will generally be excluded from the lower tax rate," said Howard Wagner, managing director of the accounting firm Crowe Horwath.
One reason for the bifurcation is that Republicans need to finance the
ambitious individual and corporate tax cuts in the sweeping plan and couldn't give the 25% rate to all small businesses. The plan lowers the rate for a traditional corporation from 35% to 20%.
"They're trying to target the manufacturers, people out creating things, as opposed to the service sector," said Tim Steffen, director of advanced planning at Baird Private Wealth Management. "They had to draw the line somewhere for revenue purposes."
That demarcation has the small business lobby on the other side of Capitol Hill Republicans for now. The National Federation of Independent Business said that most small businesses won't qualify for a tax cut.
"We think that it's bad public policy to discriminate against businesses depending on what they do," said Jack Mozloom, NFIB national media director. "We want the manufacturers to get a tax cut, but also their accountants and financial advisers."
Advisers would still benefit from the tax bill because their clients are likely to be better off under its provisions, said James Hickey, chief investment strategist at HD Vest Financial Services.
"Even if they excluded financial firms from taking advantage of the new lower pass-through rates, their clients all of a sudden will have a lot more income and [clients'] savings will grow," Mr. Hickey said. "It's an [assets under management] game, and you win."
The
bill released on Thursday is only the beginning of tax reform. Lawmakers hope to get a final measure to President Donald J. Trump by the end of the year. There's a long legislative road ahead, which provides many opportunities to change provisions.
"It's something that will be heavily lobbied," Mr. Wagner said of the pass-through policy.
But Mr. Steffen is not confident that it will be changed.
"Everything's on the table," he said. But "it seems like expanding the business tax cut is not the direction they're going to go."
