Over the past two posts, I discussed a loophole in the tax law that benefits the wrong entity. (Instead of benefiting charitable needs, the DAF [donor-advised funds] tend to benefit the donor, with little regard to those who are in need. Yet, the charitable benefit has afforded one family to extend an olive branch to the public, by sharing some 1000+ pieces of art with the public– albeit 500 folks a day, maximum.)

I also explained a truism. One person’s tax loophole is another person’s desired tax benefit.

Which also explains the endless do-loop of taxation. As the diagram below shows, (1)when a new tax regulation or law is developed, (2)  creative practitioners (like me- of course!) who study the law discern a means to technically comply with the law, but still mitigate the taxes due, (3) which causes Congress or the IRS to create a regulation or law to close that loophole, (4) while folks like us examine where that new regulation has a silver lining to let us mitigate our clients’ taxes. As long as we are going to employ a tax code that has exceptions or mitigations, there will be creative folks like us that find ways to exploit that exception. There really is no way around it.

(You can now see why I believe the best tax code is one that involves a sliding scale of tax rates [increasing as one’s revenue per dependent or net profit increases], with a floor below which no taxes are imposed. And, one that provides a tax credit for the working poor- to incentivize them to work and not simply collect potential benefits. [The revenue per dependent reflects the fact that $ 50K or $ 250K in net taxable income is vastly different for a single taxpayer than for a family of four or six.])

A loophole is exactly what I suggested would be exploited when the new QBI (qualified business income) regulations were passed on 22 December 2017. (I posted a hint in my book- see below.) Section 199A has a “punishment” for specific trades or businesses (hereafter termed the “afflicted”)- those firms providing legal or accounting services, art practitioners, among others (specifically excluding engineers, architects, and real estate professionals [which professions tend towards the GOP party…hmm]).

The loophole? Split a business into two separate entities. Keep the afflicted’s business interests in one entity and split off the property lease and administrative functions of the business into yet another entity. Now, that second business is specifically excluded from the afflicted punishment, so the 20% pass-through on QBI will apply to that second business.

Oops. While we never publicized our creative approach (on purpose!!!!), some other folks who don’t understand the system so well actually crowed at the top of their lungs. So…

You guessed it. The IRS has just proposed new regulations. One that excludes any afflicted business that has more than 50% common ownership that provides > 80% of its property or services to that afflicted business may NOT claim the coveted QBI deduction.

Yes, we have a solution. No, we won’t tell you. We’ll limit it to our own clients. So, our solution will work for at least a few years.

Oh- and it’s not just creative practitioners who are working to correct or adjust the new tax laws signed into law right before Christmas 2017 .  The “Blue States” have been working overtime to eradicate the punishment the GOP provided their residents. By finding ways to obviate the $ 10,000 SALT (state and local tax) limitation imposed on those who itemize their taxes. (Most middle class residents in the Blue States have (previously) deductible  taxes above that limitation- and won’t be able to deduct their full state and local taxes without some workaround.)

So, the Treasury Department announced it would create new regulations to continue to punish the Blue State residents. (However, that regulation could also punish many a Red State resident, where this loophole has obtained for many years. Except, the new regulation won’t apply to those credits that are < 15% of the taxpayer’s contribution. This new proviso may let many Red State residents skate across the limitation; not so many Blue State denizens.)

But, the fight is still not over. Four states (New York, New Jersey, Maryland, and Connecticut) have filed suit in the Southern District of New York (that famed NY  office that has served as Special Prosecutor Mueller’s “go to” for prosecuting the tax evasions that run rampant among TheDonald’s acolytes and sycophants) to invalidate the $ 10K SALT cap. (That cap is considered to violate the US Constitution- it interferes with states’ sovereign authorities to invest and promote their lives of their residents, businesses, and infrastructure.) You can bet the new IRS regs to limit their charitable workaround will be challenged in federal court soon, as well.

Good thing we engineers are exempted from the “endless do-loop”. Because we’ve been dealing with those kinds of problems for decades.

Don’t forget that I am offering a special benefit to those who purchase my book explaining the new tax law.  You can find that offer here.