Everyone’s an Owner

Some experts are predicting that the recent tax legislation will create a ton of new business creation and activity—just not the kind that lawmakers originally intended. These people are predicting a surge in efforts for reclassification and the organization of cover companies by employees so they can have their salaries recognized as business income, significantly lowering their tax burden as a result.

A central tenet of the Republican bill is that it reduces both corporate and pass-through business tax rates. Corporate profits are now taxed at only 21 percent, and owners of pass-through companies will get to take a 20 percent deduction. While these same experts predict it will take some time to adapt, they believe that as lawyers and accountants delve into the new rules, they will find ways to minimize taxes for their clients using the new tax structure.

A group of tax law professors and lawyers wrote a paper on various ways imaginative and wealthy individuals can use the preferential business tax treatment to reduce their taxes. This academic paper is entitled “The Games They Will Play: Tax Games, Roadblocks, and Glitches Under the New Legislation” (available for download via SSRN), and it chronicles how they believe individuals in various fields and scenarios will create or turn themselves into small businesses to take advantage of the new tax structure.

Below is a brief synopsis of the different strategies. As always, remember that each situation is unique and you should consult your tax professional before implementing any of these strategies—this is definitely not a DIY type of situation.

Partnership Game Changers
Some of the paper’s authors believe that people will transform themselves into self-employed contractors or partnerships, thus turning their wages into pass-through profits and entitling them to the 20 percent deduction.

The IRS lays out pretty strict guidelines on who can be classified as an independent contractor, with a bias toward workers being treated as W-2 employees—so this isn’t a simple path. The most likely candidates are individuals in certain professions, such as law firms. One example given is that associates (partners would already receive the pass-through treatment) could create an LLC and then be hired by the firm. There are provisions that prevent guaranteed payments from qualifying for the deduction; however, many feel these regulations are weakly written and might only apply to S corporations.

Split the Difference
Another strategy professional service pass-throughs can use is to split their companies into parts. One part would perform the services portion of the business, while the other would own the real estate and/or any productized revenue streams. Separating the service portion of the business would allow the other segments to qualify for profit deductions where they would not otherwise if they were comingled.

Initially, many believed the easiest way to arbitrage the new tax rate structure would be to organize a corporation. 
Currently, however, most entrepreneurs avoid forming corporations due to double taxation (profits are taxed at both the corporate level and then again as dividend distributions). The reduced corporate rate of 21 percent combined with the top dividend rate of 20 percent means that even taxpayers in the top brackets will do better not incorporating; however, opportunities for interest earning investments are still available.

Change often means opportunity when it comes to tax law. The new tax law substantially shakes up business taxation, and as professionals sort through the finer details, new strategies will emerge for some taxpayers.

Joseph D. Callicutt, Jr., Named as Audit Partner

Reynolds, Bone & Griesbeck PLC recently promoted Joseph D. Callicutt, Jr., to Audit Partner from the position of Senior Audit Manager. 

Callicutt became a partner effective January 1, 2018, after ten years at RBG. During his tenure here, Callicutt has managed audit and tax engagements for financial institutions, and provided advisory services related to interest rate risk management, bank profitability and efficiency, strategic planning facilitation, and outsourced internal audits.

In addition to his technical abilities, Callicutt has shown himself to be a passionate professional, committed to building lasting relationships with his clients and peers. According to Managing Partner John Griesbeck, “I’ve never seen anyone more passionate about the banking industry than Joseph. His passion is exceeded only by his desire to serve clients and provide solutions for the issues they face.” 

 This ability to grow and maintain well-established and supportive relationships has been a strong resource for Callicutt’s clients. Through an intricate knowledge of clients’ challenges, and a deep understanding of tax and regulatory policy, Callicutt has been able to support small and mid-sized banks in navigating their challenges effectively and ethically, while assisting clients in looking toward the future.

Prior to his work at RBG, Callicutt was employed at a regional financial institution, where he worked in the areas of commercial real estate lending and investments in affordable housing and historical tax credit developments. 

Callicutt is a member of both the American institute of CPAs (AICPA) and the Tennessee Society of CPAs (TSCPA). A Mississippi native, Callicutt was educated at the University of Mississippi, where he earned a dual bachelors in Accountancy and Business Administration in Banking and Finance. He is also a graduate of the Barret School of Banking.

Reynolds, Bone & Griesbeck PLC has served the greater Mid-South for the past 100 years. The accounting firm specializes in accounting and auditing, tax, and advisory services for a diverse client base, including financial institutions, manufacturers and distributors, not-for-profit entities, retail dealerships, and employee benefit plans. For more information, visit rbgcpa.com.

Net Neutrality – What’s All the Fuss About?

According to the pundits, the Dec. 14 move by the U.S. Federal Communications Commission to repeal existing net neutrality rules is either a major blow to free communication or a storm in a teacup. Perhaps the truth lies somewhere between these polarizing viewpoints.

It appears that those who supported dismantling the rules put in place to ensure equal access to the Internet (a concept usually known as “net neutrality”) and those who wished them to remain want the same things. Both sides say they are opposed to Internet Service Providers putting discriminatory practices in place to slow down or block certain content, and neither wants ISPs to charge users more to see certain websites. The disagreement appears to center on how fair play on the Internet should be enforced and who exactly does the enforcing. Not surprisingly, President Trump’s appointee to the FCC, Chairman Ajit Pai, believes less government regulation will be more beneficial, and that broadband should not be regulated as if it were a utility. 

Most software companies disliked the FCC’s recent repeal of the Obama era regulations. Many small business owners and entrepreneurs also voiced their opposition to the repeal, fearing that the big ISPs will take advantage of their “gatekeeper” role. On the other hand, telecommunications companies were glad to see them repealed. The naysayers believe there are clear dangers in allowing market players to also be guardians of net neutrality. They argue that big telecom companies are already dabbling in preferential Internet usage practices to steer consumers to their sister companies and that Pai’s repeal opens the door for more ploys of this nature.

Here is some of the history behind the headlines and some of the key issues to ponder:

  • Before 2015, Internet Service Providers were governed by general laws regarding anti-competitive policies and consumer protection. In 2015, under President Obama, ISPs were classified as utilities and so-called net neutrality rules were put in place to stop ISPs from slowing down service, blocking access or requiring payment to favor certain content providers.
  • When Ajit Pai, who had voted against the 2015 reclassification in his role as an FCC Commissioner, was nominated by President Trump to take over the top job, industry observers knew a reversal was on the horizon. Pai contends that heavy-handed government regulation inhibits innovation and investment.¬†
  • Net neutrality existed prior to launch of the 2015 regulations. It might be argued that now, in 2017, we are back to pre-2015 conditions and that there is no call for the alarmist clamor.
  • On the other hand, Pai‚Äôs critics note that a neutral Internet is not guaranteed to last. Major companies already are deploying preferential usage patterns to boost sales‚Äîfor example, AT&T customers who access DIRECTV Now (which AT&T owns) are able to do so without that access counting as part of their data package. AT&T competitors like T-Mobile and Verizon also have similar setups. This practice‚Äîzero rating‚Äîwas scrutinized by the FCC under the Obama era regulations but, following Pai‚Äôs repeal, it isn‚Äôt any longer. Vertical integration by major ISPs is on the increase, and there could be a strong incentive for these industry leaders to favor their own content over all-comers.

Lawmakers have the power to overturn this recent decision, and to propose their own laws to provide some stability to the regulatory environment. Small business owners who want to see a fair and level playing field will want to continue to monitor this situation.