How did Trump change the tax code? We asked a local expert.

Michael Cosby, a partner at Husch Blackwell and expert in tax law, explains what's happened and why.

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It’s tax time, and even the CPAs look a little glazed. The Trump Administration revised the Tax Code and Jobs Act of 2017, and everybody’s still trying to figure out the implications.

What’s the main change?

The corporate tax rate was reduced significantly. It’s 21 percent. Before, it varied, but the top was 39 percent. That has caused clients to rethink whether they should be taxed as a corporation or as a partnership or another pass-through entity. It’s a matter of math, basically—do you choose a corporate tax, then a dividend tax, or treat the company as individual income?

So it’s just simple math?

You’d think so, but they complicated it by adding a new provision, in an attempt to get holders of pass-through entities to a comparable tax rate. So there’s now a 20 percent deduction on certain types of business income. In other words, you’re not just applying math to your corporate income. If you do certain things or meet certain qualifications, you get a deduction. That’s the thing a lot of clients and, frankly, practitioners, are struggling with. Is there an advantage to staying a partnership and taking advantage of this 20 percent?

Are a lot of businesses shifting how they file?

We really won’t know until after the tax filing season. Then, if we see an uptick in c-corp filings… Also, there’s a new limit for partnerships and other pass-through entities on the amount of losses that can be deducted. Corporations have no limit.

Why impose that new limit?

If I were to guess, it’s to offset the impact the corporate lower rate was going to have. This was a place where we could show neutrality.

Who’s ultimately gaining here?

It’s probably very much misunderstood who’s really getting the advantage of the changes. It’s a hodgepodge, as far as the economic benefit that’s going to be realized. I don’t think there’s any clear winner or loser.

What prompted the change?

The initial driver was, the president wanted to have a lower corporate tax rate. But in order to offset the revenue losses, the ultimate writers of the tax code had to find places to recover that revenue. So where they gave a little bit, they had to take a little bit back.

Is this a big deal or a simplification?

The amount of change and the degree of change is significant, and by no means has it streamlined or simplified taxes. The idea that you’d be able to put your taxes on a postcard and send it in is certainly a long way off.

Was the tax code ever a simple and logical thing?

That’s hard to say. The tax code is not necessarily entirely about revenue generation. It’s a body of legislation used, rightly or wrongly, to encourage or discourage economic activity. I suppose early on it started out logical. But as we progressed and said we wanted to encourage, say, home ownership or charitable contributions, the code became a lot more complicated.

When was the last major change before this one?

They always tinker around the edges, but in 1986, the code was in essence completely rewritten, and that revision is as complicated as any. Then, the president was wanting to encourage economic recovery and activity. Here, the major impetus was to lower corporate taxes and eliminate some of the individual tax brackets, with the thought that it would result in a reduction in total tax liability for a number of people.

Did the revisions erase the incentive to give to charity?

I don’t know that we have discouraged charitable contributions, but one of the attempts to simplify the filing process was to significantly increase the standard deduction and personal exemption amounts to a level that would eliminate a lot of people from having to itemize their deductions. The idea was to put a standard deduction in place that was so significantly higher, it would simplify the process. If you don’t have, as a married couple, $24,000 or more in mortgage liability, charitable contributions, and healthcare costs, you don’t have to keep track of that information. It’s triggered people either reconsidering or more deeply considering their charitable giving. Donors are aggregating their contributions into a single year.

Does the shrinking of the middle class show up in the tax code?

I don’t know. It’s an interesting question.

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