WASHINGTON ― Republican lawmakers, who promised all year to help “small businesses,” have settled on a final tax bill with a last-minute addition that appears to benefit one particular small businessman: Donald J. Trump.
The president ― who reported income of at least $200 million from the companies running his residential buildings, hotels and golf courses last year ― might have lost out on millions of dollars had House and Senate negotiators failed to insert a provision that extends a big new tax break to businesses that own expensive properties but that don’t have many employees.
Conference committee members had largely settled on the Senate version of the rules defining which businesses would and would not be eligible for that deduction. Large corporations are getting a 40 percent reduction in their top income tax rate. Originally, Senate Republicans wanted to ensure that a similar tax break for “pass-through” businesses ― so named because the owners’ profits “pass through” onto their individual tax returns and are not reported on separate corporate returns ― was aimed at firms that employ workers, not just passively own property.
“But then they crafted a new loophole that appears designed for real estate businesses,” said Steven Rosenthal, a tax law expert at the nonpartisan Tax Policy Center, adding that why that happened was “the $64,000 question.”
“Certainly a large chunk of the Trump empire runs through pass-throughs that would benefit from this change,” Rosenthal said.
Both the White House and Senate Finance Committee Chairman Orrin Hatch (R-Utah) denied that the change was designed to benefit anyone in particular. “Through several rounds of negotiations, the House secured a version of their proposal that was consistent with the overall structure of the compromise,” Hatch wrote to fellow Republican Sen. Bob Corker.
Corker queried Hatch after drawing criticism over the weekend for announcing his support of the bill just as the new tax break language was released. The Tennessee senator owns real estate companies as well, although not as large or as lucrative as Trump’s.
The White House similarly argued that the break had originally been in the House bill and was added to the final legislation as part of normal negotiations between the two chambers. “There’s a lot of things that come together in a giant compromise like this,” legislative affairs director Marc Short told CNBC on Monday.
In fact, the original House language and the final bill permit the pass-through tax break for all types of “passive” owners ― that is, those who do not have a day-to-day role in running the business. Most, if not all, of Trump’s companies would fall in this category. But the new language in the compromise bill also adds a deduction worth 2.5 percent of a pass-through business’s property ― meaning it can generate millions of dollars in deductions for owners of multiple buildings worth many tens of millions of dollars.
“The House bill did not contain the 2.5-percent property test or any connected to the amount of property,” said Lily Batchelder, a New York University law professor and a former member of President Barack Obama’s National Economic Council.
Had that new language not been added, Trump’s real estate companies would have been limited to a deduction worth half of the amount they pay in wages. Most real estate businesses like the president’s employ relatively few workers, so that figure would likely have been in the tens or perhaps hundreds of thousands of dollars.
Precisely how much Trump will benefit from the change cannot be known because he has refused to release his tax returns, despite have promised to do so before he entered the presidential race in 2015. Every previous major-party presidential nominee going back four decades has released multiple years of tax returns.
The compromise bill lets the owners of most small pass-through businesses deduct 20 percent of their business incomes on their personal tax returns. A florist with $100,000 in business income, for example, would be able to deduct $20,000 and pay taxes on the remaining $80,000 ― amounting to an actual savings of about $4,000 if that is the florist’s only income stream. More profitable pass-through businesses will have their deductions limited by the size of their payrolls and their property values.
How much businesses can benefit from the changes, though, will depend on a number of factors, including how much their owners choose to pay themselves in salary ― which certain categories of pass-throughs are required to do under Internal Revenue Service rules.
“That becomes an interesting and complicated calculation,” Rosenthal said, laughing at Republican claims that their bill would simplify the tax code. “This bill is the antithesis of simplification. This law is the Tax Lawyer Relief Act of 2017.”