Gyroscopic Investing

How the Trump Tax Law Created a Loophole That Lets Top Executives Net Millions by Slashing Their Own Salaries



https://www.propublica.org/article/how- ... ce=twitter

tomfoolery wrote: ↑Thu Aug 19, 2021 10:44 pm

yankees60 wrote: ↑Thu Aug 19, 2021 10:05 pm How the Trump Tax Law Created a Loophole That Lets Top Executives Net Millions by Slashing Their Own Salaries



https://www.propublica.org/article/how- ... ce=twitter

Interesting title! I look forward to someone reading it and providing some commentary to use as a basis of discussion!

Kudos to the people that figured this out.

As an accountant, wouldn't you have recommended this to your clients Vinny?

pp4me wrote: ↑Fri Aug 20, 2021 5:34 pm

tomfoolery wrote: ↑Thu Aug 19, 2021 10:44 pm

yankees60 wrote: ↑Thu Aug 19, 2021 10:05 pm
How the Trump Tax Law Created a Loophole That Lets Top Executives Net Millions by Slashing Their Own Salaries



https://www.propublica.org/article/how- ... ce=twitter

Interesting title! I look forward to someone reading it and providing some commentary to use as a basis of discussion!

Kudos to the people that figured this out.

As an accountant, wouldn't you have recommended this to your clients Vinny?

For decades there has been in place what goes on for owners of Sub S corporations. Keep in mind that, in general, choosing a Sub S corporation over a C corporation is limited to smaller corporations with limited different owners.

With a Sub corporation the owner gets paid in two ways...1) via payroll 2) via Sub earnings.

The first is subject to all the applicable Social Security and Medicare taxes (along with the employer matching those). The second is not.

Therefore I've had clients take as little as reasonable for payroll and let the balance come to the owner in the form of Sub S earnings.

The IRS being no dummies does not like this and I've many times read articles about the IRS cracking down on this "abuse". But I've never seen it actually happen.

At a CPA firm I worked at one of the partners would not let the payroll be less than 1/2 of the total of payroll and Sub S earnings. The other partner did not seem to care.

From reading the article it is not clear to me what the tax law created as it seems to just describe the taxation for Sub S corporations which have been around for decades and decades. I first dealt with one in the mid 70.

It seems that rather than creating a new loophole it expanded eligibility so that more professions / businesses would be eligible?

"As the Trump tax cut was being hammered out, lobbyists for industry groups and specific companies pushed to make sure they were eligible. Engineering, real estate and manufacturing were granted the deduction. Lawyers and companies performing “financial services,” for example, were not.

Despite that, banks lobbied successfully to be eligible for the deduction"

In support of the above where I said I'd never seen an IRS challenge to unreasonable compensation...

"A 2009 report from the Government Accountability Office estimated that in 2003 and 2004, about 13% of S corporations paid artificially low wages, resulting in about $3 billion in lost tax revenue. IRS officials complained to investigators that making the case that a salary is artificially low can be difficult and time consuming. From 2006 to 2008, the IRS examined only 0.5% of S corporations, and in less than a fourth of those cases was compensation looked at. By 2019, the audit rate for S corporations had fallen even lower, to 0.2%."

However, it seems like this accountant acted like a pig and was thus slaughtered by the IRS:

"In another case, an Iowa accountant was paid a salary of $24,000 a year, while taking profits of about $200,000. The accountant, David Watson, specialized in advising clients on tax issues involving pass-through companies. The court ruled against Watson, forcing him to pay back taxes and penalties, after it found that the market rate for his services at the time would have been over $90,000."

Finally, I've never done an analysis of while the business owner is paying these reduced Social Security and Medicare taxes that this may possibly affect future Social Security payouts since less was paid into Social Security....and how much are those possible lost future Social Security payouts compare to the amounts saved from not paying those Social Security and Medicare taxes.

I believe that Michael Kitces has written an article / analysis regarding this but it's still on my to read list...

tomfoolery wrote: ↑Sat Aug 21, 2021 12:01 am

pp4me wrote: ↑Fri Aug 20, 2021 5:34 pm

As an accountant, wouldn't you have recommended this to your clients Vinny?

As he's said many times, although it's possible this is the first time someone is reading it, Vinny is an accountant but not the kind of accountant anyone thinks of when you us that word.

Which means the majority of my accounting career has not had a major focus on taxes and preparing tax returns but, instead, as the head, inside accounting / finance person for organizations / businesses. Therefore mainly serving one master rather than many via doing many tax returns each years.

tomfoolery wrote: ↑Sat Aug 21, 2021 12:01 am

pp4me wrote: ↑Fri Aug 20, 2021 5:34 pm
As an accountant, wouldn't you have recommended this to your clients Vinny?

As he's said many times, although it's possible this is the first time someone is reading it, Vinny is an accountant but not the kind of accountant anyone thinks of when you us that word.

He seems to know a good bit about taxes based on his last post.

pp4me wrote: ↑Sun Aug 22, 2021 4:28 pm

tomfoolery wrote: ↑Sat Aug 21, 2021 12:01 am

pp4me wrote: ↑Fri Aug 20, 2021 5:34 pm

As an accountant, wouldn't you have recommended this to your clients Vinny?

As he's said many times, although it's possible this is the first time someone is reading it, Vinny is an accountant but not the kind of accountant anyone thinks of when you us that word.

He seems to know a good bit about taxes based on his last post.

More than someone who has never been an accountant and never been concerned at various points with tax matters...but far below what the typical accountant who is regularly dealing with tax returns. At this point I only know what directly affects me and the one business who tax returns I still prepare.