WSJ: Crack And Pack — How Companies Are Mastering The New Tax Code

Wall Street Journal, Crack and Pack: How Companies Are Mastering the New Tax Code:

Dallas attorney Garry Davis plans to break up his immigration-law practice. One firm will have all the lawyers. The other will record the profits.

It’s just one of many strategies businesses are exploring as they pore over the biggest rewrite of U.S. tax rules in decades. Mr. Davis’s approach, which some have dubbed “crack and pack,” seeks to get around a provision denying high-earning lawyers, doctors and other professionals a tax break available to plumbing contractors, restaurateurs and architects.

By separating the lawyers from other parts of the business, he hopes to lower the business’s overall tax bill while changing little in his day-to-day operations.

Long before most clarifying regulations have been issued, the new law has led to a burst of activity in tax circles as lawyers, accountants and businesses look for ways around some of the proposals meant to pinch them—and for ways to extend the reach of new tax breaks. For owners of closely held businesses, that can mean splitting operations apart, reclassifying them and re-categorizing their activities, all in an effort to get as much of their income taxed at the new low rates as possible.

The legislation contains more uncertainties than usual for a tax overhaul because of the speed of its drafting, which left little opportunity for the public and congressional scrutiny that often identifies confusion in bills. The recent omnibus spending bill shut down one loophole, involving farm products sold to cooperatives, while lawmakers and regulators say they are collecting feedback as they consider future changes.

In the meantime, tax experts are searching for moves business owners can make that will disrupt their businesses the least, while best qualifying for new tax breaks Congress has dangled. The private sector’s old game of cat-and-mouse with the Internal Revenue Service and Congress, in other words, is intensifying, and is likely to play out over years in regulations, audits, appeals and litigation.

For all but the largest publicly traded companies, much of the attention is focused on a new tax break for so-called pass-throughs, which make up a majority of U.S. businesses. In these, profits “pass through” to owners and are taxed at the individual level, instead of facing a corporate tax and then individual taxes, too, after money is distributed to owners.

Even with the corporate tax rate reduced by the new law, that two-layered structure means that it will still be attractive for many businesses to operate as pass-throughs. And the break given to them by the tax law effectively lowers the maximum individual income-tax rate for millions of business owners to 29.6% from 37%, the new top rate for wage income.

The break is fully available for the smallest businesses, but it contains guardrails meant to prevent some high-earning business owners such as Mr. Davis from claiming some or all of the benefit. Business owners who may bump up against these limitations are looking at steps that could permit them to claim or maximize these savings.