Trump’s Tax Proposal Troubling for Professional Services

President Donald Trump introduced a sweeping tax reform bill that promises to simplify and lower the corporate tax rate, but carves out professional services firms.

Under the proposal, pass-through companies, such as limited liability companies, partnerships, sole proprietorships and S corporations, would pay a capped rate of 25 percent. This rate creates a loophole for the wealthiest owners who could incorporate as a sole proprietorship and contract with their employer, meaning income counts as pass-through income rather than wages, according to Vox.com. In order to offset this, the proposal creates an exception to carve out professional service firms, which would assume that 100 percent of the earnings from professional services firms that count all earnings as wages, and not pass-through income. That would be taxed at the higher 39.6 percent income. This affects law firms. For businesses where the owner is actively involved in the business, the proposal would tax 70 percent of the income as wages at the higher rate, and 30 percent at the preferred pass-through rate of 25 percent.

Another element of the proposal that raises concerns in the legal community is a proposal to end the tax deduction on alimony payments. While not retroactive, the proposal is widely seen as troublesome for family law attorneys who often negotiate the terms of property settlement agreements using the tax treatment of alimony as a bargaining tool. The bill further proposes to eliminate the alternative minimum tax and estate tax, and end the medical expense deduction.

Other proposals include:

  • Future mortgage interest deductions would be capped at a home value of $500,000, down from $1 million under current law;
  • The deduction for state and local income and sales taxes would be eliminated; and
  • The deduction for state and local property taxes would be capped at $10,000.

Over the next few weeks, the bill will be debated in Washington. The NJSBA will review the professional services tax proposal in the wake of its treatment to law firms.

Changes Abound In New Jersey With New Administration, New Legislature

Last week’s election left little surprise as to who would be governor, but some surprises in the down ballot races will lead to some interesting developments in the new session. Here are some observations:

Phil Murphy

Democrat Phil Murphy bested Lieutenant Kimberly Guadagno to almost no one’s surprise. While he comes to the helm with no background in state government, he has promised to bring a wealth of knowledge stemming from his financial expertise at Goldman Sachs and his diplomacy skills as ambassador to Germany. The new governor’s agenda includes a budget that deals with pensions, funding formulas, and a host of other issues that New Jersey is used to seeing in the headlines year after year.

Chris Brown

Senator Colin Bell’s incumbency was short-lived with Chris Brown’s win last Tuesday. Bell was appointed to serve out the last few months of Sen. Jim Whelan’s term after his unexpected death in August. Whelan had announced his retirement earlier this year and Bell was already running for the seat. Brown’s win makes this the only Senate seat that flipped to Republican. He vacated his Assembly seat, which was picked up by Democratic Assembly candidate John Armato. Vincent Mazzeo also won re-election.

Stephen Sweeney

In the most expensive legislative race in New Jersey history, Senate President Stephen  Sweeney fended off a major challenge against the New Jersey Education Association-backed candidate to easily win re-election. It remains to be seen how Sweeney will work with the new governor.

Troy Singleton

Assemblyman Troy Singleton now moves to a different house as he takes over Senator Diane Allen’s seat. Allen retired this year and Singleton flipped the seat from red to blue. Carol Murphy, an aide to Assemblywoman Gabriela Mosquera, won election to Singleton’s Assembly seat. Murphy’s husband, Michael Muller, quit the Democratic Assembly Campaign Committee after a fallout with Assembly Speaker Vincent Prieto.

Vin Gopal

A Democratic leader in Monmouth County, Vin Gopal mounted a successful challenge against 11-year incumbent Senator Jennifer Beck in the 11th Legislative District. This was not an easy feat given the landscape of the district. Gopal, a small business owner, has amassed a Democratic base in Monmouth County over the years. Gopal has been credited with helping turn two Assembly seats Democratic two years ago with the victories of Joann Downey and Eric Houghtaling. Both won re-election this year.

Linda Greenstein

Senator Linda Greenstein again holds on to her Senate seat in her split district after another close race for Senate. This came after suspending her race following the sudden death of her husband just days before.

Christopher “Kip” Bateman

Sen. Christopher “Kip” Bateman keeps his seat in a narrow win. Andrew Zwicker and newbie Roy Freiman, a Democrat, will share the district with Bateman, who is a Republican.

Parker Space

Despite becoming embroiled in controversy regarding posing in front of the Confederate flag, and calling his female opponent a not-so-flattering name, incumbent Assemblyman Parker Space won re-election and will rejoin his colleagues next session.

Kirstin Corrado

Incumbent Republican Senator Kristin Corrado bested Democrat Thomas Duch to keep her seat, which she filled after Senator Kevin O’Toole left to join the Port Authority.