Advisory firm owners unlikely to see windfall on tax returns from House bill

Proposed legislation is designed to give manufacturers the lower 25% tax rate, not professional service firms such as financial advisers, lawyers and accountants

Nov 2, 2017 @ 5:18 pm

By Mark Schoeff Jr.

Financial advisers who own their own firms and pay their business taxes through their personal returns probably won't see a windfall from the House Republican tax proposal released on Thursday.

Under the plan, small businesses that operate as so-called pass throughs could be eligible for a 25% tax rate rather than having to pay as much as 39.6% at the top individual level. But by and large, the benefit will go to manufacturing firms, leaving out the service sector, such as law, accounting, consulting and financial services. Only certain dividends of real estate investment trusts would qualify in the financial category.

"Brokers and investment advisers operating through partnerships, limited liability companies and S corporations will generally be excluded from the lower tax rate," said Howard Wagner, managing director of the accounting firm Crowe Horwath.

One reason for the bifurcation is that Republicans need to finance the ambitious individual and corporate tax cuts in the sweeping plan and couldn't give the 25% rate to all small businesses. The plan lowers the rate for a traditional corporation from 35% to 20%.

"They're trying to target the manufacturers, people out creating things, as opposed to the service sector," said Tim Steffen, director of advanced planning at Baird Private Wealth Management. "They had to draw the line somewhere for revenue purposes."

That demarcation has the small business lobby on the other side of Capitol Hill Republicans for now. The National Federation of Independent Business said that most small businesses won't qualify for a tax cut.

"We think that it's bad public policy to discriminate against businesses depending on what they do," said Jack Mozloom, NFIB national media director. "We want the manufacturers to get a tax cut, but also their accountants and financial advisers."

Advisers would still benefit from the tax bill because their clients are likely to be better off under its provisions, said James Hickey, chief investment strategist at HD Vest Financial Services.

"Even if they excluded financial firms from taking advantage of the new lower pass-through rates, their clients all of a sudden will have a lot more income and [clients'] savings will grow," Mr. Hickey said. "It's an [assets under management] game, and you win."

The bill released on Thursday is only the beginning of tax reform. Lawmakers hope to get a final measure to President Donald J. Trump by the end of the year. There's a long legislative road ahead, which provides many opportunities to change provisions.

"It's something that will be heavily lobbied," Mr. Wagner said of the pass-through policy.

But Mr. Steffen is not confident that it will be changed.

"Everything's on the table," he said. But "it seems like expanding the business tax cut is not the direction they're going to go."

0
Comments

What do you think?

View comments

Recommended for you

Featured video

Events

The importance of a diverse team

Clients, advisers, and even communities are telling firms that yes, diversity within the advisory community is important.

Latest news & opinion

Private Ocean grows to $2.2 billion with acquisition of Mosaic Financial

Combined financial planning operation gives the firm an expanded footprint in the San Francisco area.

Joe Duran has a game plan, and anyone can play

The CEO of United Capital built a formula for holistic financial planning that any firm can tap into — for a price.

LPL video about private equity looks like a swipe at Cetera

Recruiting video warns about potential consequences for advisers when a PE firm buys a broker-dealer.

Ladenburg chairman Phillip Frost steps down

The SEC charged Frost with fraud earlier this month.

Envestnet Tamarac partners with Schwab, TD on digital account openings

Auto-filling documents designed to make onboarding more efficient for RIAs and more convenient for clients.

X

Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting investmentnews.com? It'll help us continue to serve you.

Yes, show me how to whitelist investmentnews.com

Ad blocker detected. Please whitelist us or give premium a try.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print