A new report expects 2018 to be something of a “Wild West” for taxpayers and their advisors, who will rush to create “facts on the ground” that would hinder IRS efforts to reverse some of the gaming available in the Tax Cuts and Jobs Act.

An SSRN report written by a number of tax scholars, practitioners and analysts — The Games They Will Play: An Update on the Conference Committee Tax Bill — examines some of the major games, legal roadblocks and glitches in the conference bill.

“The legislation is still likely to cost more than the current estimates of over $1 trillion, to advantage the well-advised (and their advisors) playing tax games in ways that are both deliberate and inadvertent, and to face legal roadblocks like WTO noncompliance that could undermine key components of the legislation,” according to the report, which is the continued work of a group of legal experts from across the country.

According to the report, the bill still has glitches that could lead to “haphazard and unexpected results that could arbitrarily favor or penalize taxpayers.”

Specifically, the conference bill allows for the following four tax planning opportunities:

Using corporations as tax shelters.

1. Using corporations as tax shelters.

The conference bill taxes C corporations at a 21% rate beginning in 2018. As a result, taxpayers would still be able to use corporations as tax-preferred savings vehicles.

With no further protections added to the bill to avoid this outcome, C-corps will be used to shelter income from the top ordinary income tax rate.

According to the report, “the use of corporations as tax shelters can result in labor income only being taxed at the preferential 21% rate, and entirely eliminate the ‘second layer’ of tax when an individual receives a dividend or sells the corporate stock.”

The incentive to use corporations as tax shelters is slightly reduced under the conference bill relative to the prior version as a result of the slightly higher corporate rate (from 20% to 21%) and lower top individual rate (from 39.6% to 37%). But, according to the report, the tax savings could still be considerable.

“Pre-existing safeguards to avoid these kinds of consequences are already inadequate and will be even more so in light of the planning incentives that this rate differential creates,” the report states.

Pass-Through Games.

2. Pass-through games.

The conference bill grants a 20% deduction for certain qualified business income, which in effect reduces the top tax rate from 37% to 29.6%. According to the report, this provides a “tremendous incentive” for taxpayers to shoehorn their income into the “qualified” category.

The report finds that the complex rules involved will invite plenty of gaming opportunities.

“There is no particular logic to who clearly fits into the preferred categories, and the game will be to get within the haphazard lines,” the report states.

In fact, the conference bill actually worsens matters along an important dimension, according to the report.

The conference bill allows owners of firms with no wages whatsoever, and just certain kinds of property, to take advantage of the lower rate.

“This change both expands the availability of the pass-through deduction and encourages firms to game the rule by increasing their ownership of qualifying property (for example, by owning instead of leasing) — and possibly even by replacing workers in the process,” the report states.

Service providers will also be able to take a number of steps to try to qualify for the pass-through deduction. According to the report, any married employee with taxable income less than $315,000 will have an incentive to be a partner or an independent contractor rather than employee, and appear to get the full benefit in that case.

For example, higher-income law partners, doctors and other professionals will likely be able to engage in strategies to access the special rates, such as buying their buildings and owning them in a separate entity, or going in-house at firms that are not in restricted fields.

Another important loophole is that pass-throughs may be able to largely bypass the new limitation on interest expense, and public corporations can then use pass-through subsidiaries to do the same, according to the report.

Restructuring state and local taxes (SALT) to maintain deductibility.

3. Restructuring state and local taxes (SALT) to maintain deductibility.

The conference bill caps the SALT deduction at $10,000, but permits a combination of taxes in order to reach that cap. In many parts of the country, however, taxpayers pay state and local taxes well in excess of $10,000. Affected states have ample incentive to respond creatively to the changes in federal tax law.

Under the conference bill, there are still three possible responses by states and municipalities to restructure their revenue collections and preserve the SALT deduction.

All three strategies rely on replacing state taxes that are no longer deductible over this cap with other taxes or sources of revenue (such as employer-side payroll or charitable donations or franchise taxes) that will remain deductible.

According to the report, taxes imposed on a business are still deductible. “Therefore states can shift from nondeductible over-the-cap state income taxes to still-deductible employer-side payroll taxes,” the report states.

The report also notes that the new law would also permit the shift from use of nondeductible over-the-cap state income taxes to deductible charitable contributions to state and local governments.

Regarding franchise taxes, the report finds that state and local taxes remain deductible by pass-through businesses, so long as they are imposed on the entity itself rather than the individual.

International games, roadblocks and glitches.

4. International games, roadblocks and glitches.

According to the report, the international tax provisions in the conference bill present numerous gaming opportunities, adverse consequences under international law, and undesirable incentives to locate investment and assets abroad.

The new bill will invite a variety of tax planning and avoidance opportunities for taxpayers with international operations.

For example, taxpayers may seek to claim the lower export rate when they sell products abroad even when those products are sold right back into the United States, according to the report.

The report also finds that the minimum tax formula in the conference bill induces companies to locate assets and investment offshore.

The conference bill imposes a minimum tax on global intangible income that is intended to stop U.S. corporations from shifting profits out of the United States. However, the report calls the minimum tax “highly problematic.”

“The conference bill exempts from the tax a deemed 10% return on tangible assets abroad, measured by tax basis,” the report states. “This rule encourages U.S. firms to locate tangible assets (and accompanying jobs) overseas.”

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