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The way US tax law works is that businesses mostly can deduct their business expenses from their taxable income, but people mostly can’t deduct their personal expenses. So a company that has $100 of revenue and spends $80 on inputs will have $20 of taxable income, but a person who has a $100 paycheck and spends $80 on food and rent will have $100 of taxable income. There are various exceptions. A person who has a $100 paycheck and spends $80 on food and a mortgage will have less than $100 of taxable income, because the interest on the mortgage is at least partially tax deductible.

Sometimes the lines blur. In particular, many people run businesses, and many of those businesses are not corporations (which file their own tax returns and pay their own corporate income tax) but what are called “pass-through entities,” like partnerships, whose income belongs to their owners. A pass-through business doesn’t pay taxes; its owners just count their share of its income as their income on their tax returns. And of course they deduct its business expenses: Intuitively, if you own a business that has $100 of revenue and spends $80 on business expenses, only the $20 of net business income will be income on your tax return.

And so, if you run a business, you will have enormous incentives to classify expenses as business expenses (deductible) rather than personal expenses (not deductible). And there are various specific rules and gray areas about what you can and can’t count, and this is a much-discussed topic with lots of potential for cheating.

One expense of particular interest is state income taxes. If you are a person with a high-paying job in New York, you will pay perhaps 35% of your taxable income in federal income tax and roughly 10% in state income tax. [1] For every $100 in your paycheck, the Internal Revenue Service will get $35, New York will get $10 and you will get $55. The rules used to be somewhat different: You could deduct that $10 New York tax from your federal taxable income, so you would only have $90 of federal taxable income, you’d only pay $31.50 in federal tax, and you’d have $58.50 left over for yourself. But in 2017, Congress changed that, capping the state and local tax (SALT) deduction at $10,000, so high-income taxpayers in high-tax states now can’t fully deduct their state income taxes.

On the other hand, businesses in high-tax states can still deduct their state income taxes: Those are business expenses, of course they are deductible. [2] Or, at least, corporations in high-tax states can deduct their state income taxes. What about pass-through businesses?

From first principles the rule is that, if the business pays the tax, as a business expense, it is deductible. Intuitively, if you own a business that has $100 of income and pays $10 of state taxes, only the $90 of net income is income on your federal tax return; if you own a business that has $100 of income and doesn’t pay state income taxes (because it passes through the income to you), and you pay $10 of state taxes on that income, the full $100 is income on your federal tax return. Historically pass-through businesses didn’t pay state income taxes, because they were pass-through businesses: For both federal and state tax purposes, they passed their income through to their owners, and the owners paid all the taxes on that income. But the 2017 federal tax changes created an incentive to find a way for those businesses to pay state income taxes themselves, so that they would remain deductible from their owners’ federal taxes.

And so a lot of high-tax states created some sort of pass-through entity tax that lets business owners pay their state taxes at the business level, so that they remain deductible from federal taxes. So if you are a person with a high-paying job in New York, you’ll pay $35 to the IRS and $10 to the state for every $100 in your paycheck. But if you are a person with a high-paying law firm partnership in New York, your partnership will pay $10 to the state, you’ll only get $90 of federal taxable income, and you’ll only pay $31.50 to the IRS. [3]

We talked about this back in 2022. As a person with a job, this has always struck me as mildly unfair (I don’t get unlimited state income tax deductions), but also aesthetically pleasing (I do enjoy tax structuring), so I don’t complain too much.

But of course if you are a law firm partner, you would much prefer to pay lower taxes (like other business owners) rather than higher taxes (like me). And Congress’s current efforts to revise tax laws involve taking away that advantage, but only for “‘specified service’ businesses, a category that can cover entertainment companies in Hollywood, pharmacists and physicians on Main Street, legal and financial firms on Wall Street and many other industries.” The law firms are mad. The Financial Times reports:

> US accountants and lawyers are mounting a furious lobbying effort on Capitol Hill to head off a tax rise targeted at professional services firms, which is buried in Donald Trump’s “big, beautiful bill”. ...

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> The American Bar Association this week wrote to senators calling the measure “fundamentally unfair” for singling out professional services firms, which include doctors, dentists and veterinarians as well as lawyers, accountants and consultants.

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> The American Institute of Certified Public Accountants called the measure “ugly” and has co-ordinated local accounting groups from across 53 states and US territories to write to senators demanding the measure be dropped. …

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> The move would be “fundamentally unfair and further widen the tax parity gap between professional service businesses and other pass-through businesses and corporations”, ABA president Bill Bay wrote in a letter to Senate leaders this week.

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> “The vast majority of law firms in America are small pass-through businesses, as more than 75 per cent of practising lawyers in our nation work as solo practitioners or in small law firms . . . These professional service businesses provide just as many benefits to the economy and society at large as other pass-throughs and corporations.”

Right I mean the fairness issue here is that right now I pay higher taxes, and law firm partners and car dealership owners pay lower taxes, and the bill would tax the law firm partners like me rather than like the car dealers, and they’d prefer to be taxed like the car dealers. I understand their preference!

(http://www.autoadmit.com/thread.php?thread_id=5739946&forum_id=2...id.#49028842)

alright zealous advocacy and all that but let’s not go crazy here

(http://www.autoadmit.com/thread.php?thread_id=5739946&forum_id=2...id.#49028998)