Treasury Secretary Steven Mnuchin on Friday appeared to dish out advice for taking advantage of a potential loophole in the new tax law, by hinting to television anchors that they could cut their taxes by forming pass-through businesses eligible for a special new tax break.
In an appearance on CNBC’s Squawk Box at the World Economic Forum in Davos, Switzerland, Mnuchin suggested the possibility to the hosts after they complained that the new law took away a deduction they use to pay agents’ fees. He offered that they might create “small businesses” in order to take advantage of a new tax break created in the law meant for businesses that file through the individual side of the code.
“I’m not going to give you tax advice … but for small businesses, we have the lowest rate since the 1930s … Go hire people and create a small business,” Mnuchin said, as he and the hosts engaged in cross-talk.
The tax law created a new 20 percent deduction for businesses whose income passes straight through to owners’ taxes, rather than being taxed at the corporate level.
Republicans said that the break would provide relief to the vast majority of small businesses that are “pass-throughs,” but outside experts warned that it would be a target of abuse for high-earning professionals, who would try to declare themselves LLCs and turn their salaries into small business income.
As Mnuchin spoke Friday, CNBC host Andrew Sorkin commented that he was suggesting they do just that, by creating “loan-out corporations” — a business form used in Hollywood and elsewhere to “loan out” the services of actors or other professionals to their employers.
That is exactly the kind of maneuver that Republicans and Mnuchin said throughout last year that they would try to prevent.
“As we change the pass-through rates, it’s important that we have guard rails around those rules,” Mnuchin said in October. “This isn’t about creating tax cuts for the rich.”
“We will put procedures in place … to make sure that people who should be paying higher taxes do not use pass-throughs to arbitrage the system,” he said in congressional testimony in May.
The final bill contained a number of complicated rules meant to limit the pass-through deduction to legitimate businesses that tax lawyers are still trying to assess, and game to their advantage.
One significant limitation is that the 20 percent deduction wouldn’t be available to professional services, with certain industries excepted. Journalists would likely fall under that category. That limitation, however, only phases in after the first $315,000 in income for married couples.
