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New Tax Proposal - Are Professional Services Doomed?

I have been slogging through this tax reform bill (not actually the bill, but the commentary on the bill), looking for any and all information on the impact to professional services corps, specifically those of us that are S corps.

Here is what I have figured out as of this moment. We are screwed!

Here is why.

C corporations are going to be taxed at a flat 20%

Professional services corporations who have NOT elected to be an S corp are going to be taxed at a flat rate of 25%

For those of us who have elected to be an S corporation, the future is a bit fuzzy.

Here is why. The bill starts to distinguish between capital rich companies and capital “poor” companies. If you are a capital rich company, such as a manufacturer, you should benefit from a lower tax rate since your earnings are generated from your capital.

For those of us in a capital “poor” company (otherwise known as professional services firms – attorneys, accountants, doctors, consultants, engineers, etc) our income is generated from our labor and therefore we should NOT be given a preferential tax treatment. We should be taxed at our regular income tax rates.

So that is the logic.

The game for accountants is going to be determining what is income generated from capital and what is income generated from service. It remains to be seen as to what sort of leeway we will have in making that determination.

Frankly, I think this is flatly unfair. The thought that physical capital is the only thing that generates jobs and therefore is the only thing that should be rewarded with a reduced tax rate is absurd. Professionals that run service organizations do not necessary have huge amounts invested in physical assets, instead we have huge amounts invested in training our people, developing efficient processes, keeping on top of ever changing laws, and investing in cyber security, just to name a few.

I believe that investing time and money into my co-workers is just as important as investing in a piece of machinery and should be rewarded with equal tax benefits.

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