Re: Tax Cuts and Jobs Act

December 8, 2017
The Honorable Mitch McConnell
Majority Leader
United States Senate
317 Russell Senate Office Building
Washington, DC 20510

The Honorable Orrin G. Hatch
United States Senate Committee on Finance
219 Dirksen Senate Office Building
Washington, DC 20510

The Honorable Charles E. Schumer
Minority Leader
United States Senate
322 Hart Senate Office Building
Washington DC 20510

The Honorable Ron Wyden
Ranking Member
United States Senate Committee on Finance
219 Dirksen Senate Office Building
Washington, DC 20510

Re: Tax Cuts and Jobs Act

Dear Majority Leader McConnell, Minority Leader Schumer, Chairman Hatch and Ranking Member Wyden:

My law firm, the Royse Law Firm, is a Silicon Valley-based law firm that advises companies on tax, business, and corporate law matters. We regularly comment on tax issues of interest to the business community. Today, I write to urge you to amend pending legislation so that professional service firms are taxed at the same rate as other businesses.

In late 2014, the Senate Finance Committee released report entitled “Comprehensive Tax Reform for 2015 and Beyond”. That Report noted that tax reform should abide by key principles, including fairness, simplicity and competitiveness. We applaud your efforts in passing the Tax Cuts and Jobs Act (the “Act”) for moving us closer to a fairer, simpler tax code that creates jobs for individuals, increases take home pay for working families, and levels the playing field for American businesses in the United States.

While an improvement over the current system, the Act does not fully accomplish its goals in one notable respect. The Senate version of the Act would reduce taxes on certain business income from a partnership, S corporation, or sole proprietorship (a “passthrough”) by providing a 23 percent deduction for qualified pass-through business income, effectively resulting in a top rate of 29.6 percent in the absence of other limitations. The Act, however, would reduce or deny the benefit of the lower rate out for professional service businesses that earn more than $500,000 for married individuals filing jointly and $250,000 for other individuals.

We urge Congress to evenhandedly apply the reduced pass-through tax rate to all professional service businesses, including law firms. Professional service providers are no less important actors in our economy and equally contribute to the nation’s goal of creating jobs and competitive wages. Without the benefit of a fair and consistent rate reduction, the incentive to start or grow a professional business would be diminished. Accordingly, in any adjustments in the Code, Congress should provide parity for all pass-through entities, regardless of their line of business, in order to achieve a fairer, simpler, and more competitive tax code. In particular, removing the professional service business exceptions from the lower pass-through tax rates or qualified business income deduction would promote efficiency and fairness.

We also suggest that, consistent with the goal of simplicity, Congress should minimize the effect of the tax law on a taxpayer’s decision, and encourage businesses to make decisions motivated by economic and business factors instead, such as interest rates, supply and demand, inflation, technology, and human capital. Excluding professional services firms from the pass through rate would undoubtedly push many such firms to convert to C corporations, which would enjoy a lower rate of tax. We do not believe that the tax code should drive taxpayers’ decisions on how to form their businesses.

Finally, we note that in today’s economy, professional and personal service pass-throughs increasingly compete on an international level. As the US moves to a service based economy, and technology enables remote work, many service businesses find that their income is increasingly mobile. The same considerations that compel Congress to reduce business tax rates on the non-service sector apply to the services sector, perhaps even more so. New graduates now must compete with foreign workers in low cost destinations and are being displaced by foreign providers of US legal and accounting services. The tax law may not be able to stop that practice, but should not encourage it. We urge you to allow American professional service firms to remain competitive.

Thus, we urge Congress to amend pending tax reform legislation consistent with the principles of sound tax policy outline above.

Very truly yours,

Roger Royse
Attorney at Law

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