David S. Miller, a tax lawyer at Proskauer Rose LLP, said the proposal could be tailored to restrict the size or types of pass-throughs eligible for the 15 percent rate.
“There are ways to write rules that would limit who could pay the lower rate -- by eliminating service providers or restricting it to businesses below a certain size,” Miller said.
Trump’s plan faces many hurdles in Congress and within the Treasury Department. But if enacted, it would present a challenge to the IRS, which would have to determine whether any influx of new pass-through businesses was legitimate. During the past decade, the agency has seen steep funding and manpower cuts that drastically reduced the number of classification audits it performs, said Garrett Gregory, a former senior attorney at the IRS until 2014 who worked in the agency’s large and mid-size business and international unit.
Gregory said classification audits are notoriously time-intensive -- involving a 20-part test -- so the prospect of retraining auditors would strain an already overburdened workforce.
“The IRS manpower is so low that it’s not like you have a lot of people sitting around twiddling their thumbs,” he said. “So it’s not a good time to have to retool them and redeploy them overnight. But there would be no choice. Otherwise, everyone and their dog will be filing as an LLC.”
This article was provided by Bloomberg News.