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US accountants and lawyers are currently engaged in a vigorous lobbying effort on Capitol Hill to prevent a tax increase that is targeted at professional services firms. This tax rise is hidden within Donald Trump’s ambitious tax and spending package, which lawmakers are currently negotiating. If this pressure campaign on Republican leaders in the US Senate fails, a tactic used by firms to reduce partners’ federal income tax could be shut down.
The American Bar Association has expressed their concerns by writing to senators, stating that the measure is “fundamentally unfair” as it specifically targets professional services firms, including doctors, dentists, veterinarians, lawyers, accountants, and consultants. Similarly, the American Institute of Certified Public Accountants has labeled the measure as “ugly” and has rallied local accounting groups from across 53 states and US territories to urge senators to drop the proposal.
The issue at hand revolves around a workaround that was introduced by US states after the first Trump administration imposed limitations on the ability of individuals to deduct state and local tax payments from their income before calculating their federal tax liability. This workaround, which has been adopted by 36 states, allows state income taxes to be paid at the firm level, benefiting professionals in highly taxed states.
The Salt cap, introduced during Trump’s 2017 Tax Cuts and Jobs Act, limited the total state and local taxes that taxpayers could deduct to $10,000. This measure disproportionately affected individuals in Democratic-leaning areas with high state income taxes and local property taxes, including lawyers and accountants whose partnership profits are taxed as individual income.
The ongoing negotiations regarding the One Big Beautiful Bill Act, passed by the House of Representatives, have reignited the debate over the Salt cap. The House version of the bill raises the cap to $40,000 but includes provisions that restrict the use of the workaround for professional services firms categorized as a “specified service trade or business.” This category covers accountants, lawyers, doctors, and some other professional services, while partnerships in other sectors are exempt.
The AICPA has raised concerns about the targeted nature of the measure, emphasizing its complexity and the potential impact on small pass-through businesses. Senate Republicans have signaled their intention to revise the Salt cap, citing its regressive and costly nature. However, negotiations are ongoing with House members who are advocating for the cap to be raised.
According to a Tax Foundation analysis, eliminating the workaround for professional services businesses could generate $73 billion over 10 years to offset the cost of raising the cap. The ABA has emphasized the importance of maintaining tax parity between professional service businesses and other pass-through entities, highlighting the significant contributions of small law firms to the economy.
In conclusion, the debate over the Salt cap and its implications for professional services firms underscores the complexity of tax policy and the need for careful consideration of its impact on different sectors of the economy. Stay informed about the latest developments by subscribing to the White House Watch newsletter.
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