The tax bill heading for adoption in Congress bestows one of its biggest and most controversial gifts—a 20% deduction for pass-through revenue—on the majority of U.S. firms that are partnerships, S-corporations and sole proprietorships.
The Senate and House versions of the tax bill excluded from the deduction architects, engineers, doctors, lawyers, financial services firms and numerous other types of businesses. Before, those type of companies were lumped together for tax purposes.
Instead, the engineers and architects lobbied key lawmakers. Their efforts were rewarded when a redraft of the compromise measure made a specific exception, tucked into the section on the deduction for pass-through entities, that entitles architects and engineers to the deduction.
The American Council of Engineering Companies, which represents 5,000 firms, argued for what staffers say was an “imperative” change.
The engineers lobbied key congressional and committee members, noting that the treatment of engineers under the tax reform measure was inconsistent with another section of the tax code that recognizes such firms’ “integral role in facilitating capital investment” and, therefore, qualifies them for the proposed pass-through tax benefit.
Congress explicitly provided that engineering and architecture firms qualified for the Section 199 domestic manufacturing deduction, ACEC argued. "in contrast to other "specified services" industries such as law, accounting and financial services, engineering and architecture are the only industries that (a) lose a significant tax benefit (Section 199) and (b) are excluded from the proposed pass-through tax benefits, resulting in a net tax increase."
In a Nov. 14 letter sent to Senate Finance Committee officials, ACEC said "there is no public policy justification for establishing a tax code that favors corporations over smaller firms, or one that creates arbitrary winners and losers among passthrough firms."
Sen. James Inhofe (R-Okla.) proposed an amendment that would have peeled the architects and engineers away from the other specified services firms, but that amendment “did not receive a vote, given the expedited consideration of the Senate bill,” said ACEC.
The American Institute of Architects also pressed for changes. It targeted conference committee members through AIA members in local districts, reaching out directly to other lawmakers through contacts on Capitol Hill or via member relationships. AIA also teamed up with engineering groups and distributed a letter.
The 20% deduction for pass-though entities is subject to income limitations; the breaks it provides real estate companies have made it a target of critics who say it will benefit, among others, President Trump. But the benefit for designers shows, as AIA President Carl Elefante said, “that the conferees listened to our members.”
Adds ACEC President and CEO David Raymond: "Achieving this equity was critical for our industry, and we are encouraged and pleased."