Washington, D.C. — As the majority in the U.S. House of Representatives considers a second helping of tax cuts that will largely benefit those who need them least, the Center for American Progress released a new report that highlights 11 ways the wealthy and corporations will game the first tax bill—the so-called Tax Cuts and Jobs Act (TCJA)—passed in December 2017. While proponents of the bill—including President Donald Trump, House Speaker Paul Ryan (R-WI), and House Committee on Ways and Means Chairman Kevin Brady (R-TX)—promised a simpler tax code under the TCJA, the law, in fact, fails to close many existing loopholes or eliminate special tax breaks. As CAP’s report outlines, the TCJA actually created new loopholes and special tax breaks and contains many mistakes and glitches—all of which open the door to tax gaming.

“Taxpayers taking advantage of glitches, loopholes, and mistakes doesn’t add jobs, grow the economy, or boost middle-class paychecks. All it does is allow the richest Americans and big corporations to game the system to enjoy even bigger tax cuts,” said Alexandra Thornton, senior director of Tax Policy at CAP and author of the report. “Conservative messaging about simplifying the tax code is merely rhetorical cover for a tax law that shovels big tax breaks to the wealthiest. If that wasn’t unbelievable enough, now leadership in the U.S. House of Representatives is trying to push a second round of tax cuts heavily skewed toward those who need them least.”

CAP’s report explains how vague language, complexity, and illogical rules in the TCJA encourage tax gaming and examines 11 specific ways the law allows wealthy individuals, highly profitable businesses, and corporations to engage in tax avoidance measures. Those ways include:

1 and 2. Cracking and packing. Lobbying firms, law firms, and other businesses breaking apart or taking on unrelated businesses in order to claim the new 20 percent deduction for pass-through business income.

3. Hedge fund managers circumventing the three-year holding rule for carried interest. In a weak attempt to look tough on carried interest, legislators included a small limit on the practice: Carried interest assets must be held for at least three years in order to qualify for the lower capital gains tax rate. Hedge fund managers, who tend to hold shares for shorter periods, are creating S corporations to hold their interests because of an ambiguity in the rule that exempts corporations without specifying what type.

4. Wall Street firms and wealthy families turning themselves into C corporations. If the pass-through business deduction workarounds fail, wealthy individuals may be able to shelter income from taxes by setting up their affairs as a traditional C corporation.

5. Wealthy families using dynasty trusts to maximize the estate tax cut. Over the past decade, the nation’s wealthiest families have seen their assets increase dramatically in value; thus, they have a strong incentive to move their assets into trusts and other structures that will defer tax on the gain. The dynasty trust tax dodge existed before the new law was passed, but the dramatically increased estate tax exemption creates a window of opportunity to squirrel away even more wealth tax free.

6. Corporations manipulating timing of worker bonuses and pension plan payments to maximize deductions. Many employers may have rushed to give bonuses before the end of 2017 or taken advantage of accounting rules allowing them to pay 2017 bonuses in the first quarter of 2018 to ensure that they received the biggest tax deduction possible for bonuses they would have given anyway. Offering the bonuses for 2017 enabled corporations to receive a larger tax break since it reduced corporate income that would have been taxed at a 35 percent statutory tax rate. Corporations may also be accelerating other expenses for similar reasons.

7. U.S. corporations investing more overseas to game the new international tax regime. By not taxing the profits of foreign subsidiaries, the new law provides a strong incentive for U.S. companies to earn as much income as possible offshore. A new minimum tax on high foreign profits designed to prevent this—the global intangible law-taxed income (GILTI) tax—instead encourages U.S. corporations to invest even more in actual physical operations offshore to avoid the tax.

8. U.S. multinationals averaging global profits in order to continue exploiting offshore tax havens. The new GILTI tax allows multinational corporations to blend credits for foreign taxes on a global basis—rather than country by country. Thus, taxes paid on earnings in a high-tax country can effectively offset very low-taxed earnings in a tax haven, thereby reducing or even eliminating any GILTI tax due.

9. U.S. corporations manipulating cost of goods sold (COGS) to avoid anti-abuse tax. The base erosion and anti-abuse tax (BEAT) taxes transfer payments from a U.S. firm to its foreign affiliates. But the BEAT does not apply to expenses on a company’s books that are considered COGS. Tax experts from high-level law and accounting firms already are discussing opportunities to embed nonqualified payments into the COGS loophole to circumvent the BEAT.

10. Corporations getting a bigger foreign-derived intangible income (FDII) deduction by round-tripping goods. Tax experts have observed that corporations may be able to use so-called round-tripping in order to characterize more of their domestic income as eligible for this deduction. For instance, in order to generate export sales income, a corporation that otherwise would sell its products to U.S customers could instead sell the products to an unrelated foreign company, thereby generating a FDII deduction; thereafter, the U.S. firm’s foreign subsidiary could repurchase the products from the unrelated firm and sell them to the U.S. customer.

11. Big businesses relocating debt to foreign subsidiaries to avoid the limit on interest deductions. Tax advisers for U.S. multinational corporations are considering ways to skirt the new interest deduction limit—ways not available to small businesses.

Read the report: “11 Ways the Wealthy and Corporations Will Game the New Tax Law” by Alexandra Thornton.

Related resource: “Congress Should Not Give a Second Helping of Tax Cuts to the Rich” by Seth Hanlon and Galen Hendricks.

For more information or to speak with an expert, contact Allison Preiss at ‮g​r​o​.​s​s​e​r​g​o​r​p​n​a​c​i​r​e​m​a​@​s​s​i​e​r​p​a‭ or 202.478.6331.