The new tax law includes a little-noticed blacklist, which could prevent everyone from doctors to tanning salon owners to LeBron James from claiming the 20 percent deduction. | Adam Glanzman/Getty Images Hidden blacklist in GOP tax law could hit everyone from LeBron James to doctors

Republicans have created a big tax break for businesses, but not just any businesses.

Their new tax law includes a little-noticed blacklist barring people working in certain fields, and earning more than $157,500, from claiming a new 20 percent deduction for unincorporated businesses called pass-throughs. It could prevent everyone from doctors to tanning salon owners to LeBron James from claiming the break.


Republicans say they barred some types of businesses because they didn’t want just anyone to benefit from the lucrative break — they wanted it to be reserved for job creators, who employ other people. Some say there were political considerations as well, because lawmakers didn’t want to be seen handing out big tax cuts to wealthy doctors and lawyers, who aren’t expected to make the cut.

But to critics, the list is arbitrary, vague and amounts to picking winners and losers. It includes more than a dozen areas, including "health," "law" and "consulting."

It's up to the Treasury Department and the IRS, charged with implementing the new law, to figure out who exactly belongs on the blacklist.

Officials will have to determine, for example, who is in the business of providing health services. It seems clear doctors will not be allowed to take the break, experts say, but what about someone who owns a gym or a tanning salon? Or someone who sells an X-ray machine to a hospital? What about a doctor (likely banned) who also earns income from owning a parking garage (likely not banned)?

All of that will involve lots of messy judgment calls that promise headaches for Treasury, not to mention confusion for millions of Americans wondering if they can take the break.

“People definitely want to know: Am I in? Am I out?” said Jeff Erickson, a principal at the consulting firm Ernst & Young.

POLITICO Playbook newsletter Sign up today to receive the #1-rated newsletter in politics Email Sign Up By signing up you agree to receive email newsletters or alerts from POLITICO. You can unsubscribe at any time. This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.

Acting IRS Commissioner David Kautter says his agency is working on fleshing out the deduction, but that the rules won’t be released until late summer or early fall.

“This is one of those tasks that you have to hold your nose and do the best you can,” said Dana Trier, who recently stepped down as Treasury’s deputy assistant secretary for tax policy, where he coordinated the agency’s efforts to implement the new law.

The tax deduction was created to help unincorporated businesses that wouldn’t benefit from Republicans’ big cut in the corporate tax rate. It can substantially reduce the owners' tax bills, effectively cutting the top marginal tax rate to 29.2 percent from 37 percent. For someone in the 24 percent bracket, it can reduce their rate to 19.2 percent. It’s projected to cost about $50 billion annually.

Despite the importance of the deduction to the overall tax legislation, lawmakers weren't very specific when it came to who was in and who was out. For instance, the provision excludes trades and businesses “involving the performance of services” in, among other areas, financial services, performing arts, athletics, actuarial science and investing.

Treasury will not only have to parse things like who is providing consulting or brokerage services. It will also have to decide how to implement a vague, catch-all line in the law that also bars businesses "where the principal asset of such trade or business is the reputation or skill of one or more of its employees or owners."

Experts say it could be interpreted narrowly so that it only includes people like LeBron James or Tiger Woods who are well-known brands. That would amount to allowing more people to claim the deduction, which means it would cost the Treasury more money.

Or the agency could apply it broadly, deciding that businesses ranging from restaurants to construction companies rely on their owners' and employees' reputations and are therefore ineligible for the break — an interpretation that would leave many fewer people taking the deduction.

There is also the question of what happens when someone straddles the good and bad lists.

A veterinarian, for instance, provides health services for animals “while also offering non-healthcare goods and services (such as grooming, pet food, toys and other products),” the American Institute of CPAs said in a letter last month to Treasury.

Morning Tax Sign up for our tax policy newsletter and stay informed — weekday mornings, in your inbox. Email Sign Up By signing up you agree to receive email newsletters or alerts from POLITICO. You can unsubscribe at any time. This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.

Others warn of exotic combinations of businesses, as people on the blacklist merge with those who can take the deduction — like if a law firm buys a laundromat. Would it get the entire deduction? None? Only a portion?

“Everybody would agree [Republicans] didn’t want doctors or lawyers or accountants to get it, but once you get past that, the distinctions are kind of arbitrary,” Trier said. “There’s just no possibility that you’re going to make everybody happy.”

The IRS isn't totally new to parsing distinctions in the tax code. That has some scouring existing regulations in hopes of getting a sense of how it might sort out the good and bad lists for the new deduction.

The agency has previously decided, for example, as part of rules regarding who can use a particular accounting method, that people working in the performing arts include actors, singers and other entertainers, but not those who manage them or promote them or broadcast their performances.

Likewise those rules specify that health service providers include doctors and nurses, but not people who operate health clubs or spas.

There is a way to escape the occupational limits: The law sets them aside for individuals earning less than $157,500 and couples earning less than $315,000.

That will excuse many from having to worry about the coming rules. But it will also favor people living in lower-cost areas because a lawyer working in Oklahoma, for example, will have an easier time coming in under the income restrictions than one living in New York City.

"People in places with lower costs of living are extra-benefited with this provision," said Libin Zhang, a tax partner at Roberts and Holland LLP.

