Tax advisers have been struggling all year with how to best guide high-net-worth and business clients seeking to capture the benefit of the federal tax reform, especially its lower rates and greatly enlarged unified estate and gift exemption amount. Here in New York and in other high-tax states, the need is more acute given the law's limitation on deducting state and local taxes, commonly known as SALT.

Plans to take advantage of the sharp reduction in the corporate tax rate to 21%, and the complementary 20% pass-through deduction, were complicated by uncertainties in the legislation. Political forces moved it at unprecedented speed, as nearly 500 pages rocketed through Congress in just under two months (the 1986 tax reform was debated for 10). Changes from last-minute compromises were handwritten on the bill. Gaps and drafting errors meant that interpretative and legislative fixes were needed (and some have come). Further complicating things, key provisions—such as the reduction in individual tax rates, the 20% deduction for pass-through entities not engaged in "specified services" and the almost doubling of the unified estate and gift exemption amount—expire at the end of 2025.

The new 21% corporate tax rates piqued the interest of businesses operating as partnerships and S corporations. Conversion to C-corporation status could be attractive in the short run to growth companies, depending on their exit horizon and strategy; but if assumptions later change, the unwinding of these restructurings could trigger a tax bill that more than offsets the expected savings.

Flow-through entities owned by individuals performing "specified services" still face a 37% federal tax rate. Specified services include health, law, accounting, athletics, performing arts and anything provided by a company whose principal asset is the skill or reputation of one or more of its employees. Some for whom C-corporate status was not workable sought to carve off nonspecified service components of their businesses into separate flow-through entities in an effort to obtain the 20% deduction for nonspecified service income. Tax advisers cautioned their clients that precipitous restructurings were risky because of the 2025 sunset provisions and the absence of needed guidance from the IRS. Indeed, when the agency issued 184 pages of proposed treasury regulations in August on the application of the 20% pass-through deduction, the regulations contained language that treated nonspecified service income of certain related entities as specified service income.

The House sought to relieve some uncertainty with its Tax Reform 2.0 bills, which would have made permanent many of the temporary provisions of the 2017 Tax Act, including lower individual income-tax rates, the increased estate and gift exemption and the 20% pass-through deduction. However, the bills never got much traction in the Senate, where the budget reconciliation process was not available, meaning 60 votes were needed. The Republican leadership was disinclined to take up the bill without some certainty of getting the minimum nine Democratic votes needed. President Donald Trump last week promised a new "major tax cut" ahead of the midterm election, perplexing White House officials and congressional leaders, most of whom are back home campaigning.

The midterm elections itself compounds the confusion and sense of uncertainty. Democrats have been very vocal about bringing back the 39.6% tax rate for high-income individuals, removing the 20% pass-through deduction and increasing the corporate tax rate to at least 25%. At the moment, it looks like the Democrats have a better chance of recapturing the House than the Senate. Still, a strong showing by the party could foretell a 2020 change in the White House and, with it, more uncertainty before the 2025 sunset.

In the meantime, high-net-worth clients who merely want direction and a greater sense of clarity are forced to parse national debates on civics, politics and the legislative process. Perhaps all this would be easier to digest if Congress would just restore the full state and local tax deduction—that is, pass the SALT.

Previously published in Crain's New York Business.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.