Some lawyers, accountants, dentists, and other service providers are facing a tax hike from the Republican One Big Beautiful Bill Act, thanks to the interaction of separate provisions that they are lobbying to change as the Senate picks up the legislation.
The problem facing the service providers is a new measure meant to protect the cap on state and local deductions, which was implemented by the 2017 Tax Cuts and Jobs Act, from being bypassed through workarounds used by businesses that file through the individual side of the tax code — also known as “pass-through” businesses.
Specifically, the act would limit deductions for state-level pass-through entity taxes, or PTETs, which many states implemented to help business owners bypass the $10,000 SALT deduction cap, imposed by the 2017 law.
However, the limitation only applies to businesses singled out by the 2017 law as primarily service providers — dentists, lawyers, brokers, accountants, and others. It does not apply to pass-through manufacturers, design firms, and others.
Yet the service-providing businesses are also limited in their ability to claim another key tax break that would be extended and enlarged by the “big, beautiful bill,” namely, a special deduction for pass-through businesses. The bill would raise the deduction from 20% to 23% of income.
So, on the one hand, the dentists and accountants would lose the ability to deduct some state and local taxes, and, on the other, they would lose out on a bigger tax break that other pass-through businesses will enjoy.
“We’re talking about tens of thousands of dollars of difference when it comes to what I have to pay in taxes and what I can’t put back into my general fund to run my operation,” Jon Davis, a dentist based in Findlay, Ohio, told the Washington Examiner about how the proposed change could affect him.
It’s an ironic situation because the House tax legislation that narrowly passed this month quadrupled the SALT cap to $40,000. That should benefit most pass-throughs.
However, Davis and others have argued that the House bill unfairly puts them at a disadvantage by ending service businesses’ ability to bypass the cap on SALT through PTETs.
“It raises taxes on me and many other small business owners,” Aaron Hall, a Minnesota-based business attorney, told the Washington Examiner.
Andrey Yushkov, senior policy analyst at the Tax Foundation, said while the new House legislation does increase the 20% QBI deduction to 23%, which will help some small businesses, the bill would not be good for the pass-through businesses defined as service providers.
“The problem here is that there will be a non-neutral treatment of different types of small businesses,” Yushkov told the Washington Examiner. “The main problem for them is that they won’t be able to use state-level pass-through entity taxes, and these are essentially SALT cap workarounds that were created by many states, and they exist in more than 30 states right now.”
For businesses defined as service providers, “treatment changes drastically, and for them, their tax liability will inevitably go up if this legislation passes,” he added.
Yushkov said the provision could create a disincentive for certain types of businesses to operate, or at least operate in high-tax states such as New York and California.
Hall said the proposed change in the House tax bill came as a “total surprise.”
“And it is very frustrating when small business owners are just trying to take care of business every day — taking care of their clients, their customers, and their employees — and then you have a punch in the face from Washington every few years with some tax increase,” Hall said.
Hall said he might have to raise fees on customers and clients in order to make up for the revenue loss if the Senate doesn’t change that provision in the legislation.
Davis, the dentist, said he thinks the increase in taxes could cause some businesses to close.
“It’s just bad for the whole economy, and you know, small business runs a lot in this country,” Davis said.
Notably, a Tax Foundation analysis found that disallowing SALT deduction cap workarounds for the businesses in question would reduce gross domestic product by 0.2% and the capital stock by 0.3%.
Alex Conant, a GOP strategist and a partner at Firehouse Strategies, told the Washington Examiner that he thinks the matter might be resolved in the Senate. If it is not, he said, the result would be akin to a new tax on the businesses in question.
“It’s a really big deal for these industries,” Conant said. “I know there’s a lot of organizing happening on that. And I know a lot of Republican senators are already taking a hard look at that.”
Some groups are already starting to push back. For instance, the American Dental Association, which is the largest dental association in the United States, sent a letter to House leadership ahead of the reconciliation vote asking Republicans to keep allowing services pass-throughs to deduct PTET on their federal returns.
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“To be clear: the PTET deduction is not a loophole, nor a workaround,” the group said. “It reflects the original intent of Congress to preserve fair treatment for all small businesses, regardless of structure. Its elimination would unfairly single out service professionals and further widen the tax disparity between them and larger corporations.”
“Dentists, physicians, and other healthcare providers should not be arbitrarily penalized for the way their practices are structured,” the group added.
