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“Pass-through” Companies Tax Reform

By Stephen Barlas
December 1, 2017
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As the Trump administration and Congress negotiate over the provisions of a major tax reform bill, some accounting and tax issues are up for grabs. Both the House and Senate began writing and voting on bills in mid-November, but a final bill likely won’t be written, much less voted on, until after the New Year.

 

The House passed its bill on November 16 by a vote of 227–205, with all Democrats and 13 Republicans voting against it. But it differs in a number of particulars from the emerging Senate bill, whose provisions will undoubtedly change on its way to the Senate floor and a vote.

 

One of the big concerns for business groups has been creation of a lower tax bracket for “pass-through” companies, which include millions of partnerships, limited-liability companies, S corporations, and sole proprietorships that don’t pay corporate taxes or dividends. These company owners pay at the individual rate, which can be as high as 39.6%. The House bill creates a new pass-through rate of 25% since pass-throughs won’t benefit from a drop in the corporate rate from 35% to perhaps 20%. It requires individuals “actively involved” in businesses with more than $200,000 in income to pay their individual rate on 70% of their income (which would be deemed wages) and the 25% rate on their remaining income.

 

As of this writing, the Senate bill takes a different approach, creating a 17.4% deduction on income taxes for pass-through owners of all income levels, effectively cutting rates both on rich owners and on middle-class small-business owners. For service-providing pass-throughs, it would phase out that benefit for individuals with income greater than $75,000 and for married couples with income exceeding $150,000.

 

Stephen Barlas has covered Washington, D.C., for trade and professional magazines since 1981 and since 1984 for Strategic Finance and its predecessor Management Accounting. You can reach him at sbarlas@verizon.net.
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