Pass-through businesses are the dominant business structure in America. Pass throughs file more tax returns and report more business income than C corporations. Pass-through businesses are not subject to the corporate income tax, but instead report their income on the individual income tax returns of owners. This blog will address some frequently asked questions about pass-through structure and taxation.
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Less than one percent of businesses employ almost half of the private sector workforce. Large companies pay 89% of corporate income taxes in the United States.
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More business income is reported on individual tax returns than corporate returns. The U.S. now has fewer corporations and more individually owned businesses. Corporations make up less than 5 percent of businesses but earn 60 percent of revenues.
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Since most U.S. businesses are pass-through businesses, such as partnerships, S corporations, LLCs, and sole proprietorships, changes to the individual income tax, especially to top marginal rates, can affect a business’s incentives to invest, hire, and produce.
4 min readStates incorporate provisions of the federal tax code into their own codes in varying degrees, meaning that federal tax reform has implications for state revenue beyond any broader economic effects of tax reform.
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Here’s how the new pass-through deduction works and how it can be reformed to be less complex, less prone to abuse, more neutral, and more economically efficient.
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Amending the Illinois constitution and adopting a graduated-rate income tax cannot solve the state’s fundamental problems. Instead, it doubles down on an already uncompetitive tax code.
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Senator Hass’s proposal to limit the special pass-through deduction in Oregon is the right choice, protecting the state’s budget, while advancing sound tax policy.
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The Tax Cuts and Jobs Act tax preference for farm co-ops would distort agricultural activity and create tax planning opportunities for wealthy taxpayers.
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For policymakers in most states, the fact that the pass-through deduction doesn’t affect AGI should come as a relief. For those in the six states which use federal taxable income as their starting point for conformity, decoupling from the provision is an entirely viable option.
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A more careful look shows that the Senate Tax Cuts and Jobs Act doesn’t put pass-through businesses at a disadvantage compared to C corporations.
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The Chairman’s Mark of the Senate’s Tax Cuts and Jobs Act includes a number of important changes. Here’s a quick overview of those that matter most.
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The Senate Tax Cuts and Jobs Act includes hundreds of structural reforms to the tax code. Here is a guide to the eight most important changes.
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Even with large changes, many in the pass-through community are arguing that small pass-throughs don’t benefit since most or all of their taxable income falls below the 25 percent maximum rate. While correct on the small point, advocates miss the greater tax reform picture. Small pass-through businesses would still benefit from a number of other changes.
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Though admittedly complex, the pass-through anti-abuse rules in the Tax Cuts & Jobs Act represent a well-thought-out approach to dealing with this issue.
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