New Pass-Through Tax Cuts?

Today, the House of Representatives passed its own tax reform bill that includes $1.5 trillion in tax cuts for individuals, corporations, and other business entities.

Although the bill is far from becoming law, as the House and Senate bills must be unified, successfully voted on, and signed by the President, it is now clear that if a GOP tax reform bill ever does become law, it will include drastic cuts to federal taxes on “pass-through” income.

Pass-through income refers to income earned by owners of pass-through business entities such as LLC’s, S corporations, partnerships, and proprietorships.  These entities do not pay taxes on profits.  Instead, the business profit passes through to the owners and is reported and taxed as the owners’ income, with the owner also being responsible for self-employment tax.

C corporations, on the other hand, pay taxes on corporate profits.  Those rates would also be drastically cut by any GOP tax bill.  But C corps are subject to “double taxation,” meaning the corporation’s profits are taxed, and then its shareholders are taxed at their individual rates on any dividend they receive from the corporation’s stock.

The GOP tax reform bill (at this point) looks to cap pass-through income rates at 20%, which could mean significant tax savings for individuals and married couples with incomes from pass through businesses.  With current rates topping out at 39.6% for the highest wage earners, it’s obvious that reducing the top rate to 20% would mean major savings for many business owners.  By comparison, under current tax law, a business owner earning $75,000 a year would have about $37,050 of that income taxed at 25%.

There are many other advantages to forming a business as a pass-through entity such as an LLC or S corporation, including asset protection, flexibility, and, in some cases, reduced administrative costs.  Now, with the potential for major tax savings from a GOP tax bill, it makes even more sense to properly structure your business as a pass-through entity.

Learn more about business entity formation, registration, filings, and other business law issues by scheduling a consultation with one of our business attorneys by calling (503) 206-6401 or using our online scheduling feature.