Trump administration officials and congressional Republican leaders are negotiating the terms of a tax reform bill. While they have not introduced legislation or a detailed plan, here are some of the latest news items detailing what we know so far about their goals and possible intentions with respect to taxation of income flowing through pass-thru entities—and only applying to pass-thru entities. The following update is based on what they have said so far, as published in a July 27, 2017 report by the Washington Examiner.
However, to gain a more up-to-date overall perspective of what has transpired up to this point with tax reform, please refer to the article at the CPAGardens website entitled Trumps Tax Plan Unleashed, category “Tax Strategies,” posted on January 11, 2017.
Focusing On Pass-Thru Taxation
Perhaps one of the most significant reforms noted has to do with the policy question of “Pass-Thru Taxation.” This term is more accurately described as “taxation of income flowing through pass-thru entities”:
- Pass-throughs are businesses that pay their taxes through the individual income tax code rather than through the corporate code.
- In contrast, traditional C corporations can retain earnings without distributing them immediately to any particular shareholder.
- However, there are multiple interpretations of the proposed tax plan because the plan is not finalized.
Currently, the clearest understanding of the current plan is as follows:
- Pass-throughs are not eligible for a single 15 percent tax rate on the individual income that their owners report.
- At best, they may be allowed to adopt some kind of tax status similar to that of C-corporations, either on a temporary or permanent basis.
As noted, some of the latest news has the House Republicans favoring a new special top tax rate for businesses that file through the individual side of the tax code. The House Republican plan would set that rate at 25 percent, while the Trump plan would make it even with the corporate rate at 15 percent.
A joint statement between the Republication House and the President didn't specify where the rate would be. However, the special tax rate would ensure that mom-and-pop businesses get tax cuts with giant C-corporations. A significant portion of pass-through income goes to big businesses, and about half flows to the top 1 percent of income earners.
In conclusion, at this point in the negotiation process it is difficult to predict with any degree of certainty which of the proposed terms will be included in the bill. So far, there is no finalized proposed plan. With respect to timing, House Speaker Paul Ryan at the CNN Townhall on August 21, 2017 stated that he is committed to finalizing tax reform by the end of the year. Wether that is what really happens remains to be seen.
The foregoing discussion is presented merely for information purposes and should not be relied on for planning purposes. We highly recommend that you speak to your tax advisor concerning the impact of the foregoing on your personal tax situation.
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