Tax reform and business owners: Two things to watch

Keeping up to date with the proposed changes and the debates regarding tax reform occurring within the Senate and House is a daunting, potentially impossible task. A number of changes are under discussion, but two big ones that specifically impact business owners are the corporate tax rate and pass-through taxes.

What does the proposal say about the corporate tax rate? The current tax rate applied to corporations is set at 35 percent. The most recent proposal aims to reduce this tax to 21 percent. 

What about pass-through taxes? Provisions regarding pass-through taxes remain a point of contention. The Internal Revenue Service (IRS) considers sole proprietorships, partnerships, limited liability companies (LLCs) and some types of corporations as pass-through entities. This basically means the entity itself is not subject to income taxation. Instead, the owner is responsible for this tax obligation through his or her income taxes.

The exact treatment of these taxes is not yet certain. A recent piece analyzing the tax proposal by PBS News notes that this is arguable the “messiest part of this tax bill.” Business owners will need to carefully review any change to see if a different business entity would result in better tax savings.

When will we know if this proposal is the real thing? In short, the changes would become apparent pretty quickly. Both chambers, the House and the Senate, are schedule to vote on a final proposal next week. If it passes, the proposal would move on to the president who is expected to approve. In a recent speech President Donald Trump promised that if “Congress sends me a bill before Christmas, The IRS…has just confirmed the Americans will see lower taxes and bigger paychecks beginning in February.”