www.qns.com I LIC COURIER I JUNE 2017 43 BY JOHN SAVIGNANO As Republicans carry on with tax reform there are lots of details they need to firm up. One is the taxation of pass-through entities, partnerships, S corporations and LLCs, the income of which is reported on their owners’ tax returns, as well as sole proprietors who file Schedule C. According to the IRS statistics, 3.6 million partnerships and 4.3 million S corporations filed returns in 2013, compared with 5.9 million regular corporations. In 2014, 24.6 million 1040s with Schedule C were filed. President Trump wants a 15 percent corporate rate, which he’d apply to business income of pass-throughs and sole proprietors. The House Republican plan released last summer advocates for a 20 percent corporate rate, 25 percent for businesses that pass income through to their owners and those who are self-employed. Pass-throughs support the idea of tax rate parity with regular corporations. But Trump’s plan could encourage gaming of the tax system. That’s because his desired 15 percent business tax rate is far below the maximum 35 percent rate that he is proposing for individual taxpayers. For example, high earning employees could be incentivized to become independent contractors or to set up their own LLCs to take advantage of the lower business tax rate. Owners of pass-through businesses would be highly encouraged to reduce their salaries and take more profits instead. Applying a 15 percent tax rate to pass-throughs is also costly and can mean up to $1.95 trillion in lost tax revenues over the next 10 years. Tax experts point to Kansas to illustrate the issues they’re concerned about. In 2012, Kansas enacted a law exempting pass-through firms from state income tax as part of a broad tax cut plan. The result was that many individuals and corporations in the state set up or restructured their businesses as pass-through entities to take advantage of the tax break. The number of pass-throughs has almost doubled in the few years since the law was passed, and the state now faces large budget deficits. The pass-through exemption alone is estimated to have cost the state $472 million in 2014 and even more in 2015. A bipartisan group of state legislators have since voted to kill the loophole. The Trump administration is pondering ways to curb the potential for abuse that comes with a low tax rate for pass-throughs, but has provided no details yet. John Savignano Advertorial Taxation of Pass-Through Entities
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