Report: Small Pass-Through Businesses Would Benefit From GOP Tax Plan

Plan would lower rates, improve simplification, increase expensing amounts

Speaker of the House Paul Ryan / Getty Images
• November 13, 2017 5:00 am


Small pass-through businesses would benefit from the House Republican Tax Cuts and Jobs Act, according to a report from the Tax Foundation.

About 95 percent of businesses in the United States are pass-throughs—businesses where the income is passed to the owner, who is taxed under the individual income tax.

The report finds that instead of the income being taxed at the top rate of 39.6 percent, the GOP proposal would lower the maximum tax rate to 25 percent.

"Even with that large change, many in the pass-through community want to push the bill even further, arguing that small pass-throughs don't benefit since most or all of their taxable income falls below the 25 percent maximum rate," the Tax Foundation explains. "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."

Currently, if a pass-through business has an income of $38,700, they would be included in the 25 percent bracket. Under the proposed legislation, the 15 percent bracket would be expanded so pass-throughs would have to hit $45,000 in income before being included in the 25 percent bracket.

The proposal also doubles the standard deduction, which helps pass-through businesses save even more.

"The current proposal would functionally double the standard deduction to $24,400 for married filers in 2018, compared to $12,700," the report states. "Individuals with pass-through business income who do not itemize would see this benefit as well. Coupled with the wider brackets described above, a pass-through business would need $114,400 in income to hit the 25 percent bracket, compared to $90,100 now."

In addition, pass-throughs currently can only expense $500,000 in property costs. Under the GOP tax proposal, pass-throughs can expense up to $5 million, which can help businesses write off investments, which will help them reduce the amount of tax they owe.

Pass-throughs also would see more simplification under the new tax code as it helps them avoid accrual accounting. Currently, if a pass-through's gross receipts total more than $5 million, they are required to use accrual accounting. The House proposal would increase that amount to $45 million.

"Because small business owners pay their taxes on their personal tax returns, consolidating and decreasing personal income tax rates will provide relief to many middle-income business owners," the National Taxpayer Union explains. "Clarification of what businesses can claim as business and wage income will allow small businesses to plan and invest in their businesses and their workers, while remaining competitive with corporations."

Published under: Tax Reform, Taxes