Contrary to the promises Republicans have made to small business owners in the past, the GOP’s recently passed tax plan is not as beneficial to small businesses as was expected, with a majority of the plan only benefiting large corporations.
The tax plan, which was passed through the U.S. House of Representatives and the Senate in December 2017, is the largest overhaul of the American tax code in more than 30 years. The main feature of the plan is a one-time reduction in the corporate tax rate, dropping it from 35 percent to
21 percent starting in 2018. The aim of the revision is to spur economic growth across the United States by modifying tax structures for both small businesses and
Other major features of the bill include a 20 percent deduction for all pass-through businesses and the elimination of the alternative minimum corporate tax rate.
As part of the recently enacted Tax Cuts and Jobs Act, Section 199A, a new provision of the Internal Revenue Code was created. The new section outlines deductions for owners of sole proprietorships, partnerships and S corporations equal to 20 percent of their business earnings.
To balance out this deduction, Republicans reduced the tax rate of what Forbes refers to as “C corporations” from 35 percent to 21 percent as well. The companies that Forbes calls “C corporations” are taxed twice as a result of the new plan, once at the corporate level when it is earned and again at the individual level when the corporation distributes the income to stockholders as dividends. The taxes that are being deducted are on the corporate level.
On the other hand, for sole proprietorships, partnerships and S corporations, taxes are only paid at the individual level at individual rates. These types of small businesses are often referred to as “pass-through” businesses because they do not pay corporate income taxes. Because of the double taxation, many small businesses avoid operating as “C
Thus, Republican leaders created Section 199A, which has
also become known as “pass-through deduction.” The pass-through businesses that are supposed to benefit from Section 199A make up the majority of American businesses, accounting for around 95 percent of all U.S.
Section 199A allows owners of a pass-through business to claim a deduction equal to 20 percent of the income earned by the business. However, there are many conditions associated with the deduction, which makes the process to receive it extremely convoluted.
For example, married people who own service-based businesses like law firms or doctor’s offices can only claim the deduction if their annual income is below $315,000, or $157,500 for a single person.
The theory behind these pass-through tax cuts was to allow these small businesses to reinvest the money they would save back into their businesses; buying new equipment, hiring new workers or expanding operations, ultimately benefiting the health of the economy overall.
Despite the fact that few small businesses are able to take advantage of these complicated pass through tax cuts, the GOP continues to claim that the act is a victory for small businesses. In reality, C corporations are the ones benefiting the most from new regulations.
According to data collected by the Joint Committee of Taxation, only when income rises above $50,000 does the popularity of pass-through businesses begin to increase, and above that income level, the number of returns claiming a Section 199A dissipates. As the income levels of the business owners increase, so does the relative size of the business, and when businesses get larger they
often become established as C
Because of this, by the time the income of a business owner exceeds $1,000,000, only 200,000 returns are filed claiming a 199A deduction.
There are some businesses that are profitable operating as S corporations and would not become C corporations as their income rises. This includes accounting firms or law firms.
Under Section 199A, owners of these types of service-related businesses are generally barred from claiming the 199A deduction. In other words, the highest-earning businesses are the only ones benefitting from the new tax plan opposed to the middle class, whom it was supposed to uplift.
This new plan also benefits many large businesses that are not clearly filed as C or S corporations, such as Koch Industries Inc. and Cargill Inc., which together make over $250 billion in annual
The major problem with the GOP’s tax plan is that to them a “pass-through business” is not synonymous with “small business.” This problem could have been solved if the GOP placed a cap on the level of income a business could benefit from the Section 199A tax cut.
This bill does not assist the middle family as it was pitched, and a majority of Americans are against the tax plan. A poll from Quinnipiac University revealed just 25 percent of voters approved the plan, which is substantially less support than what past tax cuts received in Congress.
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