For small biz, a lot riding on tax reform

‘Pass-through’ entities may also get a break from Trump

There has been much talk from President Trump about lowering corporate tax rates. But where does that leave the smaller companies that employ nearly half of non-public sector American workers?

Trump and Republican lawmakers are in the midst of hammering out new legislation that would cut the U.S. corporate tax rate, now at 35% even though few corporations pay that rate thanks to loopholes and deductions.

From 2006 to 2012, at least two-thirds of all corporations had no federal income tax liability, while 42% of large corporations — those with at least $10 million in assets — paid no federal income tax in 2012, the Government Accountability Office said last year. Meanwhile, non-farm small-business sole proprietorships pay an average effective tax rate of 15.1%, according to Quantria Strategies, a policy analysis firm.

But even with many companies already paying far less than the high end of corporate rates, tax reform proponents say cutting taxes and simplifying the corporate tax code would boost American competitiveness.

“We have an incredible opportunity here,” says Joe Kennedy, senior fellow at Information Technology and Innovation Foundation. “If we don’t get reform, we’d lose a big opportunity for getting additional economic growth.”

That opportunity may not filter down so easily to many smaller enterprises. The priorities of the General Electrics and Boeings get the big headlines, but most small businesses, including sole proprietorship and other limited-liability entities such as partnerships and so-called “S corporations,” don’t pay corporate income tax. Instead, they’re structured as “pass-through,” entities where business profits are taxed at individual income rates, which top out at 39.6%. Small and midsized businesses (SMBs) make up 99% of U.S. employer firms and nearly half of all private sector employment, the Small Business Administration says.

“We’re not opposed to corporate tax reform, says Todd McCracken, president of the National Small Business Association. But “(small businesses) want to make sure their tax rate goes down as well.”

Trump has yet to announce a specific tax reform plan but has proposed reducing the corporate income tax rate, not including pass-through businesses, “to anywhere from 15% to 20%.” During his campaign, Trump also said pass-through businesses — the Trump Organization is one — would have a top tax rate of 15%. Other key proposals include:

uThe Blueprint. A tax bill introduced by House Speaker Paul Ryan (R-Wis.) and House Ways and Means Committee Chairman Kevin Brady (R–Texas) would lower the corporate tax rate to 20% from 35% and reduce the rate on pass-through businesses to 25%. uThe Bring Small Businesses Back Tax Reform Act. Introduced by Reps. Rand Hultgren (R-Ill.) and Jason Smith (RMo.) this month, the bill envisions a bigger cut for passthrough businesses than Ryan’s plan. It would lower the tax rate on the first $150,000 of smallbusiness income to 12% and to 25% for all income above the threshold.