President Proposes Lower Tax Rate on S Corp Income
President Trump’s plan to cut the tax rate to 15% for pass-through businesses would be a radical change to the tax code.
The measure would apply to partnerships, S corporations, and limited liability companies that don’t have to pay corporate-level taxes and instead “pass through” to owners the income and losses. The current tax rate on these earnings matches an individual’s personal tax rate which could be as high as 39.6%.
Most CAS clients take advantage of the benefits of being treated as S corporations for tax purposes. This allows profits to be taxed only once thus avoiding the potential ‘double taxation’ C corporations incur. This advantage would become enhanced under Trump’s tax cut proposal.
The appeal of becoming a pass-through business jumped after a 1986 U.S. tax overhaul set the top rate for individuals lower than the top rate for corporations. By 2011, more than half of business income was earned by pass-through entities.
Lowering the rate on pass-through income to 15% will further enhance the appeal of S corporation tax status.
Owners will still be required to take reasonable salaries which will be taxed at their normal tax rate for earned income.
We will advise you if this proposal passes. If it does, there will be considerable tax planning we will undertake to help you in consideration of this major shift in the tax code.
In addition other proposals include:
• Limiting the personal income tax rate to 3 levels; 10%, 25%, 35%. There are currently 7 levels, the highest being 39.5%
• Repealing the Alternative Minimum Tax (AMT)
• Doubling the standard deduction to $24,000 for married couples
• Eliminating the estate tax
We will keep you informed as the negotiations begin and Congress and the Senate begin to work on tax reform.