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Pass-through problems in the GOP tax reform bill

Business entities and how they are — and might be — taxed is one of the things complicating the Republican-formulated tax reform bill.

The primary motivation for the Republican's new tax reform plan is to lower business tax rates. Major corporations definitely will see relief under the bill (even though many are doing quite well under our current system).

But there's concern that smaller businesses won't be so tax reform lucky.

In fact, the Tax Cuts and Jobs Act as the bill, as H.R. 1 is known, could make things worse for some so-called pass-through entities.

Potential problems for plenty of pass-throughs: These are businesses, such as sole proprietorships, partnerships, limited liability companies (LLC) and S-corporations, where the company's income "passes through" to the business owner. The income then is reported on the owner's personal tax return and taxed at the same URL ordinary income rates that apply to wages and salaries.

There are around 25 million pass-through companies in the United States. And they're not necessarily small businesses.

The Dallas Cowboys, the NFL team I pull for (yes, despite Jerry Jones' asshattedness regarding players' pre-game kneeling and the 'Boys' current erratic performance), is a partnership with reported annual revenue of $840 million and an operating profit of $350 million.

The GOP's proposal addresses pass-throughs, but not in the way many such company owners would like.

In addition to calling for a tax rate on these companies that's higher than the proposed 20 percent for corporations, H.R. 1 also complicates filing for pass-through entities.

"This is supposed to be a simplification. It's not. It's going to be the most explosive thing once members hear about it," a House GOP member told Axios before the bill's official release on Nov. 2.

Political pondering pass-throughs: Here's what that Representative was talking about.

Pass-through entities under the Republican plan would pay tax at 25 percent on 30 percent of business income. The remaining 70 percent of business income would be taxed as it is now, at the owner's individual tax rate.

Plus, any individuals bringing in more than $200,000 a year (or $260,000 annually for couples) would pay the rest of their taxes at a rate of 35 percent.

True, all those various rates represent a major cut from the potential 39.6 percent top tax rate that some pass-through companies now pay. But, as the Axios source noted, it's not simplification.

Why the added math?

Pass-throughs already are exempt from the corporate tax on profits and taxes on dividends. So tax writers, with an eye on the politics of tax reform, want to ensure that traditionally high earning professionals such as doctors, lawyers and accountants (I see some of my tax accountant friends rolling their eyes here) pay their fair share of taxes under the proposed new system.

But the flip side of the tax cut argument is that to cover their political as…bases, Congress must give some tax break to pass-through entities if it's also going to slash the top corporate tax rate to 20 percent.

Small businesses balk: Trade groups representing small business and professional groups immediately let Capitol Hill know of their concerns about the tax proposal.

"This bill leaves too many small businesses behind," National Federation of Independent Business CEO Juanita Duggan said in a statement. "We are concerned that the pass-through provision does not help most small businesses. Small business is the engine of the economy. We believe that tax reform should provide substantial relief to all small businesses, so they can reinvest their money, grow, and create jobs."

The Small Business Majority shares that sentiment. "[These] tax proposals are being billed by many as small business tax cuts, but they won't actually help the vast majority of small firms," said the advocacy group's CEO John Arensmeyer.

For more on pass-through entities and their part in the tax reform bill, today's Shout Out Saturday goes to two articles:

Check out the tax bill and this (and other) coverage of it and then be sure to let your lawmakers know of your support or opposition.

Hurry, though. The House Ways and Means Committee is scheduled to start marking up H.R. 1 on Monday, Nov. 6.

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