Among Big Winners in Tax Bill: Pass-Through Businesses

Provisions in the monumental new tax law signed in the closing hours of 2017 benefit businesses. Corporations saw the biggest tax cut, and lawmakers created another break for companies known as pass-through businesses.

The new law creates a 20 percent deduction on income for pass-through entities, which are businesses in which the profits pass through to individual owners and are taxed as individual income.

The deduction is subject to certain limitations; notably, it applies only to “qualified business income” and can’t be claimed by most taxpayers in service businesses.

Some small businesses may be tempted to shift the form of business ownership or transfer ownership shares to other family members to cash in on this break. Expect the IRS to issue guidance on the new deduction for pass-through entities soon, and know that these rules are so complex even tax experts have trouble sorting through them.

Adam Looney with the Tax Policy Center run by the Brookings Institution and Urban Institute described the change as “huge.”

“So, we have never had a system where business income was taxed at a lower rate than wage income,” he said. “And we have never had a system where the self-
employed paid lower taxes than ordinary employees. So, for those taxpayers, it is a really big deal.”

Sources: PBS, cpapracticeadvisors.com