The Republican-backed tax proposal announced last week addresses concerns of some small business groups but also raises questions that it could create a tax loophole for wealthy people.
The proposal would change the way some company owners—sole proprietors, partners and owners of what are called S corporations—are taxed. They report business income on their individual 1040 forms and under current law, can be taxed at a rate up to 39.6%.
Many small business advocates have long objected to the fact that some of these owners pay a higher tax rate than corporations whose rates currently top out at 35%.
Under the GOP proposal, the tax rate on the businesses known as pass-throughs would be 25%. The corporate rate would be 20%.
Small business advocates were split over the plan. The National Federation of Independent Business welcomed it, but others objected.
“The current proposal leaves a disparity by offering pass-through entities a 25 percent tax on business income while dropping the corporate rate to 20 percent,” says Todd McCracken, CEO of the National Small Business Association. “We hope to work with tax writers to find ways to close that gap.”
