New Pass-Through Tax Rate Among Major Provisions of House Tax Reform Bill

By Brian Cove

After delaying its release by a day to iron out last minute details, Congressional Republicans last week introduced legislation to reform and simplify the tax code for both business and individual taxpayers.

The 429 page Tax Cuts and Jobs Act contains a variety of significant changes to how businesses will be taxed. The bill reduces the corporate tax rate from the current 35 to 20 percent and establishes a 25 percent tax on pass-through business income, imposes a tax on repatriated foreign profits, adopts a territorial tax system, allows for immediate expensing of capital equipment, and limits businesses’ ability to deduct net interest expenses and eliminates a number of other business deductions.

The proposed pass-through tax rate will not apply to professional service partnerships, such as accounting, law and consulting firms. Pass-through businesses that are eligible for the new rate will have the option of declaring 70 percent of their income as wages, subject to the personal rate of the owner, and 30 percent as business income subject to the new 25 percent rate, or set the ratio of the business’ wage income to business income based on the amount of their capital investment.

FEI’s Committee on Private Company Policy (CPC-P) has recommended a more flexible approach to establish guardrails to prevent gaming of the pass-through rate by taxpayers and will continue to advocate its adoption as the House considers the legislation in the coming weeks.

While the legislation is on a fast-track in the House, with a Ways and Means Committee markup scheduled for Monday and President Trump pushing for House passage by Thanksgiving, smooth sailing through the legislative process seems unlikely. Powerful business groups including the National Association of Home Builders, National Association of Realtors and National Federation of Independent Businesses have already come out against the bill due to provisions that would negatively affect their members and a number of House Republicans have stated opposition because of the bill’s state and local property tax deduction limits.