The Republican Tax Plan’s Break For Small Business Yields Huge Benefits….For Big Business
As part of the recently-enacted Tax Cuts and Jobs Act (TCJA), a new provision of the Internal Revenue Code was born: Section 199A, which provides a deduction to owners of sole proprietorships, partnerships and S corporations equal to 20% of the income earned by the business. Republican leaders who designed the TCJA hailed the provision as a field leveler; after all, the foundation of the tax bill was a reduction in the tax rate of so-called “C corporations” from 35% to 21%. And, the logic went, if owners of C corporations were going to enjoy that type of windfall, then something needed to be done for the Mom-and-Pop store down on Main Street as well.
Because, you see, in all likelihood, that sweet couple down at Al’s Hardware doesn’t run their business as a C corporation. Instead, Al’s is either a sole proprietorship, partnership, or S corporation. Why? Because if you operate a business as a C corporation, your business income is taxed twice: once at the corporate level when it is earned (now at the new, lower 21% rate), and again at the individual level when the corporation distributes the income to you as a dividend. That stings.
To the contrary, if you operate your business as a sole proprietorship, partnership, or S corporation (so-called “pass through businesses”), you only pay tax on the income of the businessonce;at the individual level at individual rates. And since Mom and Pop generally don’t want to pay tax twice, most small businesses avoid operating as a C corporation and opt instead to be taxed as a pass through business.
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Authored by Tony Nitti, Withum Partner and writer for Forbes.com.
