Double Taxation

The Republican Tax Plan’s Break For Small Business Yields Huge Benefits….For Big Business

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.

Continue reading on, Forbes.com

Authored by Tony Nitti, Withum Partner and writer for Forbes.com.

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