General:  Neither the House nor the Senate bills live up to the promise of the 25-percent pass-through rate proposed in the Framework.  The Senate bill doesn’t even have a pass-through rate.  Pass-through businesses employ the majority of workers and earn the majority of business income.  They represent approximately one-third of the entire American economy.  Yet neither the House nor the Senate bills devote anything close to these percentages for tax relief towards the pass-through sector.  The Senate bill in particular comes up short, even with the improvements made on the Senate floor.  To fix this, conferees should devote a proportional amount of revenue to reducing the pass-through rate as it does to reducing the C corporation rate.

Wide Rate Variance:  The corporate rate in both House and Senate bills is 20 percent. With one small exception, this rate applies to all C corporations.  By contrast, the House and Senate bills would tax S corporations (and other pass-through businesses) at wildly divergent top rates.  The House bill would tax an S corporation manufacturer operating in Wyoming with shares held in trust at 29 percent, while the Senate bill would tax that same company at 42 percent.  That same business operating in California owned by active investors would pay Federal tax of around 40 percent in the House bill, whereas the Senate bill would tax this business at a rate of around 35 percent.  This accounts for the additional marginal tax rate attributable to the repeal of SALT deductions for pass-through businesses.  If the business was an engineering firm rather than a manufacturer, it would pay even higher rates.  There is simply no good policy rationale for this variance, or for taxing pass-through businesses at rates more than twice those applied to C corporations.  To fix this, we recommend the following:

  • Trusts:  Many family businesses will pay higher taxes under the Senate bill – and potentially the House bill – because it precludes trusts and estates from using the deduction.  This is not a small issue – every family business subject to the estate tax has these trusts.  They are designed to help the business survive from one generation to the next and have nothing to do with income taxes.  Most of these trusts already pay tax at the highest rates.  Just as importantly, it would be incredibly unfair for all the income of a closely held business to suddenly become taxable at a much higher rate, just because the owner died unexpectedly, and the stock is now owned by his or her estate.  This exclusion will hurt a majority of multi-generational family-owned businesses, including wholesalers, distributors, contractors, and manufacturers.  These large pass-through businesses employ nearly 20 million workers and are the cornerstone of local economies nationwide.  Solution:  Allow trusts and estates to benefit from the pass-through deduction in the Senate.
  • Guardrails:  The House bill offers a 25 percent top rate, but the guardrails preclude most businesses from getting that rate, or anything close to it.  Businesses with active ownership would pay rates at least 10 percentage points higher.  Solution:  Rather than use the badly flawed 70/30 concept, conferees should look at a ratio that varies based on the payroll and other expenses incurred by the business – the higher these expenses are compared to revenues, the more profits the business can claim.  This would be an excellent way to both prevent abuse and make sure that this tax relief actually gets to the bona fide ongoing businesses that are intended to benefit.
  • SALT:  Both bills would repeal the State and Local income tax deduction for pass-through businesses, but not for C corporations.  As noted above, this has the effect of raising marginal rates of pass-through businesses by up to 5 percentage points, exacerbating the rate differential between S and C corporations.  Solution:  Owners of pass-through businesses should be able to deduct state and local income taxes paid on their pass-through business income.
  • Sunset: As amended by the Finance Committee, the Senate bill would now sunset the pass-through deduction after the year 2025, resulting in significant tax hike on pass-through businesses.  This tax hike, not only relative to the Senate bill prior to 2026, but also relative to current law.  The former obviously is due to the loss of the 23 percent pass-through deduction beginning in 2026. The latter is due, with one exception, to all the Senate base broadening provisions are made permanent and would have the effect of permanently increasing the taxable income of pass-through businesses.  These revenue raisers include the new cap on interest deductions, repeal of the Section 199 manufacturing deduction, repeal of the IC-DISC, and numerous other provisions affecting both C corporations and pass-through businesses.  As currently constructed, the Senate bill is “corporate-only tax reform” with all the provisions affecting C corporations made permanent, while only provisions benefiting individuals and pass-through businesses made temporary.   Solution:  Make the pass-through business deduction permanent, just as the reduction in the C corporation rate to 20 percent is made permanent.


The Senate and House bills move business taxation from a world-wide system to a modified territorial system –  reserved for C corporations only.  S corporations and other pass-through entities are not included.  This exclusion puts S corporations with overseas operations at a distinct disadvantage.

The Senate bill in particular would harm S corporations with international operations.  The bill applies the “GILTI” tax to S Corporations, but S Corporations are precluded from the deduction in Section 250. The net effect is that not only are S corporations blocked from territorial treatment, they are required to pay tax on their foreign source income immediately at the highest marginal rates.  Finally, the Senate bill limits the pass-through deduction to domestic income only. Foreign income earned by an S corporation would be subject to the top 38.5 percent rate.

Example:  Under the Senate bill, a C corporation with a CFC operating in the UK would pay the 20 percent UK corporate tax.  Assuming no further inclusions under the GILTI regime, it would be able to pay the remainder back to the US with no additional tax.  When the C corporation pays that income as a dividend to its shareholders, they would be taxed at 23.8 percent.

S Corporations with branch operations in the UK would pay the 20 percent tax to the UK and then the US tax immediately at the new pass-through tax rates.  They would be allowed a Foreign Tax Credit for the taxes paid in the UK against their personal income, but this would be subject to limitations.  There would be no opportunity to defer paying the US tax.  There is also a 20 percent basis reduction for the UK tax taken as a credit.  This income would then be subject to the top, 38.5 percent rate, as foreign-source pass-through income does not qualify for the pass-through deduction in the Senate bill.

Alternatively, an S corporation with a CFC would pay the 20 percent UK tax and its shareholders would be taxed at 23.8 percent (without any credit) on 100 percent of the dividend income when that is repatriated, regardless of whether the dividend was distributed to the shareholders.  In other words, an S corporation with a CFC is treated worse than a C corporation CFC under the new territorial system.

Solution:  Conferees should allow S corporations with CFCs to participate in the territorial system on the same basis as C corporations.  The result would be similar treatment for all types of business operating overseas.