Another update on the Ways & Means “Tax Team” front. The S Corporation Association today submitted its comments making the case for fair treatment of pass-through businesses, including a permanent Section 199A pass-through deduction. The letter is addressed to the Main Street Tax Team, one of ten teams organized by Ways & Means Chairman Jason Smith to identify solutions to the 2025 fiscal cliff, and it covers the various key aspects of how pass-through businesses should be treated under the Tax Code. As the letter begins:
The United States is unique among developed countries in the emphasis it places on pass-through business structures – S corporations, partnerships (including Limited Liability Companies), and sole proprietorships. Pass-through businesses make up 95 percent of all U.S. businesses, they employ 62 percent of private sector workers, and they contribute the majority of business income to our Gross Domestic Product (GDP).
This reliance on pass-through businesses is not an accident. It was done purposefully by successive Congresses seeking to strengthen the role of small- and family-owned businesses in the American economy. These deliberate actions date back to the creation of the S corporation rules in 1958 and they have worked to the benefit of the businesses themselves, the people they employ, and the communities they serve. America has more jobs, higher wages, and a more diverse economy because of the strength of its pass-through business sector.
It is critical for Congress to understand this history as it seeks to address the expiration of provisions under the Tax Cuts and Jobs Act (TCJA), including the Section 199A deduction, next year.
The Correct Way to Tax Businesses
One reason the pass-through business structure has been so successful is that it is the correct way to tax business income. If Congress were to start from scratch, the pass-through treatment of business income, particularly how S corporations are taxed, would be the starting point. As Eric Toder of the Tax Policy Center told the Senate Finance Committee in 2011:
I would… note that the ideal way to tax business income is the way we tax S corporations. We would like to attribute the income to the owners and the only reason we have a corporate tax is for large and frequently traded companies – very hard to do that and identify the owners who would pay the tax. So where you can do that, we should do that, and that is the right treatment.
Pass-through taxation reduces opportunities for gaming and it ensures a more progressive outcome for business owners – those with modest means pay lower rates while wealthy owners pay higher rates.
For public corporations, pass-through treatment may not be feasible. But allowing all closely-held businesses the option to use the pass-through structure improves tax administration, progressivity, and simplicity while making the U.S. more competitive.
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