Provision In 2017 Tax Bill Helped Smaller U.S. Businesses

As Connecting the Dots readers are well aware, in 2017 the U.S. government enacted a tax reform law that included a provision that granted a special deduction for individually and family-owned businesses. Because these companies pay income taxes through the individual tax system and not the corporate code, they often face higher marginal tax rates than competitors who run much larger businesses.

Since the centerpiece of the 2017 tax bill was a reduction in the corporate tax rate, that gulf would have become even wider without congressional action. As such, the goal of the Section 199A deduction was to ensure tax parity between companies no matter how the filed their income taxes.

According to a new study sponsored by the S-Corp Association, the inclusion of the Section 199A provision achieved its goal. Average income tax rates for large S-corporations fell from more than 41 percent to 34 percent after the 2017 law went into effect. Average rates for pass-through entities declined from nearly 33 percent to 27 percent. Today, rates for C-Corporations range from about 25 percent to 32 percent today. While those rates are still somewhat lower than the rates paid by smaller businesses, the gap has closed since 2017.

But Congress’ work is not done.

When the 199A provision begins to expire in 2026, this relative parity will end. At that point, the corporate rates will stay about the same, but the average rate for large S-Corporations will balloon to more than 41 percent while the average rate for pass-through entities will go back up to about 33 percent.

As the S-Corp Association noted, the 199A pass-through deduction is the only federal tax provision that protects thousands of local small businesses. It reduces the tax burden on the companies in order to make them more competitive while helping to level the effective rates paid by private and public companies. As such, federal lawmakers must commit to preserving these companies and jobs by making the Section 199A deduction permanent.

Read more here.