Bloomberg: Tax Reform Could Open Up a Huge Loophole for the Wealthy

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A perk meant for business owners may help a wide variety of affluent Americans cut their tax bills.

In the emergency room, there’s a good chance your doctor isn’t an employee of the hospital. She might be an independent contractor and, for tax purposes, the owner of a small business whose sole purpose is to sell her services as a physician.

That’s one example of a “pass-through business,” now a hot topic in the U.S. tax reform debate. Everything from a giant real estate business to a corner liquor store can be a pass-through, so called because it doesn’t pay taxes itself but instead passes profits on to the owner, who pays taxes based on his or her own individual rate.

In fact, of the 26 million businesses in the U.S. in 2014, according to the Brookings Institution, 95 percent paid taxes on a pass-through basis. Unless a company is large or its ownership is complex, a pass-through is usually the simplest and lowest-tax option. Actors, architects, factories, and football teams can all structure themselves as pass-through entities.

Now, everybody else might want to get in on the act, or at least think about it if they’re in a higher tax bracket. The tax reform framework released this week by President Donald Trump and congressional leaders offers a lucrative treat to pass-through business owners. A key provision would cap the federal rate for many pass-through businesses at 25 percent, a huge tax cut if owners are now taxed at the maximum individual rate of 39.6 percent.

https://www.bloomberg.com/news/articles/2017-09-29/tax-reform-could-open-up-a-huge-loophole-for-wealthy-americans