According to an analysis from the Tax Policy Center, the Senate’s recently passed tax plan will increase the after-tax income of folks in every income bracket. Of course, there are exceptions to every rule and plenty of arguments to be had between the Left and Right over how the tax savings scraps should be divvied up, but in the aggregate individual tax payers should see their net incomes increase in 2019.
But when it comes to the taxation of business income, one group of small business owners is about to get a massive tax increase, on a relative basis, compared corporations and other pass-through entities: Family Trusts.
As the Wall Street Journal points out this morning, many small businesses in the U.S. are organized as family trusts as a way to preserve an enterprise for succeeding generations, protect against estate taxes or a divorcing spouse or other claimants who might try to seize a stake. But while the Senate tax bill provides a massive tax cut for corporations and individually-owned pass-through corporations, small businesses organized as family trusts will see no changes making them much less competitive on a pro forma basis.
Family-owned businesses represent a large slice of the universe of so-called “pass through” companies, which are organized as partnerships, limited liability companies and S Corporations, and pay taxes through individual rather than corporate returns. Trusts in this category of business include Hobby Lobby, the arts and crafts chain founded by billionaire David Green, and Love’s Travel Stop. They also include a whole host of other small businesses from grocery stores, to packaging makers, wholesalers, beer distributors and family farms.
Tax writers in the Senate crafted the bill in a way that prevents trusts and estates that operate businesses from reaping the benefits of new low business tax rates. Republican tax writers haven’t explained their motives, but the move could save billions.
“If they are really left out of this, that in my opinion would be a problem,” said Ed McCaffery, who teaches tax law at the University of Southern California’s law school.
As the Tax Policy Center notes, under the Senate’s tax plan, Corporations will see their tax rates slashed from 35% to 20% and pass-through entities owned by individuals would also benefit while family trusts, randomly, would continue to see every dollar of their income taxed at the top marginal rate.
Earnings generated by such trusts are taxed as ordinary …read more