Legislation

Treasury Department sets guidelines for which small businesses benefit from pass-through tax break – Baton Rouge Business Report

The sweeping tax overhaul enacted by Congress last year created a special 20% deduction for small-business owners. But many of them have been waiting to find out just who will benefit.

As The Wall Street Journal reports, the Treasury Department provided some answers today.

Among them: Owners of closely-held companies should be able to claim the new tax benefit even if a small portion of their income doesn’t qualify for the favorable treatment.

But it could be hard for high-earning business owners to get around limitations in the rules by splitting up a business, a strategy some tax professionals have dubbed the “crack and pack.”

As part of its broad rewrite of U.S. tax rules, Congress created a 20% deduction for owners of a variety of pass-through businesses, which include limited liability companies, partnerships, so-called S corporations and sole proprietorships. The tax break effectively lowers their top rate to 29.6% from 37%. The deduction can be claimed by business owners whose taxable income is $315,000 or less for joint filers.

Above that level, the break would be phased out over the next $100,000 of income for service-business owners such as lawyers, doctors and consultants. There are separate restrictions tied to the level of wages paid and capital investment.

The proposed rules include limitations designed to prevent business owners from relabeling certain employees as independent contractors so they can take advantage of the tax benefit.

Owners of pass-through businesses filed 35.3 million tax returns in 2015, according to the Joint Committee on Taxation. Another 1.6 million returns were filed by C corporations. Pass-through companies have become more common since Congress lowered individual tax rates in 1986.

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