Large businesses with limited ownership are likely to face a series of overlapping tax increases as part of Democrats’ proposals, leading to a heavier tax burden on owners of partnerships and S.companies – companies that pay directly to shareholders and enjoy corporate structure benefits without having to pay federal taxes. The structure is characteristic of most small companies.
The plan, introduced in September by the House Ways and Means Committee, seeks to raise about $ 2 trillion over a decade to expand the social safety net and fight climate change. The House of Representatives plan is different from the Biden administration’s proposals and is expected to change as lawmakers move forward to discuss its scale and details.
Most family.owned companies will not see a change in their tax burden
Most family.owned companies will not see a change in their tax burden under the proposal. But owners of larger and more profitable companies are already waving red flags.
“Dollar to dollar, it’s going to diminish our ability to reinvest in the business and grow it,” said John Frilling, chairman of Precision Components Group, a company from York, Pennsylvania that manufactures components for Navy submarines and aircraft carriers.
House of Representatives member Richard Neil (Democrat from Massachusetts), chairman of the Roads and Means Committee, said last week that he was only beginning to hear about some of the concerns of various business owners.
“There’s a certain unease, that’s for sure,” he said. “We are trying to respond to some of the concerns they have raised and if they are legitimate of course we would like to correct them.”
U.S. President Joe Biden said his proposals were not meant to punish anyone. “I am a capitalist,” he said in a mid.September speech after Democrats in the House of Representatives released the plan. Just success. All I want is for you to pay your fair share. “
What is being discussed is a series of proposed changes that may affect some owners of limited liability companies, private costs and other companies of the type called pass.through companies. These companies do not pay taxes themselves; Their profits pass on to the owners and the tax is collected from their personal refunds. In contrast, regular.type corporations like Apple pay corporate corporation tax. Their shareholders then pay an extra layer of tax on dividends or capital gains.
96% of the companies are organized as pass.through companies, according to an analysis of the tax refunds from 2018 made by the Joint Taxation Committee.
3% tax on income over $ 5 million
One major change in the Democratic program will limit the 20% reduction that most such companies ask for up to $ 500,000 for couples reporting together, which means the benefit will no longer be available to companies with more than $ 2.5 million in household income. Congress established the benefit in the 2017 tax law to give pass.thorugh companies a tax benefit equivalent to what corporate companies receive.
The proposed legislation will also create additional tax that will be levied on high.income individuals and add a 3% tax on income over $ 5 million. In addition, the bill would extend a 3.8% tax on investment income to married taxpayers who earn more than $ 500,000 (and individuals who earn more than $ 400,000) and do not pay other types of employment taxes. At present, this tax is applied only to taxpayers who receive income from investments and not to those who are actively involved in the company. The highest marginal tax rate will also be raised, to 39.6%, from 37%.
“You read all the different sections and none of them sound intimidating on their own, but then you start attaching them to each other,” said Eric Wenger, a partner in the accounting firm RKL LLP of Lancaster, Pennsylvania. The top marginal tax rate for pass.through company owners could jump to 46.4% from 29.6%, an increase of nearly 17%, he said. State taxes will be added to this tax rate.
“People earning less than $ 400,000 will not feel a significant impact on their tax burden, if at all,” Wenger said. Owners of companies that make millions of dollars through their pass.through companies, on the other hand, “should definitely pay attention.”
Most pass.through companies are small, although much of the money they earn goes to households whose income is at a relatively high threshold. Pass.through companies include law firms and accounting firms, clinics, mutual funds, manufacturers and some internationally family.owned companies.
Nearly 96% of the 24.4 million tax returns filed by partnerships, S corporations and individual costs reported income after expenses of less than $ 500,000, according to estimates by Penn Wharton of the University of Pennsylvania. Less than 100,000 tax.return filers with pass.through income reported income of $ 2.5 million or more.
About half of the benefits of tax cuts for pass.through companies went to households in the top percentage in terms of income distribution, according to the Center for Tax Policy.
Company owners with $ 5 million in revenue will face the largest increase
Business owners with revenues of $ 5 million or more may face the largest tax increases, tax experts say.
Precision, a defense industry contractor from York, Pennsylvania, is listed as a limited liability company. The company has about 430 employees and $ 90 million in revenue, and it spends about $ 3 million a year on capital investments, Frilling said. The company is considering an expansion of almost 2,500 square meters with two cranes weighing 75 tons at an estimated cost of $ 15 million in order to better meet the fleet’s schedule.
“The proposed increase in tax cuts is reducing our cash flow that was supposed to partly fund this expansion,” Frilling said. Precision distributes money among its owners in order to cover the tax burden, he added.
The possible blow from tax increases could be even harder for Breakthru Beverage Group, a beverage distribution company that has annual revenues with $ 6 billion in annual revenues. The company from New York, which employs about 7,000 people, distributes enough money to its owners each year to cover the tax costs arising from the business and sometimes makes a further distribution of the profits.
The more the company pays in these taxes, the less money it has to spend on capital and other initiatives, said Jacob Onopreichuk, the company’s director of strategy and industrial development, which was created by merging two wholly.owned wholesale distribution companies.
The House of Representatives tax plan will also reduce the tax rate for companies earning up to $ 400,000, to 18% from 21%, while increasing corporate tax to 26.5%.
The gap in corporate tax rates between corporate and pass.through companies could make it harder for pass.through companies to compete for truck drivers and warehouse workers against companies like Amazon, which pay corporate tax but do not pay dividends, said Richard Davis, senior vice president of government affairs. Republic National Distributing, a wholesale company that sells alcohol and employs about 13,000 people.
Company owners may change their organizational classification
The difference between the top tax rate for pass.through companies and C corporations, companies with a board of directors, may cause some small.owned companies to decide to move to Model C.
“We got a lot of calls from clients who asked us to start running the numbers,” said Matt Talkoff, national industrial tax director at RSM US LLP, a tax, accounting and consulting firm.
Whether a company makes the change or not may change according to the wording of the final law, the size of the dividend payments, the implications for state taxes and the question of when the owners are supposed to sell the company.
“When you move from corporation S to corporation C, there are new taxes that may be imposed on you,” said Richard Whiteware, owner of Direct Wire & Cable, a Denver, Pennsylvania.based company that produces $ 100 million worth of wires and cables and 120 employees. .
In addition, it is easier for a company to move to a C corporation structure than to move back. Companies that become from corporation S to corporation C usually have to wait five years to choose to become corporation S again.
“The biggest problem for me is that they can always raise corporation tax,” said Marvin Kirsnir, a Fort Lauderdale.based Florida tax attorney.