Business Owners Face Complicated Choices With Republican Tax Plan

Dec 22, 2017
Originally published on December 22, 2017 7:28 am
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RACHEL MARTIN, HOST:

President Trump has signed a sweeping tax overhaul into law this morning. The centerpiece of the plan is a big corporate tax cut from 35 percent to 21 percent. Most of American businesses, though, are not structured as corporations, and for a lot of those business owners, life is about to get complicated. Our co-host David Greene talked about this with NPR's Jim Zarroli.

DAVID GREENE, HOST:

Hi there, Jim.

JIM ZARROLI, BYLINE: Hi.

GREENE: All right, so if you own a small business, will this new tax bill mean that you will pay lower taxes? I guess a simple question to start off with.

ZARROLI: Yeah, probably, it will, yeah. But how much that your taxes will go down depends on what kind of small business you are and also how big you are. Right now, about 95 percent of American businesses qualify as pass throughs, which means they make revenue and their revenue is passed on to them as personal income, and it's taxed at the personal income rate. And that includes small businesses, but it also includes some very big ones. I mean, President Trump's businesses are mostly pass throughs. The new tax bill will create a separate tax category for these pass-through businesses, and they will be able to deduct 20 percent of their income and essentially end up paying much less in taxes.

GREENE: OK. So this is not the lower personal income rate. It's not corporations. This is a new separate category for these pass throughs. How many businesses can actually take advantage of that?

ZARROLI: Well, that's where it gets tricky because, you know, there's the risk that a lot of people who now earn salaries will try to change their tax classification and try to become pass throughs to take advantage of these lower taxes.

GREENE: Essentially turning themselves into businesses to try and get in this category.

ZARROLI: Right. So the bill has rules that are meant to prevent people from doing this, from, you know, trying to take advantage of this. For instance, they say if you're a, you know, a specified service provider, you may not be able to convert. And the bill defines this, so certain kinds of professions are allowed to do it and certain others are not. But there's an important distinction because really small businesses are exempt from these rules. So if you're a lawyer, for instance, who makes a certain amount of money, you may be able to qualify as a pass through whereas if you make more than that, you may not. So this will end up benefiting, for instance, a lot of small-town businesses in places where salaries may not be as high.

GREENE: The corporate tax rate, though, is what's getting a lot of attention. It's dropping to just 21 percent. It's permanent where some of these other tax cuts in the bill are temporary. So can businesses take advantage of this in some way?

ZARROLI: Yeah, and that's a really important question. Right now, the corporate rate is so high that a lot of American businesses haven't wanted to incorporate, but this will change that. So a lot of businesses that aren't allowed to qualify as pass throughs have this other option of becoming corporations that will allow them to deduct certain expenses, like health care costs, in a new way. And there aren't the types of rules that limit who can qualify for this as there are with pass throughs. So you can expect to see just a rush of businesses, you know, calling their accountants, calling their tax lawyers and trying to find out what they should do.

GREENE: Wasn't this supposed to have the opposite effect? It was supposed to simplify everything and mean that businesses and people didn't have to call their lawyers and their tax people as often.

ZARROLI: Yeah. And I think you could argue that it does that for individuals, but for businesses, it makes life much more complicated. Everyone who now files taxes has to try to decide, you know, what's the best category. Do I file as an individual? Do I file as a pass through or a corporation? So this is really a full employment act for tax lawyers.

GREENE: NPR's Jim Zarroli. Thanks so much, Jim. We appreciate it.

ZARROLI: You're welcome.

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