Trump Tax Plan Seen Turning ‘Everyone And Their Dog’ Into An LLC

By David Kocieniewski
Bloomberg News

WWR Article Summary (tl;dr) Pass-through businesses, which include small businesses like corner stores and free-lancers get their name from the way they file taxes: The businesses pass their income through to their owners, who then pay tax based on their individual income-tax rate. The top individual income-tax rate is now 39.6 percent but President Trump’s plan would cut the LLC rate to just 15 percent. With that proposal out there, could we see more of these LLC’s in the future? David Kocieniewski of Bloomberg takes a look.

NEW YORK

The Trump administration’s proposal to cut the tax rate on partnerships and limited liability companies could set off a stampede of individual taxpayers trying to reclassify themselves as so-called pass-through businesses to take advantage of the savings, according to tax experts.

Call it the Kansas problem.

In 2012, Kansas exempted pass-throughs from state income taxes, a move that was billed as a chance to spur so much business growth and job creation that it would actually raise money for the state treasury.

Instead, an unexpectedly large number of taxpayers began calling themselves pass-throughs, and state tax revenues fell by hundreds of millions of dollars. Kansas lawmakers passed a bill to eliminate the exemption, which was derided as the “LLC loophole,” but Gov. Sam Brownback vetoed the measure.

Now, Trump’s administration wants to try a similar move. Pass-through businesses, which include small businesses like corner stores and free-lancers but also doctors, lawyers, consultants and vastly profitable hedge funds, get their name from the way they file taxes: The businesses pass their income through to their owners, who then pay tax based on their individual income-tax rate.

The top individual income-tax rate is now 39.6 percent, though Trump’s plan would cut that to 35 percent. But for pass-through businesses, he’d cut it even more: to just 15 percent.

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