After 2017 U.S. Tax Reform Package, Pass-Through Entities Pay Majority Of Businesses

Ernst & Young has published a new report commissioned by the S Corporation Association that looks at the economic footprint large S corporations have and that examines how the federal tax reform package, the Tax Cuts and Jobs Act (TJCA), passed in the United States in late 2017 impacted these companies. The study found:

• Pass-Through Tax Parity Exists Today, But Will Not In A Few Years. In terms of both effective and marginal tax rates, prior to TCJA large S corporations and C corporations faced similar tax rates. Rough parity remained following enactment of the TJCA, but the sector will face significantly higher tax rates in 2026 than C corporations will due to the expiration of key TCJA provisions, including the 20 percent Section 199A deduction for qualified business income.
• Pass-Through Sector Employs The Majority Of American Workers. The pass-through sector (S corporations, partnerships, and sole proprietorships) employed 58 percent of the private sector workforce in 2016. Large S corporations, defined as those with 100 or more workers, employed 13.1 million workers, or 10 percent of the 133 million private sector workers in 2016. States with the highest levels of pass-through employment are Montana (69.7 percent), South Dakota (67.4 percent), Idaho (67.2 percent), Wyoming (65.6 percent), and Vermont (64.9 percent).
• Pass-Through Entities Pay The Majority Of Business Taxes. In 2018, after passage of the TCJA, individual owners of pass-through businesses paid $326 billion in income tax on their business income. These taxes comprised 51 percent of all federal business income taxes. Taxes on corporate earnings are estimated at $316 billion.

Click here to read the full report and click here to review the Metals Service Center Institute’s stance of federal tax policy.