May 27, 2019

Analysis Shows Tax Burden On Pass-Through Entities Might Be Even Higher

Last week, Connecting the Dots published information from the nonpartisan nonprofit Tax Foundation showing the average marginal tax rate paid by pass through businesses in each state. The S-Corp Association (SCA), which fights for tax parity for small and large businesses, also noticed the map.

While SCA said the map “is helpful” and shows “pass-through businesses employ the majority of private sector workers in every state of the country,” in an article released last week it argued the Tax Foundation actually underestimated the rates pass-through entities pay by illustrating “only a small subset of pass-through businesses, and those towards the bottom end of the possible marginal rate range to boot.”

Specifically, the data the Tax Foundation used only applied to businesses that have qualified for the full 199A pass-through deduction established in the 2017 tax reform bill and “many pass-through businesses qualify for only a partial deduction, while others get no deduction at all.”

The data, in other words, likely excluded:

  • Pass-through businesses operating in health, law, accounting, consulting and other industries that aren’t eligible for the deduction;
  • Companies that are subject to “guardrails” that limit the size of their deduction to 50 percent of the wages they pay or a combination of wages and return on qualified capital; and
  • Pass-through businesses with international income have that income excluded from the pass-through deduction.

Despite these exclusions, the Tax Foundation’s goal clearly was to show the heavy tax burden paid by pass-through organizations. Data from both it and the SCA illustrate how important it is for state governments and the federal government to ensure tax parity for large and small businesses.