The U.S. Senate might vote on tax reform later this week, but the U.S. House of Representative’s tax plan that recently passed might not mean as much for small businesses as compared to larger corporations. Yet, the House plan has the support of trade organization American Trucking Associations, which recently praised approval of the plan.
The tax reform plan is expected to reduce the corporate tax rate to 20%, from 35%; however, most small businesses don’t pay the corporate tax rate, said Travis Crabtree, president of Swyft Filings and attorney for Gray Reed & McGraw in Houston. Swyft Filings helps people to establish businesses, including 259 filings in Arkansas.
The benefit to small businesses regards pass-through income, which refers to being taxed at the individual level instead of at both the corporate and individual levels, and 75% of small businesses pay taxes with the pass-through income method, according to Crabtree.
Of the 50 filings that Swyft Filings has handled in Benton and Washington counties, 42 were for “pass-through entities,” he said. Seven of the eight filings in Sebastian County are for pass-through entities, 11 of 12 filings in Craighead County are for pass-through entities, and 31 of 34 filings are for pass-through entities in Pulaski County. These entities won’t receive the same benefits as the larger corporations that pay the corporate tax rate.
Another aspect of the tax plan is the 70/30 rule, which only allows individuals to claim 30% of business income to be taxed at a 25% rate.
“Nobody’s really talking about this,” Crabtree said.
A small business owner earning $1 million would face a 39% tax rate, but it would be reduced to 35% under the proposed plan. With the 70/30 rule, the total tax bill on the $1 million profit would be $320,000, with 70% of the income taxed at a 35% rate and the remaining 30% taxed at a 25% rate. But if earnings were taxed only at the 25% rate, the tax bill would be $250,000.
One of the recent changes in the House’s plan that was made before it was approved included a tax rate reduction for small business earning less than $150,000. For these businesses, the first $75,000 would be taxed at a 9% rate, while the remaining amount would be taxed at the existing 25% tax rate. For an individual earning $100,000, the total tax bill would be $13,000, down from $25,000 with the existing 25% tax rate. “That truly does help,” Crabtree said.
On Nov. 16, the American Trucking Associations commended the U.S. House of Representatives for passing the Tax Cuts and Jobs Act.
ATA President and CEO Chris Spear said the bill “will enhance the U.S. economy by encouraging business investment and producing good-paying American jobs.”
The trucking industry has more than 7 million U.S. workers, and it “knows full well how simplifying our nation’s onerous tax code will get our economy moving ahead at full speed,” Spear said.
ATA Chairman Dave Manning, president of TCW Inc. in Nashville, Tenn., said the tax plan would lower tax rates on business income, broaden the tax base “to render it more equitable” and simplify the tax code, benefiting “sectors of the trucking industry represented by the ATA. That includes not only large fleets, but the 97% of the industry made up of small businesses who operate fewer than 20 trucks.”