Proposed Federal Tax Hike Would Hit Pass-Throughs Hard

02.18.2016
Small Business

The S-Corporation Association, a Washington, D.C.-based nonprofit that advocates for family-owned and closely held businesses, recently released a statement warning of a proposed new federal tax hike on S corporation shareholders and other pass-through business owners.
The tax measure, buried in President Obama’s 2017 budget proposal, is an expansion of the Net Investment Income Tax.
The Net Investment Income Tax
In its statement, S-Corp explains that the NIIT was passed to help finance the Affordable Care Act and is intended to tax the investment income of taxpayers earning more than $250,000.
The tax, currently at 3.8%, applies to dividends, capital gains, and other forms of investment income.
It also applies to the active business income of S corporation shareholders, partners, and LLC members, but only if they are not active in the operation of the business.
In other words, if they work at the business, the 3.8% NIIT does not apply.

Why is it good policy to cut the marginal rates of one business, while hiking the tax rates on another?

The Obama Administration’s proposal would apply the NIIT to all pass-through income regardless of whether the taxpayer is active in the business.
Consequences
The result, says S-Corp, would be a 5% increase (from 39.6% to 44.6%) in the top rate on all pass-through business income, further widening the gap between the top tax rates on pass-throughs and the 35% top rate paid by C corporations, with whom they compete.
S-Corp also points out that the Administration’s interest in hiking taxes on pass-throughs comes as it has been voicing support for cutting the rate on C corporations to 28% or less.
“Why is it good policy to cut the marginal rates of one business, while hiking the tax rates on another?” the advocacy group asks.
“This idea is going nowhere fast, but [it does] make clear the level of hostility this Administration has for Main Street employers.”

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