Senate tax proposal gives deduction for pass-through businesses

Most financial advisers who own their own firms and pay taxes on their personal returns will not be able to take advantage of tax breaks in either the Senate or House bills. But when it comes to helping their small-business clients, the Senate’s tax bill offers less complexity.

Like the House bill, the Senate proposal, which was released on Thursday, excludes from tax relief many service businesses, such as accountants, lawyers, architects,brokerages and financial services, that are set up as sole proprietorships, partnerships or S corporations. Lawmakers wanted to target manufacturers for tax relief.

But also like the amended House bill, it does allow proprietors of service businesses a reduced rate if they earn taxable income of less than $75,000 for single filers and $150,000 for married couples filing jointly.

Where the Senate and House bills diverge on pass-through policy is how tax relief is determined. The Senate version offers a 17.4% deduction on domestic qualified business income, which leaves less room for loopholes that some financial advisers perceive in the House approach.

The House version would provide a pass-through tax rate of 25% on up to 30% of the business income. The remaining 70% would be taxed at personal rates, which could be as high as 39.6% under the current tax code. Under the House bill, the pass-through tax rate could be as low as 9% for some income for an individual owner earning less than $75,000.

Read more: How to get the pass-through deduction by reducing taxable income

Leon LaBrecque, managing partner at LJPR Financial Advisors, compared the effect of both plans on a couple who earn $150,000 in pass-through compensation as their only income, using the standard deduction of $24,000 allowed by each proposal.

The result was that the total tax owed under the Senate plan was $13,969, while the total under the House plan was $17,550.

“It seems to me that the 17.4% deduction [in the Senate plan] gives a lower overall tax bill to small businesses than the 9% bracket shift in the House bill,” Mr. LaBrecque said. “I’m in favor of the Senate bill from a small-business standpoint.”

Senate Finance Committee Republicans touted the simplicity of their pass-through proposal.

The Senate plan “substantially lowers the tax burden on Main Street job creators through a simple and easy-to-administer deduction for pass-through businesses of all sizes, allowing more small businesses to grow, invest, hire new workers and increase wages while also preventing abuse of the reformed system,” the summary states.