Investment advisers and brokers who pay taxes on their small practices through their individual returns could be left behind if President Barack Obama and Republican lawmakers pursue corporate tax reform.
As the dust settles from the midterm elections that put
Republicans in complete control of Capitol Hill with their takeover of the Senate, corporate tax reform has emerged as an area of possible agreement between Mr. Obama and the GOP.
Many small advisory firms, however, are set up as limited liability partnerships and corporations, or as S corporations. Under those arrangements, their taxes are paid on the proprietor's personal tax return, a process that defines a business as a pass-through.
“Most advisers don't pay tax at corporate tax rates,” said Tim Steffen, director of financial planning at Robert W. Baird & Co. Inc. “If corporate tax reform means lowering tax rates, most advisers aren't going to benefit from that.”
In fact, advisory firms and other small businesses might actually fall behind large businesses when it comes to tax fairness.
For instance, a small advisory firm could wind up paying the top individual tax rate of 39.5%, while a wirehouse or large regional advisory firm could have its current 35% corporate rate cut to 25%.
That situation could make corporate-centric reform untenable.
“I do not think you can do corporate-only,” said Clint Stretch, senior tax policy counsel at Tax Analysts, a publishing and educational firm. “You have to figure out some way to tax all businesses under a comprehensive regime.”
Paul Schmidt, chairman of the tax group at the law firm Baker & Hostetler, called a sole corporate focus “short-sighted.”
“Corporate-only reform, while it's interesting to discuss, quickly bogs down,” he said. “You can't leave the pass-throughs behind. You'll create a huge disparity in tax rates, which will create artificial incentives for individuals to incorporate their businesses in order to defer taxes.”
Even some Republicans may end up balking at tax reform that touches only corporations, said Dean Zerbe, national managing director of alliantgroup, a tax consulting firm.
“It will be very difficult to do corporate tax reform by itself,” said Mr. Zerbe, a former Republican tax counsel for the Senate Finance Committee. “They're going to have to make the pie bigger for tax reform. They're going to have to look at everybody, not just large corporations.”
Another obstacle to corporate reform is that the two sides have different goals, Mr. Stretch said. Mr. Obama wants to close business tax loopholes, while the GOP wants to lower tax rates.
Before the two sides can make progress on corporate or any kind of tax reform, including a decision on whether to renew the
expiring tax extenders , they need to determine how much federal revenue they want to produce, Mr. Stretch said.
“The happy talk [about corporate reform] doesn't get to the fundamental question that the parties don't agree on how big the government should be,” Mr. Stretch said.
