What Is a 'Pass-Through' Business and Why Is It Favored in the Tax Bill?
A last-minute provision added to the Republican tax plan would give people a tax cut through real estate shell companies, personally benefitting 14 Republican senators, according to a report from the
International Business Times
Utah Sen. Orrin Hatch, who added the provision this week, is one of them. That's because Hatch's wife owns a stake in a real-estate LLC that generated income in 2016 that would qualify as a "pass-through" entity, per IBT, and the newly added tax provision allows owners of certain pass-throughs (including private real estate firms) a 20% deduction on taxable income.
So what exactly is a pass-through entity?
Essentially, a pass-through is a business that does not pay corporate income tax, and includes entities like sole proprietorships, partnerships, and S-corporations. About 95% of businesses in the U.S. are categorized as pass-throughs, according to the Brookings Institute , and they have traditionally paid a lower tax rate than big C-corps.
As Joe Rosenberg, a senior research associate at the Urban-Brookings Tax Policy Center, explained on NPR , pass-through "profits are passed through to the owners of the business. And then the owners report that income on their individual tax returns and pay tax on it, along with the rest of their normal income."
While many are small businesses, not all are. For example, law firms are typically structured this way. And the new provision would "specifically allow owners of large real estate holdings through LLCs to deduct a percentage of their 'pass through' income from their
This particular pass-through provision has caused controversy because it was not included in previous versions of the House or Senate bill, and IBT reports that 14 Republican senators hold financial interests in qualifying real-estate partnerships, worth as much as $105 million. President Trump, too, "owns or directs over 560 companies , most of which are LLCs or LPs" (though we'd better know how the tax plan affects him personally if he'd just release his tax returns).
The House approved the Tax Cuts and Jobs Act this afternoon , and the Senate is expected to vote later tonight.