Once released (tomorrow?), the tax treatment of pass-through businesses in the House’s tax cut legislation will play an important role in reducing the tax liability of more than half of all US business income. Here’s an excerpt from the CRS report, Who Earns Pass-Through Business Income? An Analysis of Individual Tax Return Data (Oct. 24, 2017 R42359):
Pass-through businesses—sole proprietorships, partnerships, and S corporations—generate more than half of all business income in the United States. Pass-through income is, in general, taxed only once at the individual income tax rates when it is distributed to its owners. In contrast, the income of C corporations is taxed twice; once at the corporate level according to corporate tax rates, and then a second time at the individual tax rates when shareholders receive dividend payments or realize capital gains. This leads to the so-called “double taxation” of corporate profits.
This report analyzes individual tax return data to determine who earns pass-through business income. The analysis finds that in 2011 over 82% of net pass-through income was earned by individuals with an adjusted gross income (AGI) over $100,000, although these taxpayers accounted for just 23% of individual returns with pass-through income. A significant fraction of pass-through income is concentrated among upper-income earners. Taxpayers with an AGI over $250,000, for example, received 62% of pass-through income, but accounted for just over 6% of returns with pass-through income. Individuals with an AGI in excess of $1 million earned about 32% of pass-through income, while filing roughly 1% of all returns with pass-through income.