Small Businesses Need Meaningful Relief

Most small businesses structure as pass-through entities, which means their profits are passed through directly to the business owners and are taxed on their individual income tax returns. Pass-through business owners currently face a top rate of 39.6%.

Larger businesses generally structure as C-corporations, which pay taxes through the corporate income tax rate. C-corps currently face a top federal tax rate of 35%.

House Plan

  • Lowers tax rate for C corporations to 20%.
  • Gives pass-throughs a 25% tax rate. However, the 25% pass-through rate is misleading. The effective rate for small businesses would be much higher.
  • Only some pass-through income will be taxed at the 25% rate. A successful home builder structured as a pass-through would face an actual rate of 25-35%. A very prolific builder could see a rate even slightly higher.
  • Even though most pass-through businesses will receive a tax cut under this plan, C-corps will receive a much more significant tax cut. This disparity puts small business firms at a competitive disadvantage with large corporations that would be taxed at a much lower rate.

Senate Plan

  • Gives more meaningful tax relief for small businesses by providing a 17.4% deduction again business income for pass-throughs.
  • Recognizes the importance of the business interest deduction by allowing small firms with less than $15 million in gross receipts and, by election, any construction or development firm to retain this deduction.

NAHB’s Chief Lobbyist Jim Tobin explains why small business tax incentives are lacking in the House plan.