Congressional Republicans say one way their tax plan would help small businesses is through cuts for entities known as pass-throughs. But Los Angeles tax experts are mixed on how the GOP's proposed changes could affect these kinds of companies.
Unlike big corporations that pay corporate taxes, pass-throughs are entities that pass their income on to their owners, who then pay taxes on it as individuals.
Almost all U.S. businesses are pass-throughs — about 95 percent of them, according to the Brookings Institution. They include everything from law firms to family dentists to tech startups, according to LA-based PwC tax partner Sam Melehani.
"In the greater Southern California market, I'm starting to see a lot of businesses set themselves up as pass-through entities," he says.
Currently, if pass-through owners earn a lot, they can end up in the top tax bracket for individuals — 39 percent. But under the GOP plan, the rate on pass-through income could be as low as 25 percent.
The bill includes complex rules aimed at preventing the wealthy from using this cut to massively slash their taxes. But Loyola Law School professor Ted Seto says the proposal isn't foolproof.
"Whenever you come up with a completely different way of doing something, you very commonly don't see the holes in it," he says. "There are a lot of holes in this."
Seto says the provision wouldn't actually help mom and pop operations. He calls the talk about giving small businesses a big tax break "an intentionally misleading characterization."
He says most small business owners already pay well below the proposed 25 percent tax rate for pass-through business income.
Melehani says it's unclear whether small businesses would benefit from the proposed change to the pass-through rules.
He says another proposal in the GOP plan — getting rid of the alternative minimum tax (AMT) — could help certain small business owners.