Toto, we’re not paying taxes in Kansas anymore.
Taxes on Pass-Through Entities
In 2013, to spur business growth and job creation, Kansas exempted pass-through entities such as limited liability companies (LLCs) and S corporations from state income taxes. Tax collections plummeted when the number of taxpayers becoming pass-through entities burgeoned.
Kansas Governor Sam Brownback vetoed a bill eliminating the ”LLC loophole.” Some commentators maintain that other factors caused the decreased state income tax collections.
Ostensibly inspired by Kansas, the Trump and Ways & Means tax plans would reduce but not eliminate taxes on pass-through entities.
Under the Trump plan, the top income tax rate of 35 percent would be reduced to 15 percent for pass-throughs. The pass-through rate under the W&M plan would be 20 percent (instead of a top rate of 35 percent).
The pass-through rate would benefit mom and pop businesses, as well as lawyers, CPAs, architects, doctors, dentists, consultants, hedge fund managers and notaries.1
If the low tax on pass-through income is enacted, professionals now doing business as LLCs, etc., or who become LLCs, will pay lower taxes than their secretaries and other employees.
Treasury Secretary Steven Mnuchin says that the low pass-through rate would be drafted in a way that it “won’t be a loophole for rich people who should be paying higher rates.”
Does the Wizard of IRS have enough employees to assure that every farmer and his cow won’t be able to take advantage of a special low pass-through tax rate?
1 When I graduated from law school, one of my classmates was a double threat: a lawyer and a notary. Back then, notaries got 25 cents per document. A large admiralty law firm had 600 documents to be notarized. My classmate, the lawyer/notary, landed the job and made $150 for the day. That was more than he made in a week as a law firm associate. They may have also given him lunch.
© Conrad Teitell 2017. This is not intended as legal, tax, financial or other advice. Check with your advisor on how the rules apply to you.