The tax rate gap is one of the key factors behind the growth of the pass-through business sector. In contrast to the C-corporations, pass-throughs enjoy lower tax rates and more flexibility in distribution of income. This fact should be noted by policymakers. While pass-throughs generate almost three-fifths of business income, they are still smaller than C-corporations.
Most hedge funds, private equity funds, and law firms operate as partnerships. They generate a quarter of the total business income in the finance, real estate, and law sectors, respectively. These businesses are often publicly traded and have thousands of shareholders. They are often listed on stock exchanges, just like large C-corporations. Because they compete directly with large C-corporations in certain industries, they are often directly affected by changes to business tax rates.
While the economy is slowly recovering from the Great Recession, states are looking for ways to cut business income tax burdens. Lowering the burdens on businesses will help grow the economy and attract new jobs. But this doesn’t mean that you should cut business income coverage altogether. Here are a few things you can do to keep your business income growing.
One of the most important changes to the tax code is the way businesses are structured. Corporations tend to pay more tax than pass-through businesses. In the past, corporations were the primary producers of business income. Today, they are making fewer returns and generating less revenue than pass-through businesses. This is largely because corporate revenue was at a peak in the mid-2000s. Despite this, pass-through businesses account for more than half of business income.
While it’s true that the tax rates that business owners face may vary substantially, business owners generally benefit from other credits, deductions, and exemptions. In addition, some businesses are tax-exempt. In 2014, 80 percent of all pass-through businesses faced a marginal tax rate of 25 percent or lower, and just three percent of businesses had rates higher than 30 percent.
Some governments recognize the importance of entrepreneurs and small business development by reducing business income tax rates. Sadly, Quebec is about to introduce a new preferential rate for small businesses next year, which is a major tax barrier for growth. In addition to reducing rates, governments should also increase the eligibility thresholds to encourage the growth of small businesses.
Small C-corporations that generate less than $10 million in receipts typically take all their income in the form of labor earnings. This means that wages and salaries are tax-deductible to the firm. The tax rate for wages is 43.4 percent, which is lower than the individual tax rate for dividends. Unlike C-corporations, S-corporations do not face payroll tax rates on earnings.