The U.S. Treasury on Wednesday proposed tax regulations for a new 20 percent income tax deduction for owners of businesses organized as pass-through entities, including rules to prevent the measure from becoming a tax loophole for wealthy Americans.
Senior Treasury officials said the regulations are intended to provide everything pass-through owners need to comply with the Republican Tax Cuts and Jobs Act, a sweeping overhaul of the U.S. tax code that President Donald Trump signed into law in December.
Most U.S. businesses, including many small “Mom and Pop” firms, are organized as pass-through entities. Rather than operating like corporations with shareholders, as many large companies do, these businesses pass profits through to their owners as personal income.
“The pass-through deduction is an important tax cut for small and mid-size businesses, reducing their effective tax rates to their lowest levels since the 1930s,” said Treasury Secretary Steven Mnuchin.
“This 20-percent deduction will lead to more investment in U.S. companies and higher wages for hardworking Americans.”
Trump’s tax overhaul provided permanent tax relief for corporations, which saw their tax rate slashed from 35 percent to 21 percent and an end to U.S. taxes on much of their foreign profits.
But pass-through business owners were given only temporary relief as part of the new law’s individual tax provisions, which are due to expire after 2025. The pass-through deduction produces a tax rate of no more than 29.6 percent.
Republicans in the House of Representatives are expected to consider new legislation to make individual tax cuts permanent, with a vote possible ahead of the Nov. 6 congressional midterm elections. But such a measure is not expected to become law anytime soon.
The proposed regulations, described as the first of two sets of rules for pass-throughs, are intended to ensure that business owners receive the full deduction on business income up to a $315,000 threshold for married couples and $157,500 for single filers.
But the deduction is limited for business owners with higher income levels in specific industries including healthcare, law, accounting and consulting.
Analysts have warned that wealthy taxpayers could try to seize the full deduction improperly by declaring themselves as pass-through entities for tax purposes or splitting off a restricted firm’s non-restricted income into a separate entity.
Treasury officials said the new regulations include anti-abuse safeguards to prevent such schemes.