Study Warns of Tax Reform Impact on Flow-Through Businesses

A new study from Ernst & Young examines the impact on flow-through businesses of the tax reform proposals, and cautions against lowering corporate tax rates at the expense of S Corporations.

The study, by Robert Carroll and Gerald Prante of Ernst & Young, noted that flow-through businesses—such as S corporations, partnerships, limited liability companies, and sole proprietorships—play an important role in the U.S. economy and comprise a substantial share of economic activity.  The study was prepared for a group called the S Corporation Association.

“Recent focus on the need to lower the corporate income tax rate has also drawn attention to how flow-through businesses might be affected by tax reform,” they wrote. “With substantial evidence that the U.S corporate tax rate is out-of-step internationally, corporate tax reform is an important component of an overall approach to improving the current tax system. However, corporate tax reform that lowers the corporate tax rate and pays for this change by eliminating some or all business tax expenditures would raise the taxes paid by businesses organized using the flow-through form.”

The study noted that the flow-through sector represented 54 percent of all business activity, as measured both by employment and net income. It warned that tax reform could have significant consequences for flow-through businesses, jobs in the flow-through sector, and the broader economy.

“Based on Ernst & Young LLP estimates, pursuing corporate-only reform that eliminates some or all businesses tax expenditures would increase the income taxes paid by individual owners of flow-through businesses, on average, by 8 percent or $27 billion annually from 2010 through 2014,” the study found. “Hardest hit would be flow-through businesses in agriculture and mining, followed by construction and retail trade, and then manufacturing, finance and insurance.”

“Today’s report serves as a strong reminder that any conversation about comprehensive tax reform must consider the needs of businesses of all sizes and structures,” said House Ways and Means Committee Chairman Dave Camp, R-Mich. “As we develop tax reform policies, we must be mindful of the increasingly prominent role of pass-through businesses and be mindful of how to address their needs in the context of comprehensive reform.”

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