WHAT DOES IT MEAN FOR OUR INDUSTRY?
Cuts to corporate tax rates will not help the more than 60% of NAED member companies that
function as pass-through entities. Lawmakers must remember that addressing corporate tax rates
without protecting pass-through entities will place many small businesses at an even greater
Tax reform is badly needed. There is a growing disparity between domestic firms like most NAED
companies that pay at the corporate income tax rate and the multi-national firms which can
significantly reduce their US tax liability through use of preferences in the US and foreign tax codes
or can defer taxes on their foreign income.
NAED supports lowering corporate tax rates while also addressing individual rates and deductions
to ensure fairness for pass-through entities.
The business community, Congress, and the Obama Administration have all voiced support for a
tax overhaul. The desire is there, but compromises will have to be made from all sides in order
for actual reform to take place, so it may take years.
Then House Ways and Means Committee Chair, Dave Camp, introduced a tax reform proposal
early in 2014 which called for surtaxes on higher income individuals which would amount to very
little change in individual business owners’ tax rates, while dropping the corporate rate to 20%.
Central to the tax reform debate is the treatment of pass-through entities (like subchapter S
corporations, partnerships, sole proprietorships, and LLCs) which pass their company’s profits
through to the owners’ tax returns. Pass-through entities comprise 94% of American businesses
and over 60% of NAED members’ businesses. Camp’s proposal failed in this regard.
After the fiscal cliff deal of 2013, many pass-throughs are now facing effective tax rates well over
40%, since the deal raised top income earners’ tax rates and limited their exemptions. Meanwhile
the corporate rate has remained steady, and may eventually be lowered if tax reform legislation is
enacted. Any discussion of corporate tax reform MUST consider allowable expense deductions
and individual rates to ensure fairness for pass-throughs.