Watch the Tax Reform - C Corp v. S/LLC Fight / The great struggle in the reform of the US Tax Code lies with the current disparate rates and treatment of C corporations as compared to the “pass through” corporations, S and LLC’s

Joel Andersen for DC Velocity writes: The great struggle in the reform of the US Tax Code lies with the current disparate rates and treatment of C corporations as compared to the “pass through” corporations, S and LLC’s.  The recommendations divide strongly on R v D lines, and, as a result Senate versus House.  Each party has a different means of addressing the pass through corporation and those differences will be the subject of this column.

For reference, I recommend you read the publication, “Taxing Business Through the Individual Income Tax” by the Congressional Budget Office released December 2012. This publication outlines a process that with the LLC and S corporations being taxed at the same method as C Corporations, an additional $76 Billion would be received by the U.S. Treasury.  In essence, it would extend the double taxation inherent in C corporations to partnership and S corporations.

Republican Camp, Chairman of the House Ways and Means Committee clearly sees the need to maintain the single taxation of S and LLC corporations.  His Ways and Means Committee is soliciting comments from stakeholders on two options: one that revises current rules and a second that replaces current tax rules with a new unified pass-through regime.

Camp has said “More Americans get their paycheck from small businesses than any other type of business or government. If we really want to strengthen our economy and put more money in the pockets of American workers, we must fix the Tax Code and how it treats small businesses. In addition to all the complexity these Main Street businesses face, Washington currently taxes them at top rates nearly 10 percentage points higher than their corporate counterparts.”

Senator Baucus opened his hearing into tax reform with a written statement that included the following language: “Pass-throughs don’t pay corporate taxes; their business income is taxed at individual income tax rates. However, C-corporations get taxed on income, and then — when that money is distributed in dividends to shareholders — it is taxed again. While a valuable tool for small businesses, we should examine if the use of pass-throughs have disrupted the level playing field for larger non-public companies and their public competitors. . . One of my main goals of tax reform is to make the system more competitive, but also keep it fair. Our hearing this morning will examine the difference between corporate and pass-through taxation and whether current rules strike the right balance in our diverse economy.”

For IWLA members and logistics companies, please keep a close eye on tax reform.  The “pass throughs” are the major focus. 

As a personal and political aside, much of the intensity of the fight of how to obtain more revenues occurs because of a federal government bias toward spending versus thrift.  If we could reduce the spend of government we could reform taxes, eliminate the high marginal tax rates on C corporations and fix any disparate incentives between the C and the pass throughs.