Small business groups gave a mixed review Thursday to the introduction of the House Republican tax reform, underlining the difficulties Republicans face in spelling out the costs as well as the benefits of tax legislation.
The National Federation of Independent Business, a major group representing small businesses, said it was "unable to support the House tax reform plan in its current form,” CEO Juanita Duggan said. Duggan added that the group would try to work with Republicans to fix it.
Although the plan creates a new special 25 percent tax rate that was intended to benefit many small businesses, the rules for receiving that rate, spelled out for the first time in the tax bill Thursday, could prove onerous.
The 25 percent rate applies to business income that passes straight through to owners’ individual returns, rather than being taxed at the corporate level. Partnerships, sole proprietorships, and S-corporations are “pass-throughs.”
Tax experts warned that high-salaried individuals, such as lawyers and doctors, would try to game the system by re-classifying their salaries as contracted business income. In that way, they could lower their tax rate from as high as 39.6 percent to the 25 percent small business rate, even though they are not small businesses.
To prevent that from happening, the House GOP bill would set up a web of rules that will add to the complexity of the code.
Businesses could face a “70/30” rule, which would simply mandate that only 30 percent of their income be subject to the 25 percent rate, and the rest taxed at individual labor tax rates.
That rule could result in some legitimate businesses, such as manufacturers, not getting the full benefit of the rate. They would then face a disadvantage in competing with corporations, which would have a 20 percent tax rate under the GOP legislation.
As an alternative to the 70/30 rule, businesses could opt to have the IRS examine how much owners’ have invested in the business, and get the 25 percent rate on that ownership stake.
Another special rule would limit the rate from applying to income that looks like a salary, meaning that it’s paid out regardless of the company’s performance.
Other small business groups that had been major proponents of reform said they were worried about those rules Thursday.
"We will continue to work to ensure that for non C-corp small firms, the vast majority of small businesses, that the ‘guardrails’ developed provide fair and realistic rules that do not exclude legitimate profits from the lower rate, which is needed capital for small business growth and survival,” said Karen Kerrigan, head of the Small Business & Entrepreneurship Council.
Alfredo Ortiz, head of the Job Creators Network group, said that there is “much to like about this bill” but that the rules would need to be adjusted.
Small business support will likely prove critical to the bill's success. When groups like the NFIB opposed an effort by President Obama to reform business taxes, it failed.
Business groups that included large firms and C-corporations, however, sounded much more positive on the legislation. The U.S. Chamber of Commerce offered its support.
JPMorgan Chase CEO Jamie Dimon also said that the reform would be good “for all Americans,” while speaking in his capacity as chairman of the Business Roundtable, a group of big-business CEOs.
This post has been updated to correct the identification of the groups that include large businesses.