The House Ways and Means Committee today released a draft of tax reform changes affecting small businesses.  The most important part of this draft is a "reset button" on how small businesses with multiple owners are taxed.  There are also smaller changes envisioned which will make life much easier for entrepreneurs.

Small Business Taxation 2.0.  For decades, small businesses with two or more owners have had to choose between two forms of "flow-through" taxation that were never coordinated, never made much sense, and were ultimately the product of political compromise.  Partnerships and S-corporations have been unwieldy ways for simple businesses to organize themselves. 

This discussion draft clears the decks, creating a brand new set of rules for these companies.  It actually reads as if the taxation of pass-through entities were to be legislated on purpose (imagine that).  The current system is more akin to something between a car wreck and a Salvador Dali painting.

Fallback provisions for pass-through reform.  As an additional option in lieu of more comprehensive pass-through small business tax reform, the draft provides a series of rifle-shot, common sense fixes for S-corporations and partnerships.  These ideas are based off of bipartisan proposals which have been introduced as legislation and talked about for many years in tax policy circles.

Permanent small business expensing.  The W&M draft makes small business expensing ("Section 179") permanent.  This means that small businesses will forever be able to deduct up to $250,000 of tangible personal property from business income, the rest subject to multi-year and complex depreciation deductions.  Examples of this property include computers, software, business machinery, smartphones, tablet devices, furniture, copiers, and other assets vital for any small business to function.  If small employers spend the money to buy these assets, they should be able to deduct them that same year off their taxes.

In the context of comprehensive reform.  This discussion draft for small businesses needs to ultimately be placed in the larger tax reform context.  Since small business owners are taxed at ordinary income tax rates, the income tax rate schedule is ultimately the most important component of small business tax reform.

The FY 2014 House budget today makes it clear that the Ways and Means Committee is moving toward a system with an individual rate no higher than 25 percent (down from 39.6 percent plus a 3.8 percent surtax under current law).  When this budget target is combined with the common sense small business tax reforms contained in the draft released today, it's easy to see how the groundwork is being laid for more robust economic growth and job creation.

Posted by Ryan Ellis on Tuesday, March 12, 2013 5:57 PM EDT

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