Under the tax code, businesses are categorized into two basic categories – corporations and pass through firms. Based on how they choose to organize, they face drastically different tax, legal, and employment consequences.
If a businesses is organized as a corporation, it typically calculates profits by subtracting expenses from revenue and then pays a federal corporate income tax rate of 35 percent, plus a state corporate rate which averages over 4 percent.
Businesses organized as pass-through firms don’t pay taxes themselves. Instead, the profits of the business “pass through” to the owners who pay individual taxes on their 1040 form. Typically, this means that pass-throughs pay a higher rate than corporations, exceeding 50 percent in some states.
For many small businesses or startups this results in a significant competitive disadvantage that makes it harder to compete with businesses organized as corporations.
To address this issue, Congressman Vern (Buchanan (R-Fla) today introduced the Main Street Fairness Act, legislation that ensures small businesses are taxed equitably when compared with corporations.
In support of this legislation, ATR President Grover Norquist released a letter hailing Rep. Buchanan’s proposal as pro-small business, pro-taxpayer legislation.
The Main Street Fairness Act ensures that any business organized as a pass-through does not pay a rate greater than the 35 percent rate paid by corporations. This important change will help ensure that businesses are on a level playing field for decades to come.
A key goal of tax reform should be taxing businesses equally, not discriminating based on arbitrary laws, and the Main Street Fairness Act helps ensure this goal becomes reality.