Buzz
A last-minute provision included in the Republican tax reform could provide a tax cut for individuals using real estate shell companies, with 14 Republican senators personally benefiting, according to the International Business Times.
Utah Senator Orrin Hatch, who introduced the provision, is among those benefiting. This is due to his wife holding a share in a real estate LLC that earned income in 2016, which qualifies as a 'pass-through' entity. The newly added provision permits owners of such pass-throughs (including private real estate firms) to receive a 20% deduction on taxable income.
So, what exactly is a pass-through entity?
Essentially, a pass-through entity is a business that doesn’t pay corporate income tax. These include sole proprietorships, partnerships, and S-corporations. According to the Brookings Institute, roughly 95% of businesses in the U.S. are classified as pass-throughs, which traditionally enjoy a lower tax rate compared to large C-corporations.
As Joe Rosenberg, a senior research associate at the Urban-Brookings Tax Policy Center, explained on NPR, pass-through profits are transferred to the business owners. They then report this income on their personal tax returns and pay taxes on it along with their other regular income.
While many pass-through entities are small businesses, this isn’t always the case. For instance, law firms are typically set up this way. The new provision would specifically allow owners of large real estate holdings through LLCs to deduct a portion of their 'pass-through' income from taxes, reports IBT.
This specific pass-through provision has sparked controversy since it was not included in earlier versions of the House or Senate bills. IBT reports that 14 Republican senators have financial stakes in qualifying real estate partnerships, worth up to $105 million. President Trump also 'owns or directs over 560 companies, most of which are LLCs or LPs' (though we could understand how the tax plan impacts him personally if he would just release his tax returns).
The House passed the Tax Cuts and Jobs Act this afternoon, and the Senate is expected to vote later tonight.
