Trump Tax Plan’s Impact on Pass-through Entities Unclear

In an interview with CNBC last week, Republican presidential nominee Donald Trump opened the door to changes being made to his recently released tax plan to avoid so-called “pass-through entities” from being improperly used to avoid payment of taxes.

Pass-through entities, which include partnerships, limited liability companies (LLCs), and subchapter S corporations, pay no corporate income tax. Rather, they pass-through their earnings to the owners, who pay tax on their income at the individual rate. Many businesses engaged in the commercial real estate industry are organized as pass-through entities.

Trump has proposed taxing pass-throughs at a 15 percent rate, down from a top individual rate of 39.6 percent. Concerns have been raised by critics that people with high wage and salary income would attempt to reclassify their income as coming through a pass-through entity subject to the lower tax. Stephen Moore, an economist advising the Trump campaign on tax matters, stated that they “are absolutely dedicated to making sure the 15 percent is for legitimate businesses.”

The proposal also raises questions regarding Trump’s promise to end capital gains treatment of carried interest income that is currently taxed at 23.8 percent. Under Trump’s proposed 15 percent tax, investment managers receiving carried interest compensation could pay a lower rate than the current tax. The Trump campaign has stated that more detail regarding the tax proposals will be provided within the next two weeks.

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