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Wiley Rein Tax Lawyer Michael Grace Comments on Tax Rates for Passthrough Entities

Bloomberg BNA’s Daily Report for Executives
September 12, 2017

Michael J. Grace, consulting counsel in Wiley Rein’s Corporate and Tax practices, was quoted in a September 11 Bloomberg BNA article regarding discussions in Congress over lowering tax rates for corporations and passthrough entities, such as partnerships and most limited liability companies. Because corporate profits are also taxed when dividends are distributed, they incur a second layer of taxes.  Many in the business world will accept a slightly higher rate for passthrough entities because, unlike corporate profits, their profits are not subject to “double taxation.” 

While Republicans have called for a 20 percent corporate tax rate and a 25 percent passthrough rate, some Republican aides on the Hill have privately suggested it would prove difficult to get the corporate rate below 28 percent, and that wouldn’t give lawmakers much room for a preferential passthrough rate especially if individual tax rates are also cut.

For passthrough entities such as partnerships, it is unlikely that a rate change would trigger an influx in changing their status to corporations. According to Mr. Grace, passthrough entities continue to be popular because they avoid the double taxation experienced by corporations.   

“Partnerships are very pragmatic,” Mr. Grace said. “They [partnerships] are basically saying, ‘Look, I don’t think the administration has the political clout to push through a 15 percent rate. Even if it’s higher than 15 percent but lower than the combined corporate rate, I’m still better off in the passthrough regime than as a corporation.’”

To read the full article, please click here.