House Tax Bill Sets Limits on Pass-Through Tax Rate, Source Says

The American flag flies at the U.S. Capitol in Washington, D.C., U.S., on Wednesday, Sept. 27, 2017. President Donald Trump and Republican leaders will launch an urgent effort to get a major legislative win this year, announcing a long-awaited tax plan that will immediately set off a fight over how much top earners should pay. Photographer: Andrew Harrer/Bloomberg

The House tax bill to be released Thursday will include measures that prevent certain pass-through businesses from taking advantage of the proposed 25 percent rate, phase out the estate tax and boost the child tax credit to $1,600, according to a person familiar with the Ways and Means Committee’s deliberations.

So-called professional services as defined by the Internal Revenue Service -- doctors, lawyers and accountants, won’t be eligible for the 25 percent rate, said the person, who asked not to be named.

One of the most-watched debates has been around cutting the rate for income from so-called pass-through businesses -- such as partnerships and sole proprietorships -- and whether it would be limited to firms of a certain size. The bill sets a top pass-through rate of 25 percent -- down from as high as 39.6 percent currently.

Pass-throughs that aren’t professional services could choose to have 70 percent of their income taxed as wages -- at their individual top rate -- and 30 percent taxed as "business income" and subject to the 25 percent rate, the person said. Or companies could elect to be taxed at a ratio that would be determined by the level of their capital investment in their business, said the person.

While professional service companies won’t have the option to qualify for the 70-30 provision for pass-throughs, they can still incorporate as LLCs and even try to qualify for the capital investment formula on years that they might be expanding their business, for example, and have higher levels of investment. For most of these companies, however, their normal level of capital expenditure would be negligible.

On the individual side, the tax bill would gradually phase out the estate tax -- a 40 percent levy applied to estates worth more than $5.49 million for individuals or $10.98 million for couples.

Republicans had promised a more generous child tax credit -- key to ensuring middle-class families see relief -- but hadn’t provided specifics. The child tax credit would be increased to $1,600 from $1,000 per child under 17, with an additional $300 credit for each parent as part of a consolidated family tax credit, according to the person. The credit had been a priority for Ivanka Trump, who had met with lawmakers in recent weeks to discuss it.

House Ways and Means Chairman Kevin Brady cautioned that the bill was still a work in progress. “We’ll continue to listen and work,” Brady told reporters late Wednesday night. “We’ll continue to make improvements at every step.”

— With assistance by Colleen Murphy

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