Senate tax bill may hurt entrepreneurs with income above $500K

Yin Bogu | Xinhua | Getty Images

People protest against tax reform on Capitol hill in Washington D.C., on Dec. 1, 2017.

Accountants sifting through the Senate version of the GOP tax bill are finding that some of their small business clients may indeed pay more under the proposed legislation.

Generally, the Senate bill will permit small business owners to deduct 23 percent of their income, allowing them to save on their taxes. This rate will be available to so-called pass-through entities, including S corporations and limited liability companies (LLCs).

The remainder of the income that isn’t deductible will be subject to regular income taxes.

Under current law, profits from a small business “pass through” to the owner and are taxed at his or her individual rate, which can be as high as 39.6 percent.

But accountants are saying that the bill isn’t quite so generous for entrepreneurs who already take deductions that exceed the Senate’s proposed 23 percent.

Service businesses, including lawyers and doctors, will also feel the pain if their taxable income exceeds $500,000 if married ($250,000 if single), as they will begin to phase into higher tax rates.

“At different ranges of income, you’re paying an obscene tax rate,” said Martin M. Shenkman, a certified public accountant and founder of Shenkman Law in Fort Lee, New Jersey.

“It forces business owners to take artificial steps to make sure they don’t fall into the cliff,” he said.

Here’s why the bill isn’t necessarily a giveaway to entrepreneurs – and what they can do about it.