{
  "id": "R42359",
  "type": "CRS Report",
  "typeId": "REPORTS",
  "number": "R42359",
  "active": true,
  "source": "EveryCRSReport.com",
  "versions": [
    {
      "source": "EveryCRSReport.com",
      "id": 585982,
      "date": "2017-10-24",
      "retrieved": "2020-01-02T13:59:13.304502",
      "title": "Who Earns Pass-Through Business Income? An Analysis of Individual Tax Return Data",
      "summary": "Pass-through businesses\u2014sole proprietorships, partnerships, and S corporations\u2014generate more than half of all business income in the United States. Pass-through income is, in general, taxed only once at the individual income tax rates when it is distributed to its owners. In contrast, the income of C corporations is taxed twice; once at the corporate level according to corporate tax rates, and then a second time at the individual tax rates when shareholders receive dividend payments or realize capital gains. This leads to the so-called \u201cdouble taxation\u201d of corporate profits.\nThis report analyzes individual tax return data to determine who earns pass-through business income. The analysis finds that in 2011 over 82% of net pass-through income was earned by individuals with an adjusted gross income (AGI) over $100,000, although these taxpayers accounted for just 23% of individual returns with pass-through income. A significant fraction of pass-through income is concentrated among upper-income earners. Taxpayers with an AGI over $250,000, for example, received 62% of pass-through income, but accounted for just over 6% of returns with pass-through income. Individuals with an AGI in excess of $1 million earned about 32% of pass-through income, while filing roughly 1% of all returns with pass-through income\nThe findings change slightly when the data for each organizational type are analyzed separately. Nearly half of sole proprietorship income was earned by individuals with an AGI of $100,000 or less. Taxpayers with an AGI between $100,000 and $500,000 earned 39% of sole proprietor income. Individuals with an AGI in excess of $1 million earned 6% of sole proprietor income. Partnership net income was more concentrated among upper-income individuals with nearly all of it accruing to taxpayers with AGI in excess of $100,000, including nearly 48% accruing to those with an AGI over $1 million. Nearly all of S corporation income was also earned by taxpayers with an AGI over $100,000, but a greater share of S corporation income than partnership income was earned by those with an AGI over $1 million\u2014about 52%.\nWho earns pass-through income may have important implications for tax reform. Recent tax reform discussions have included taxing pass-through income at a lower rate than the current rate. While lowering the tax burden on pass-through income could potentially stimulate the economy, particularly in the short-run, it could also reduce the progressivity of the tax code given the share of pass-through income that is attributable to the upper end of the income distribution. Tax reform could also result in pass-through income being taxed at lower rates than labor income. This could lead some taxpayers to characterize labor income as business income to minimize taxes. Additionally, a tax rate reduction on pass-through (or corporate) income does little to simplify the tax treatment of businesses. The majority of the complexity in the tax system is the result of special tax incentives such as exclusions, credits, and deductions, formally known as \u201ctax expenditures.\u201d Finally, reducing taxes on pass-through businesses could have important budgetary and revenue impacts.",
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      "typeId": "REPORTS",
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    },
    {
      "source": "EveryCRSReport.com",
      "id": 400603,
      "date": "2012-02-16",
      "retrieved": "2016-04-07T00:15:20.388639",
      "title": "Who Earns Pass-Through Business Income? An Analysis of Individual Tax Return Data",
      "summary": "Pass-through businesses\u2014sole proprietorships, partnerships, and S corporations\u2014generate more than half of all business income in the United States. Pass-through income is, in general, taxed only once at the individual income tax rates when it is distributed to its owners. In contrast, the income of C corporations is taxed twice; once at the corporate level according to corporate tax rates, and then a second time at the individual tax rates when shareholders receive dividend payments or realize capital gains. This leads to the so-called \u201cdouble taxation\u201d of corporate profits.\nThis report analyzes individual tax return data to determine who earns pass-through business income and bears the burden of taxes on that income. The analysis finds that over 82% of net pass-through income is earned by taxpayers with an adjusted gross income (AGI) over $100,000, although these taxpayers account for just 23% of returns filed. A significant fraction of pass-through income is concentrated among upper-income earners. Taxpayers with AGI over $250,000, for example, receive 62% of pass-through income, but account for just over 6% of returns with pass-through income. A closer look at S corporations and partnerships shows passive income accounts for 10% and 25%, respectively, of their total income. This analysis, when combined with research on the corporate tax burden, suggests that higher-income taxpayers will generally bear most of the burden from increased pass-through taxes.\nA number of proposed and scheduled tax changes would result in pass-throughs paying higher taxes. Several lawmakers and the Obama Administration, for example, have expressed interest in taxing large pass-throughs as corporations, which would subject some pass-throughs to an additional layer of taxation. Pass-through taxation could also increase if a tax reform that includes lower corporate tax rates that are paid for by the elimination or reduction of certain business tax benefits is enacted. Additionally, the scheduled expiration of the 2001/2003 tax cuts at the end of this year could increase taxes on pass-throughs by increasing individual tax rates. Lastly, a new 3.8% tax on passive income that was enacted as part of the Health Care and Education Reconciliation Act of 2010 (HCERA, P.L. 111-152) is set to take effect in 2013. The tax may apply to some pass-throughs.\nWhile the analysis of these proposed and scheduled changes suggests that higher-income taxpayers will generally bear most of the burden from increased pass-through taxes, there are circumstances that could raise congressional concern. For example, an across-the-board expiration of the 2001/2003 individual tax rates will increase taxes for all pass-through owners. One option for preventing the tax burden from increasing for lower and middle class business owners is to allow the reduced rates to expire only for higher-income earners. \nConcern has also risen over the new 3.8% tax on passive income and its effect on pass-throughs. The distributional analysis in this report shows, however, most S corporation and partnership income is the active type, and active business income is exempt from the 3.8% tax. The share of income that is passive, and potentially subject to the new tax, overwhelmingly accrues to higher-income taxpayers\u201477% of passive partnership income and 93% of passive S corporation income went to taxpayers with AGI over $250,000. Sole proprietors could generally be expected to be exempt from the tax since most of their income is likely active.",
      "type": "CRS Report",
      "typeId": "REPORTS",
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  ],
  "topics": [
    "Economic Policy"
  ]
}