Maybe I’m misunderstanding the rule, but here’s and example of what I thought this was about:
General contractor owns an LLC, brings in $300K net, pays himself $150K salary and takes the rest as pass-thru business income. Currently he gets taxed as if his total income were $300K, which would mean a 33% marginal rate for everything over $191K.
Under proposed rules his W2 income would be $150K and the other $150K would only be taxed at 25%.
I’m not sure where capital invested fits in, but maybe I’m oversimplifying something.[/quote]
Nope. Doesn’t work that way. First, that GC literally CAN’T pay himself on a W-2. Against current rules. All goes on schedule C if it’s a single member LLC. Under proposed law, substantially all his income would be taxed as if it is all W-2 income. Only passive income is taxed at the preferred rate. Schedule C income, for a business the owner works in, (or a similar LLC, with more than 1 partner, filing a partnership tax return) is, as a matter of law, not passive income, ergo, no tax preference under proposed law.
There probably WILL be ways around that problem, designs that make the tax preferences for that GC possible. That’s the shit I’ve been paid to find. But the law is designed, only non-working interests get the lower rate. It’s for investors. Not for taxpayers who start and grow small business.
And it’s clearly and unequivocally NOT a tax simplification.
