Law Firms May Face Tax Increase with New Small Business Definition

In August, the Treasury Department released a report that redefines what constitutes a small business.  Previously, pass-through entities were often used as a proxy for being a small business.  The Treasury study limits the number of small businesses by:

1.  Claiming that any business with over $10 million of gross revenues or  deductions is not really small, and

2.  Claiming that any business that comprises less than 25% of an owner’s adjusted gross income is not really a business.

This new Treasury “study” is a transparent effort to reduce the identified size of the small business community, and thereby minimize the impact that raising taxes will have on them.  Practically all lawyers and other professionals use a pass-through entity to avoid double taxation of their business income.  Currently, there is no size limitation in order to qualify as a partnership, S-corporation or other pass-though entity.  This pass-through tax treatment is being challenged by those seeking tax increases.  A more thorough discussion of this issue can be found here.

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