Incorporation may be answer for small business

UHLC Prof. Bret Wells addressed tax reform as part of Legal Excellence speaker series

Bret Wells

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Feb. 1, 2013 – A faculty tax expert at the University of Houston Law Center told members of the Houston business and legal communities Tuesday if business tax reform this year produces a top corporate tax rate of 28%, then small businesses may find it advantageous to restructure out of pass-through entities and into C corporations. Assistant Professor Bret Wells’ presentation "Tax Reform Implications for Small Business Owners” was part of the Law Center’s Legal Excellence speaker series.

The United States has the highest corporate tax rate among its major trading partners, and there is significant support within Congress for reducing the US corporate tax rate so that it is comparable to the rate of other OECD member countries. Furthermore, the Obama administration in its own framework for business tax reform indicated that it supported a top corporate tax rate of 28% if the reduction in the top corporate tax rate were paid for by revenue offsets.

“Business tax reform could lead to significant reincorporation of pass-through entity businesses,” Wells said. “A reduction in the corporate tax rate will likely be funded by cutting tax loopholes.”

The first step in the ongoing tax reform discussion occurred this January when Congress enacted the American Taxpayer Relief Act of 2012. This legislation extended the Bush-era tax cuts for middle class Americans but raised the top individual income tax rate to 39.6 percent for families earning $450,000 or more and for individuals earning $400,000 or more. The top capital gains and dividend tax rate also increased to 20 percent for those earning above the $450,00/$400,000 income thresholds, said James M. Streets, CPA and tax director at Pannell Kerr Foster of Texas, P.C.

However, the government needs an additional $6 trillion in revenue and/or spending cuts to be revenue neutral, according to the Congressional Budget Office’s Alternative Fiscal Scenario Adjusted for ATRA. The structural deficit is growing due to the retirement of Baby Boomers which will increase 33 percent by 2022.

“While it is difficult to imagine that individual tax rates will go down given the size of the deficit, the top corporate tax rate may decrease as part of an overall compromise proposal that seeks to address the budget deficit and also seeks to enact broader business tax reform,” Wells said.

What would individual rates at 39.6 percent and corporate rates at 28 percent mean for small business, Wells questioned.

“It is a fair assumption that it will be favorable for small businesses to avail themselves of C corporate form to benefit from lower corporate tax rates if the business owners expected to reinvest their profits back into their business,” Wells said.

This scenario would return the U.S. tax system to a tax planning paradigm that would resemble the paradigm that existed prior to 1980 where top marginal individual tax rate exceeded the top marginal corporate tax rate.

The series will feature three additional lectures by Law Center professors. Topics include:

  • Feb. 27 -
"Affordable Care Act: What it Means for Texas" presented by Patricia Gray, UH Law Center professor and director of research in the Health Law & Policy Institute
  • March 21 - "Shaping Houston's Future: Energy & Environment Law and its Effect on Houston's Business Opportunities" presented by Tracy Hester, visiting assistant professor and director of the Environment, Energy & Natural Resource Center
  • April 25 -
"International Trade, NAFTA, Pipelines and the I-69 Corridor" presented by Stephen Zamora, Leonard B. Rosenberg Professor of Law and director of the Center for U.S. and Mexican Law

The lectures are free and open to members of the Houston business and legal community. One hour of participatory CLE credit will be awarded to attorneys in attendance. All lectures will be held from 11:30 a.m. to 1 p.m. at the
Hilton Americas Hotel in Houston, 1600 Lamar. Please RSVP to or call 713-743-2107.


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