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Companies exempt from federal income tax growing daily

By Catholic Online (NEWS CONSORTIUM)
January 11th, 2012
Catholic Online (www.catholic.org)

The numbers of companies that pay no federal income tax are growing daily. According to the Wall Street Journal, he companies are taking advantage of a special structure that passes profits along to investors who then pay the taxes.

LOS ANGELES, CA (Catholic Online) - These companies are called "pass-throughs." Rather than taking advantage of tax loopholes by hiring a brigade of accounts, the companies are set up to shuttle company profits along to investors, who subsequently pay taxes on their individual tax returns.

According to the Wall Street Journal, the pass-throughs, which have been around for decades are legal and have actually been encouraged by Congress and state governments, Pass throughs have recently been broadened recently to spur entrepreneurship.

In addition, pass-through tax treatment means that the taxes of a business are "passed through" to the tax return of the individuals owning the business. Sole proprietorships, partnerships, most LLC's, and Sub-chapter S corporations qualify for pass-through status. Pass-through status also means that these business entities are not subject to double taxation, as are corporations.

There is no IRS rule stating when the owners of a company must make cash distributions to owners or shareholders. Corporate shareholders, however, typically negotiate legal agreements before they get into business together that cover such items as distribution guidelines.

The Journal reported that 69 percent of U.S. corporations were organized as nontaxable businesses in 2008, up from 24 percent in 1986, and that the percentage is actually higher when including partnerships and sole proprietors.

Larger companies are often set up as pass-throughs, with an estimated 60 percent of U.S. businesses with profits of $1 million comprising this category, which remains the largest, such percentage in any developed country.

The U.S. corporate tax rate is 35 percent, but pass-throughs are a major reason why federal corporate tax collections made up only 1.3 percent of U.S. gross department product in 2010, which is down from 2.7 percent in 2006.

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