HR 3275 cuts rates for small corporations and self-employed, closes hedge fund loophole

What does this do?

HR 3275 makes four changes to federal tax law: it creates a tiered corporate rate for smaller companies, reclassifies carried interest income as ordinary income, expands the self-employment tax deduction for lower earners, and raises the excise tax on stock buybacks from 1 percent to 1.5 percent. Corporations earning up to 5 million dollars a year would pay 18 percent on their first 400,000 dollars of income and 21 percent above that, while larger corporations remain at 21 percent on all earnings. Self-employed workers earning under 400,000 dollars a year could deduct three-quarters of their self-employment taxes, up from one-half.

Who does it affect?

The bill primarily affects small business owners, self-employed individuals earning under 400,000 dollars a year, and investment fund managers at hedge funds and private equity firms. Corporations earning more than 5 million dollars a year are not affected by the rate change.

Why does it matter?

Investment fund managers who currently pay the lower capital gains rate on carried interest income would instead pay the higher ordinary income rates that apply to wages, and would face a 40 percent penalty for attempting to circumvent the new rules. Companies that repurchase their own shares would face a higher excise tax under the revised 1.5 percent rate.

What does it cost, and who pays?

• Corp rate drops to 18% on first $400K
• Stock buyback tax rises 1% to 1.5%
• 40% penalty for carried interest evasion

Where does it stand?