President Donald Trump's tax reform plan includes a section that is meant to help small businesses, but it appears Wall Street financiers could be the ones to reap the benefits.

"This is a revolutionary change, and the biggest winners will be the everyday American workers as jobs start pouring into our country, as companies start competing for American labor, and as wages start going up," Trump said Wednesday after he announced the plan.

Trump's proposal includes the most sweeping changes to the federal tax code in decades but leaves many important questions unanswered, including how to pay for the estimated $5.8 trillion in tax cuts. Republicans leaders must clarify those points and sell the plan to lawmakers before it can advance.

One of the key points in the reform plan is a reduction in the corporate tax rate to 20 percent, from 35 percent. It also calls for a new "pass-through" tax rate of 25 percent, which could mean large savings for mom-and-pop businesses. Here are three things you need to know about this change, which would affect a huge number of U.S. businesses.

  1. The pass-through rate applies to non-public businesses, like partnerships and sole proprietorships. These businesses don't pay income taxes; instead their profits "pass through" to the owner, who then pays taxes on them at an individual tax rate. About 95 percent of the businesses in the U.S. are structured as pass-through companies.
  2. Trump's plan could open the door for wealthy individuals to incorporate as pass-through businesses and take advantage of the tax savings. Entities like venture capital and hedge funds are partnerships and also could qualify unless Congress were to implement a way to block them. Ron Wyden, a Democrat on the Senate Finance Committee, told CNBC that Trump's plan would create "a whole new set of wealthy individuals being able to dodge their taxes through this new provision."
  3. Tax experts told CNBC that it would be difficult for Congress to exempt such partnerships from the pass-through rate. What's more, Frank Clemente, the executive director of the liberal advocacy group Americans for Tax Fairness, said the notion that the pass-through rate would aid small businesses was "simply a hoax."

"There has always been talk of how to carve out 'good' pass-through income from 'bad' pass-through income," Seth Hanlon, who works with the Center for American Progress, told CNBC. "The problem is it's exceedingly hard to do and there is no way to draw clear lines that won't be manipulated."

Published on: Sep 28, 2017