{"id":253979,"date":"2017-11-07T14:30:00","date_gmt":"2017-11-07T19:30:00","guid":{"rendered":"https:\/\/admin.rushlimbaugh.com\/?p=253979"},"modified":"2017-11-08T16:05:15","modified_gmt":"2017-11-08T21:05:15","slug":"rush-explainer-pass-through-income","status":"publish","type":"post","link":"https:\/\/admin.rushlimbaugh.com\/daily\/2017\/11\/07\/rush-explainer-pass-through-income\/","title":{"rendered":"Rush Explainer: Pass-Through Income"},"content":{"rendered":"

RUSH: Now, “pass-through.” There are terms that become accepted in usage among people in specific businesses, and only they really know what it means, and these terms serve to confuse other people. In many businesses, that\u2019s a desire to keep people not in the business confused about what is being said, what things really mean. In this case, “pass-through” is simply a term to describe an entity where income passes through and ends up in the recipient in a different form. So let\u2019s say… By the way, this is not possible if you are a salaried or hourly or wage employee.<\/p>\n

\"\"You cannot do this. This is strictly for small businesses, medium-size businesses. But if you earn a wage from which taxes and other charges are withheld, then you don\u2019t qualify. Now, there\u2019s exceptions to everything. Let\u2019s say that you work as a middle manager at a bank, and you\u2019re really valuable to this bank. You could go to them and say, “You know what? I want you to hire me as a consultant, and I want you to pay me exactly what you pay me now but you pay me the gross and I\u2019m gonna set myself up as Big Business Banker, LLC.”<\/p>\n

If you could convince your employer to hire you that way, then what I\u2019m going to suggest here you could do. This is essentially the way a small business is organized under the rules called subchapter S. I don\u2019t know what “subchapter” means; I don\u2019t know what “S” means. Don\u2019t worry about it. It\u2019s just what it\u2019s called. It\u2019s like blue is a color. You don\u2019t question it. It\u2019s just what it is. The best illustration of this, by the way, is John Edwards. The best illustration of the hypocrisy of this is John Edwards.<\/p>\n

It all became clear when Congress passed a new Medicare tax, separate from the Social Security payroll tax. The Medicare tax is… I\u2019m not sure what the number is now, but we\u2019ll go with 3.5% or 3.9% on everything you earn. Unlike Social Security, it doesn\u2019t end once you hit a certain salary ceiling — or floor, as it is. So you organize as a subchapter S, and you are the ABC Widget Company, and your business generates… I\u2019m gonna use elevated numbers here for the sake of ease of explanation. Let\u2019s say that your business earns a $1 million a year. That\u2019s how much people pay you.<\/p>\n

You have different people paying you for your service, and each of them pay a different amount. It\u2019s what you charge them versus how much work you do for \u2019em. That gross of $1 million dollars — if you were not sub-S, if you\u2019re just an individual, independent contractor — you\u2019d report all of that as income, and you\u2019d pay taxes on all of that as income minus the standard deduction, minus whatever else you get. Plus the Medicare in toto you would pay. If you organize as a sub-S, you take that $1 million and you decide to pay yourself $100,000.<\/p>\n

That means $900,000 stays in your business. It doesn\u2019t mean you can\u2019t touch it. It\u2019s just not income to you taxed at personal income tax rates. So you assign yourself a $100,000-a-year income, and you pay yourself, and you deduct your federal taxes. You deduct your Social Security and your Medicare from that $100,000, not your $1 million. You can pay yourself $500,000 if you want. You can pay yourself $250,000. You pay yourself whatever you want. But the purpose here is to be able to have as little exposure to income tax as possible.<\/p>\n

\"\"So you earn $1 million gross; you pay yourself $100,000. You pay yourself twice a month like everybody else, and the sum total of your checks that you pay yourself equals the $100,000 minus the deductions. That\u2019s the pass-through. The sub-S becomes the pass-through, and in that way, $900,000 of the $1 million you earn is not taxed at personal income tax rates. It\u2019s taxed at business rates — or, in this case, the pass-through rate of 25%. Otherwise, this example would be paying 39.6%.<\/p>\n

Now, you can do all kinds of things with this. So your business is grossing $1 million a year, but you\u2019re only paying Medicare tax on $100,000 of it, and you\u2019re only paying income tax on $100,000 of it. So what happens to the other $900,000? That\u2019s up to you. You can use some of it to bonus yourself at the end of the year and make that business and job performance related, and it might have a different tax rate. You keep that money plowed into the business so that you\u2019re investing into other aspects of the business so that it\u2019s growing.<\/p>\n

So that the $1 million you\u2019re earning becomes $1.5 million the next year or what have you. Now, I found the best way to illustrate this is John Edwards, the former Democrat presidential candidate and big, bleeding-heart liberal. His most recent presidential campaign theme was “two Americas.” (impression) “There\u2019s the poor America and the wealthy America,” and he would run around and talk to people. “Why are you poor? What does it feel like? How are you getting\u2019 by?” He would go on and on about how America was unfair and unjust and this and that and everything.<\/p>\n

And then it was learned (because he ran for office, filed his tax return, and made \u2019em public), he had a net worth of something like $35 million or $50 million, and he was paying a Medicare tax that was minuscule. Finally people looked into it, and they found out that he was paying himself an income every year of like $60,000, and therefore paying income tax rates only on $60,000 instead of everything he earned because he\u2019d set himself up as a Subchapter S corporation. There was nothing illegal about it. There\u2019s nothing illegal about anything I\u2019m telling you. Not a thing.<\/p>\n

All of this is perfectly legal. Now, there are limits, restrictions. (sigh) It\u2019s not a license to steal, but in the example I gave, you can earn $1 million gross in your small business and pay yourself a salary of $100,000 and report income only on that $100,000. Now, the odds are that if your small business is grossing $1 million dollars it\u2019s costing you a lot to produce that so you\u2019ve got a lot of expenses. You may have employees you have to pay in addition to yourself. So that $900,000 that is not being paid to you, is being spent on business expenses and employees and their health care.<\/p>\n

\"\"I don\u2019t mean to describe this as it\u2019s a way to make out like a bandit. But when John Edwards did it and when people found out, they were floored. They were shocked. “John Edwards was cutting corners and not paying the full Medicare tax? Why, that\u2019s for people who can\u2019t afford health care, and he\u2019s a big Democrat liberal concerned about sick people. He was trying to avoid it?” Damn right he was, like everybody tries to avoid taxes. It\u2019s the smart thing to do! Tax avoidance is not tax cheating. Tax avoidance is not illegal.<\/p>\n

Tax avoidance is simply taking advantage of rules and laws. And the pass-through law, they\u2019re trying to encourage more of this by lowering the small business tax rate down to 25%. If you could pay 25% on your income instead of 39.6%, wouldn\u2019t you do it? If you find a legal way to do it? Now, if you\u2019re a salaried employee, if you\u2019re a wage earner, you can\u2019t do any of this, you\u2019re not an equity, you\u2019re not a small business owner.<\/p>\n

But people who are entrepreneurs, who invest to start their own businesses, take that risk, these kinds of things are open. There\u2019s LLCs, there\u2019s subchapter S, there\u2019s C-Corps, any number of things, but the sub-S is basically the pass through-here. And the reason why it\u2019s big is because what the sub-S rules allow is for small business owners to file their business taxes on their personal income tax return. And that\u2019s why the sub-S is an attractive option for small businesspeople. You don\u2019t need two books, you don\u2019t need two separate tax returns, one for your personal income, the other for business. You can combine them. It makes it all much easier.<\/p>\n

Now, it\u2019s much more work too. Once you have to start paying yourself, you\u2019ve gotta figure out what to deduct and you\u2019ll have to hire an accountant to pay yourself. You\u2019ll have to hire somebody to run the books here. I don\u2019t want to paint a picture of it\u2019s easy to steal money. But that\u2019s what the pass-through is, and that\u2019s how it operates, and that\u2019s how people can limit their exposure to high income tax rates by claiming much less of their earnings as earned income instead of business income.<\/p>\n

All of it\u2019s legal. And there are a lot of people that do it. There are a lot of American small business owners that file their business returns on their personal income tax form. And that\u2019s why Ryan and his gang are making such a big deal out of reducing the pass-through rate<\/a>, which is basically the sub-S rate down to 25%. It\u2019s a much, much smaller rate than the 35 or 39.6 would be. So I hope that helps explain it. A lot of people do this just to avoid paying the full boat on Medicare.<\/p>\n

\"\"If you earn a million dollars a year — again, just to use this number — and you do not avail yourself of the opportunity to organize, you\u2019ll pay 3.4% of that million-dollar gross on Medicare. You\u2019ll have a ceiling that you reach on Social Security, where after you — I don\u2019t know what it is now — you earn 200 grand a year, you stop making Social Security deductions. But Medicare is on every dollar you earn. And 3.4% of a million, that\u2019s a lot of money that you can avoid paying if you organize sub-S. And that\u2019s one of the reasons people do it. And the people that wrote the tax code knew this was gonna happen. Nothing illegal about any of this. And there\u2019s nothing illegal about trying to avoid paying as much tax as you can.<\/p>\n

Now, liberal Democrats will try to criminalize it and they\u2019ll try to say it\u2019s a moral failure. That you ought to be paying more than your fair share if you\u2019re the rich because you\u2019re not paying enough. Of course, this is all bunk. But that\u2019s, again, why such a big deal is made on the improvements they\u2019re making to the pass-through rate.<\/p>\n

BREAK TRANSCRIPT<\/p>\n

RUSH: That\u2019s right. Pass-through income is business income claimed on individual tax returns. Instead of facing the corporate income tax, it passes through the business to the business owners tax at their individual tax rates. That\u2019s the best summation of the pass-through I can give you.<\/p>\n","protected":false},"excerpt":{"rendered":"

RUSH: There are terms that become accepted in usage among people in specific businesses, and only they really know what it means, and these terms serve to confuse other people. <\/p>\n","protected":false},"author":49,"featured_media":251423,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_et_pb_use_builder":"","_et_pb_old_content":"","_et_gb_content_width":"","ngg_post_thumbnail":0},"categories":[12,1],"tags":[],"yoast_head":"\nRush Explainer: Pass-Through Income - The Rush Limbaugh Show<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/live-rush-limbaugh.pantheonsite.io\/daily\/2017\/11\/07\/rush-explainer-pass-through-income\/\" \/>\n<meta name=\"twitter:card\" content=\"summary\" \/>\n<meta name=\"twitter:title\" content=\"Rush Explainer: Pass-Through Income - The Rush Limbaugh Show\" \/>\n<meta name=\"twitter:description\" content=\"RUSH: There are terms that become accepted in usage among people in specific businesses, and only they really know what it means, and these terms serve to confuse other people.\" \/>\n<meta name=\"twitter:image\" content=\"https:\/\/www.rushlimbaugh.com\/wp-content\/uploads\/2017\/10\/FB-101917-Complex.jpg\" \/>\n<meta name=\"twitter:label1\" content=\"Written by\" \/>\n\t<meta name=\"twitter:data1\" content=\"George Prayias\" \/>\n\t<meta name=\"twitter:label2\" content=\"Est. reading time\" \/>\n\t<meta name=\"twitter:data2\" content=\"9 minutes\" \/>\n<script type=\"application\/ld+json\" class=\"yoast-schema-graph\">{\"@context\":\"https:\/\/schema.org\",\"@graph\":[{\"@type\":\"WebSite\",\"@id\":\"https:\/\/admin.rushlimbaugh.com\/#website\",\"url\":\"https:\/\/admin.rushlimbaugh.com\/\",\"name\":\"The Rush Limbaugh Show\",\"description\":\"Excellence In Broadcasting\",\"potentialAction\":[{\"@type\":\"SearchAction\",\"target\":{\"@type\":\"EntryPoint\",\"urlTemplate\":\"https:\/\/admin.rushlimbaugh.com\/?s={search_term_string}\"},\"query-input\":\"required name=search_term_string\"}],\"inLanguage\":\"en-US\"},{\"@type\":\"ImageObject\",\"@id\":\"https:\/\/live-rush-limbaugh.pantheonsite.io\/daily\/2017\/11\/07\/rush-explainer-pass-through-income\/#primaryimage\",\"inLanguage\":\"en-US\",\"url\":\"https:\/\/www.rushlimbaugh.com\/wp-content\/uploads\/2017\/10\/FB-101917-Complex.jpg\",\"contentUrl\":\"https:\/\/www.rushlimbaugh.com\/wp-content\/uploads\/2017\/10\/FB-101917-Complex.jpg\",\"width\":600,\"height\":315},{\"@type\":\"WebPage\",\"@id\":\"https:\/\/live-rush-limbaugh.pantheonsite.io\/daily\/2017\/11\/07\/rush-explainer-pass-through-income\/#webpage\",\"url\":\"https:\/\/live-rush-limbaugh.pantheonsite.io\/daily\/2017\/11\/07\/rush-explainer-pass-through-income\/\",\"name\":\"Rush Explainer: Pass-Through Income - 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