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1 William McBride, et al., Tax Treatment of the Pass-through Business Sector: A Primer 1 (2026)

handle is hein.taxfoundation/txtremps0001 and id is 1 raw text is: *TAX FOUNDATION Tax Treatment of the Pass-Through Business Sector: A Primer Feb. 2026 William McBride Chief Economist & Stephen J. Entin Fellow in Economics Emily Kraschel Federal Tax Policy Fellow Huaqun Li Senior Economist Key Findings * The pass-through business sector-including partnerships, S corporations, and sole proprietorships- employs most of the private-sector workforce in the US and accounts for about half of US business income. * The growth of the pass-through sector is linked to long-standing tax advantages, as business income earned by traditional C corporations faces higher effective tax rates due to the corporate tax at the en- tity level and shareholder taxes on dividends and capital gains. Recent changes, including the Section 1 99A deduction, generally preserve these tax advantages. * Pass-through entities face certain limitations, and their tax filing is relatively complex, costing US tax- payers more than $100 billion per year to comply with various tax forms. * Reforming the tax treatment of US pass-through businesses has the potential to greatly reduce com- pliance costs while improving economic growth. * A coherent business tax system that is simple, neutral across business forms, and pro-growth requires fundamental changes. A key goal should be a more fully integrated corporate and individual income tax code, combining the organizational and financing advantages of C corporations with the neutral tax treatment of pass-throughs. The Tax Foundation is the worlds leading nonpartisan tax policy 501 (c)(3) nonprofit. For over 80 years, our mission has remained the same: to improve lives through tax policies that lead to greater economic growth and opportunity. TAX FOUNDATION 1325 G STREET, NW, SUITE 950, WASHINGTON, DC 20005 202-464-6200 1 taxfoundation.org