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Treasury: 97% of small-business owners won't face income tax increase under Biden tax plan

WASHINGTON, DC - AUGUST 18: U.S. President Joe Biden delivers remarks on the COVID-19 response and the vaccination program in the East Room of the White House on August 18, 2021 in Washington, DC. During his remarks, President Biden announced that he is ordering the United States Department of Health and Human Services to require nursing homes to have vaccinated staff in order for them to receive Medicare and Medicaid funding. The President also announced that Americans would be able to receive a third booster shot against Covid-19. (Photo by Anna Moneymaker/Getty Images)
WASHINGTON, DC - AUGUST 18: U.S. President Joe Biden delivers remarks on the COVID-19 response and the vaccination program. (Photo by Anna Moneymaker/Getty Images) (Anna Moneymaker via Getty Images)

Ninety-seven percent of small-business owners will not face an income tax increase if President Biden's tax plan becomes law, according to new analysis released by the Treasury Department on Thursday.

Biden is seeking to raise taxes on corporations and the wealthiest Americans to help fund a $3.5 trillion plan that would include major investments in education, child care and the fight against climate change.

The tax plan would make several tax changes including raising the corporate tax rate to 28% and restoring the top marginal individual income tax rate to 39.6%.

The new Treasury analysis looked exclusively at small businesses filing as S-corporations, partnerships and on individual income tax returns. The Treasury Department said most small businesses file taxes as a pass-through entity (LLCS, S-corps and sole proprietorships) — which don't pay a corporate tax. The business reports its income on the owner's individual tax return and is taxed at individual income rates.

The new analysis found raising the top income bracket to 39.6% — the rate before the 2017 tax cuts went into effect — would mean higher taxes for less than 3% of small-business owners.

The tax plan would also extend the expanded Child Tax Credit and include tax credits for small-business owners buying coverage through the Affordable Care Act. The White House said those changes would translate to tax cuts for 3.9 million small-business owners.

The administration did not address how raising corporate taxes would impact small businesses subject to the corporate tax rate. The National Federation of Independent Businesses has previously argued more than 1 million small businesses could see a tax increase if the corporate rate goes up.

"Even if many of these small firms don’t report any taxable income now, many wish to grow over time, perhaps go public, and will be impacted by the corporate rate increase in the Biden plan," said Alex Durante, a federal tax economist at the Tax Foundation, in a statement to Yahoo Finance.

The administration is planning on passing the $3.5 trillion plan, including the tax hikes, through the budget reconciliation process. The House will return to Washington next week and plans to take up the budget resolution, which lays the groundwork to pass the spending bill with only Democratic votes.

The budget blueprint has already passed the Senate, but a divide between progressive and moderate Democrats could make House passage difficult.

Jessica Smith is chief political correspondent for Yahoo Finance, based in Washington, D.C. Follow her on Twitter at @JessicaASmith8.

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