Is It time to Rethink Your Business Entity Type? Find out now.
One of the first important decisions every business owner must face concerns the choice of legal business entity. Many businesses start as Sole Proprietorships. Often this choice is seen as a default because business owners are too busy participating in their core business activities delivering products and services to their customers, and have very little time or resources to evaluate alternatives. Prior to the passage of the Tax Cuts and Jobs Act (TCJA, Tax Reform), the first truly deliberated choice of business entity for many sole proprietors usually came down to a limited liability company (LLC) or an S Corporation. Setting up your business as a C corporation was rarely considered. The recent Tax Reform presents a major new factor to consider when deciding on the legal form of your business with the introduction of the 21 percent corporate tax rate.
Which business entities will benefit the most?
The Tax Reform brings new tax savings opportunities for virtually all forms of business, but it draws a clear line between two major categories – (1) pass-through and (2) C Corporations. Pass-through entities include sole proprietors, partnerships, LLCs and S corporations. Trusts and estates are also included in this category. In the simplest terms, the new law offers these entities a new 20% deduction on Qualified Business Income. This incentive is not permanent, however, and will expire in 2025, unless renewed. On important caveat here is that this deduction is allowed for income tax purposes only, it does not reduce the amount of income subject to self-employment tax. C Corporations, on the other hand, receive a permanent reduction of the top income tax rate from 35 to 21 percent.
Does this mean you should change your Business Entity Type?
This is a question best answered by a tax professional after a careful review of your individual circumstances. There are a lot of items that need to be addressed in order to accurately calculate the amount of Qualified Business Income deduction. Several factors that will be considered include the type of business you are in, the extent of taxpayer’s involvement in the active conduct of business, the amount of taxable income, filing status, value of business assets, amounts of W2 wages, etc. The new tax law presents additional tax planning topics concerning bonus depreciation, section 179 expenses, increased limits on luxury automobile depreciation and others. To avoid missing out, you will want to hire a tax professional. Contact us today to explore all available options and consider all possibilities.
Disclaimer:
This article does not constitute a tax or legal advice. Each taxpayer's tax situation is different and requires taking into account all individual facts and circumstances to furnish tax advice.