Hyden, Miron & Foster, PLLC Law Blog

Friday, February 16, 2018

Rethinking Entity Choice Under the Tax Cuts and Jobs Act

The new Tax Cuts and Jobs Act has made modifications and changes to a wide variety of areas in the US Tax Code. Many business owners are now considering if their choice of entity is going to make a difference in how much they will be taxed. Talking to a skilled Arkansas tax law attorney can help clear up any doubts.

Businesses usually have the option of being taxed as a C corporation or a pass-through entity. C corporations put the tax burden on the entity, while pass-through companies require the individual owner to pay taxes. Most businesses choose to operate as a pass-through entity in order to avoid being subject to double tax and to take advantage of the capital gain tax rate if they decide to sell the businesses’ assets down the road.

Much of the decision making process towards choosing an entity stems from the businesses jurisdiction and the number of owners. Many of the changes in the GOP tax bill were intended to make investments in the United States more attractive for those who were interested in moving to other jurisdictions.

There are a couple of specific changes in the new tax legislation that have had some business owners thinking about changing their operating style.

What Are Some Changes?  

One of the biggest changes from the tax reform is the creation of the Section 199A 20% deduction. In order for business income to qualify, you need a taxable income that is below $157,000 as a single, or $315,000 if filing a joint statement. The deduction goes away for those with taxable income of more than $207,500 (single) and $415,000 (joint) unless there are wages or property.

Changing your businesses to an S corporation can help you take advantage of the 20% deduction even if you did not qualify before. A change can also give the ability for a business owner to save money on self-employment taxes while qualifying for the Section 199A deduction.

Another option would be to change an existing pass-through entity to a C Corporation in order to take advantage of the new 21% corporate tax rate. The new tax bill also got rid of the alternative minimum tax. However, there is the potential these new tax rates could be modified or even expire in upcoming years if action is not taken to keep them in their current structures.

How Do I Know If I Should Change Entities?

In general, business who are looking to use their profits to reinvest in themselves should think about taking advantage of the new corporate tax rate by changing to a C corporation. Businesses who would like to dole out profits to the owners should try and maximize the deductions under Section 199A.

Converting a partnership to a C corporation usually can be done tax free, but changing a C corporation to a pass-through one will require you to pay taxes on appreciated taxes. Some business owners choose to have part of their operations conducted by a C corporation and others through another structure.

If you are concerned about your tax status and want to maximize your tax savings, call us today to arrange a free case consultation with an experienced tax-planning attorney at Hyden, Miron & Foster, PLLC.

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