If you’re a business owner, you’re probably under some sort of tax category when you first registered your business. Well, did you know there is a new tax reform in the works that could possibly change all that?
The new tax reform, which is expected to be signed into law by President Trump, comes with many benefits for both individuals and business entities, including as C-Corporations. Under the current tax structure, business entities can be structured in the following ways:
- Sole Proprietorship—taxpayers do not file a separate tax return, instead, business income and expenses are reported individually.
- Partnership (General and Limited)—Partnerships file a separate return, and passes income and losses to the individual partners (Members) who report that information on their individual tax returns.
- Limited Liability Company (LLC)—A hybrid entity that offers the option to be taxed as a partnership or a corporation.
- Single Member Limited Liability Company—An LLC with a single member, usually treated as a “disregarded entity” for federal tax purposes, and is taxed the same as a sole proprietorship.
- C-Corporation—A C-Corporation pays any tax due, and its shareholders also pay taxes at their individual income tax rates for dividends or other distributions from the C-Corporation, also known as “double taxation.”
- S-Corporation—An S-Corporation passes most items of income or loss to its shareholders, who are each responsible for reporting that information on their individual income tax returns.
Currently, the corporate tax rates range between 15% and 39%. However, under the new tax reform, the maximum corporate tax rate will be 21%, the lowest it has been since 1939, making many pass-through entity owners consider corporate reorganization as a C-Corporation. The decision for pass-through entities to reorganize as a C-Corporation should depend on more than just the amount of money brought in annually, and there are both pros and cons that come with this decision.
The cons to reorganize as a C-Corporation, are that C-Corporations are double taxed, first at the new corporate tax rate of 21%, and the second when the owners pay out dividends. Having a double layer of taxation, a pass-through entity reorganized as a C-Corporation would not receive the advantage of this new tax reform, because it would be double taxed, which defeats the whole point of being a pass-through entity. On the other hand, if a pass-through entity does not pay out any dividends, and instead is going to re-invest its profits back into the business, the pass-through entity reorganized as a C-Corporation would likely receive the tax benefit of a flat 21% corporate tax rate. Thus, only being taxed once, instead of twice. Another type of pass-through entity that is likely to receive a benefit for reorganizing as a C-Corporation is a professional services corporation, which includes legal counsel, financial consulting, doctors’ offices, accounting firms, and more. The new tax code does not allow personal services corporations to be eligible for the pass-through deduction, making a reorganization as a C-Corporation a practical option for obtaining tax benefits under this reform.
If you or someone you know will be affected by this new tax reform, please contact us at (786) 837-6787 or email us firstname.lastname@example.org to set up a meeting so we can discuss the advantages and/or options for reorganizing your pass-through entity as a C-Corporation.
*Disclaimer: This blog post is not intended to be legal advise. We highly recommend speaking to an attorney if you have any legal concerns. Contacting us through our website does not establish an attorney-client relationship.*