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How Does the Tax Cuts and Jobs Act Affect My Choice of Entity?
The Tax Cuts and Jobs Act that was signed at the end of last year ushered in many sweeping changes to the US tax code. Pretty much every taxpayer has been affected by the new legislation, and many businesses have been curious about how new tax rates and other stipulations will affect their operations. If you find yourself questioning whether you have the most advantageous business structure, you may benefit from talking with a Fort Worth small business lawyer.
One of the biggest questions for business owners after the new tax legislation concerns choice of entity. Many businesses choose to operate as a pass-through entity in order to utilize the capital gain tax rate if it comes time to sell assets down the road and to prevent double taxation.
Other businesses decide to structure as a C corporation to take advantage of different tax rates that could come into law.
Choice of entity usually comes down to the specific components of a business. This can include the types of owners, the jurisdiction that a business is in, the type of business and the industry it is in, and any specific desires when it comes to paying taxes
Should My Choice of Entity Change After the New Tax Bill?
A big change under the Tax Cuts and Jobs Act was the slashing of the corporate tax rate to 21%, making the switch to a C corporation an attractive one. C corporations can also fully deduct state and local taxes under the new bill. Businesses who intend to reinvest their profits might find it advantageous to switch their entity to a C corporation.
Another difference under the new tax legislation is a new Section 199A 20% deduction. Businesses can qualify if they have income that is less than $157,000 (single) or $315,000 (joint). This deduction does go away if taxable income for those without wages or property exceeds $207,500 as a single or $415,000 (joint).
Switching your choice of entity to a pass-through business like a S corporation or partnership can make a business eligible for the 20% deduction and help save money on self-employment taxes. Businesses who are looking to redistribute profits to owners would find it prudent to switch to an S corporation or partnership to utilize the Section 199A deduction.
Since much of the tax legislation is intended to spurn innovation and investment across the United States, changing your businesses’ structure could reap big benefits down the road if the stipulations remain in place for many years.
What Should I Do If I Want to Change Entities?
When it comes to entity choice, there is not a blanket one-size-fits-all answer. There is a lot to think about when it comes to deciding what type of entity works best for a business. If there are questions about your choice of entity after the Tax Cuts and Jobs Act, speaking with an experienced small business attorney will be your best option. They will be able to go over the pros and cons of each business structure while taking the tax legislations’ stipulations into account, and be able to render advice about actually changing entities. Contact the Law Office of Carey Thompson today to discuss the most advantageous structure for your business.