The Tax Reform and Jobs Act passed by the Republican Congress in December has been widely described as the most sweeping changes to tax code in recent history. How will these tax reforms affect your business?
While we are not tax experts, we do want to make you aware of some of the issues that might affect one of your largest budget line items, so you can talk to your tax accountant as necessary. Over the next few months, we will explore some of the tax reforms most relevant to business owners and operators.
New Corporate Tax Rate
The tax rate for companies designated as C-Corporations (Inc.) has been lowered from 35 percent to 21 percent. That might make some business owners wonder if they should change their business status from a Pass-Through or S-Corporation (sole proprietorships, partnerships, LLCs, and SCs) to a C Corp.
In short, is it time to incorporate?
There is no straight answer for that question. In truth, it will depend on your individual situation.
Put as simply as possible, Pass-Through companies pay taxes at the owner’s income tax rate, capped at 25 percent (with the first 20 percent deductible). That means a sole proprietorship – if making enough income – could potentially pay a higher tax rate than a large conglomeration. However, size is not an indicator of corporate structure. A large family empire could reasonably be structured as a Pass-Through, as well.
In most cases, the additional fees, regulations, and reporting required for C-Corporations will make restructuring not worth the tax break. Only your tax accountant or lawyer will be able to determine the pros and cons of making that switch.
March 15, 2018, Deadline to Make That Decision
If you do decide that changing your corporate designation – in either direction – would be beneficial, you should be aware of the deadline for making the switch. For your company’s corporate status to impact your 2018 taxes, your company must make any change to its structure by March 15, 2018. Now is the time to discuss the best course of action with your tax advisors.