4 New Tax Limitations Effecting Businesses in 2018
What is business without some changes and some challenges? The first quarter of 2018 has business owners questioning the new tax law and its effects on business.
The main changes in tax and business can be grouped into two types of legal entities: the corporations and the pass-through entities.
Corporations generally include C-Corporations (Corp. or Inc.), Professional Corporations (P.C.), and Limited Liability Companies (LLC) choosing to be taxed as Corporations. For these entities, the tax reform is quite clear: starting in 2018, profits will be taxed at a flat rate of 21%. Pre-reform, they were taxed at 35%, so most corporations will see a drastic decline in their next tax bill. The hope of the tax law’s proponents is that they will use this extra income to spur domestic growth and attract better talent. Recent news seems to indicate that corporations are already re-investing their savings.
For as straightforward as the tax reform is for corporations, it is seemingly more complex for the generally smaller pass-through entities. These include sole proprietorships, partnerships, Limited Liability Companies (LLC) electing to be taxed as a partnership, Single-Member LLCs, and S-Corporations. These pass-through entities are offered up to a 20% deduction on their business income via Section 199A; however, there are some strings attached.
String #1: Threshold Amounts
The threshold amount is a pre-determined amount of income under which, the full 20% deduction is achieved. Any taxpayer having income over the threshold amount is subject to the other “strings” listed below. The threshold amount for an individual taxpayer is $157,500 and $315,000 for married taxpayers filing jointly.
String #2: Specified Service Trade or Business
Specified service trade or businesses include: service businesses in the fields of health, law, consulting, athletics, financial services, brokerage services, and “any trade or business where the principal asset is the reputation or skill of one or more of its employees or owners,” except for engineering and architecture.
If a business falls into this category, and the taxpayer(s) income exceeds a “phase-in” amount, then no deduction is achieved. The phase-in amounts are $207,500 for individual taxpayers and $415,000 for married taxpayers filing jointly.
String #3: Wage and Capital Limit
The wage and capital limit comes into play when a taxpayer is over the threshold amount, and it provides a formula that erodes the taxpayers’ deduction to less than the full 20%.
String #4: Phase-In
Phase-in begins when a taxpayer(s) income is over the threshold amount. The 20% deduction is reduced by a calculated applicable percentage rate. The resulting rate is applied against the tentative 20% deduction to achieve the final deduction amount.
Even given the above mentioned “strings,” most pass-through entities will continue to find savings with the new tax law. However, where an LLC filing as an S-Corp may have once provided the best tax advantages for a particular company, with the new tax laws, a C-corporation may better serve their needs; or vica versa. With tax reform comes entity restructuring.
Make sure that your business continues to be in the smartest entity for its industry and income level; contact your tax advisor or CPA and your business attorney for advice specific to your situation. In partnership with Phoenix Tax Consultants, we are offering ½ day comprehensive tax and entity structure consultations. To schedule, send a quick email to firstname.lastname@example.org.
Janelle Snyder Peyton is the CEO and Managing Partner of SnyderLAW, an award-winning boutique law firm providing the highest quality general counsel and intellectual property legal services to companies at predictable and reasonable rates via a service called Scribe®. The firm offers brand building strategies through corporate and intellectual property law, including business entity formation, contract drafting and review, joint venture agreements, trademark and copyright protection, and licensing & franchising.