PAYSTUBMAKR.COM article about the Business structure under the 2017 Tax Reform
In the past years, choosing a structure for your business was that simple that it was not given to much importance, you cloud seat with your accountant and lawyer discussing some issues and mostly took one of two Pass Through options: a Limited Liability Company (LLC) or S corporation.
The 15th-century bishop of Tournai is shown receiving a tithe of beer from tenants on his lands. The beer was commonly used to pay taxes and tithes in the Middle Ages.
The owners could take their choice, sign the required documentation, start operating and practically did not care about the business structure they have chosen.
The C corporation was rarely considered or used.
This was changed by the Congress Tax Cuts and Jobs Act (TCJA) that was signed into law on December 22nd, 2017,
The Tax Cuts and Jobs Act (TCJA) changed the reality for a long time pass-through businesses or future businesses owners; they could not ignore the new 21% corporate tax rate.
This article will review the options opened to business owners about the business structures to use under the new tax law.
What entity structure is preferred to use under the 2017 Tax Cuts and Jobs Act (TCJA)
The TCJA was made to favor the world of businesses, all type of companies and partnerships. We will review the most important structures, pass-through entities, and C corporations.
A pass-through entity got a special benefit from the new tax law, “ 20% deduction on qualified business income” the favorite law will take part only from the 2018 tax-year to 2025 tax-year. An Overview of Pass-through Businesses in the United States
Taxpayers at the 15th century
The C corporation got a big chunk of the cake; the top rate was given a dive from 35% to 21%. the moment that it was announced business owners ran to their accountants or tax consultants to see if it is a good idea to change their corporation to a C Corporation
The 21% cake is for an unlimited time unless the Congress will make a new tax law
Is it worth to restructure your company to save 14% on your tax rate
It is not easy to answer, so there is not an easy response, if you are a multinational corporation and you pay your taxes as a C corporation, it is not a question you need no changes in your structure. The C corporations got the biggest piece of cake for the years to come, until new Congress may change the tax law again.
You will need to answer the questions and make clear some combined possibilities before you can decide on changing your company type, though it might be an unclear answer.
What are the structures that will have benefits from a restructure
First answer this questions:
What is your business revenue?
Are your business is a pass-through and above the 20 percent deduction threshold of $157,500/$315,000 (single and married filing jointly, respectively) and pass the phase-out of $50,000/$100,000, then you may benefit if you make the change to a C corporation,
The different kinds of business
Service businesses like law or accounting firms or other “trades or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees or owners,” will have benefits from changing to a C corporation.
Marketplace in the 15th century, no VAT no paperwork, no deduction from payroll
Where the money ends is important for taxation
You can read the New York Times Hacking the TaxPlan: Ways to profit Off theRepublican Tax Bill
And take advantage of the tax planning offered in this article.
Keeping the money in a C corporation paying only the 21% tax rate is a good idea if you do not need the money right away, taking the money from the corporation will make you pay tax on it on your tax return which can be up to 37%.
Pass-Through entities do not pay taxes as a taxpayer but their owners pay taxes only on a personal base. This way there is no double tax.
Other factors to take into consideration
What is the total saved money by changing the business structure?
As business is all about numbers that means money numbers, how much it will cost you to change your entity structure vs. how much you are going to save, is an important question and answer to put clear.
The cost of changing your company type
Register your company at the state your business was first registered; there are fees to pay for the change and fees that are annually paid, it is depending on what type of entity you are changing.
Doing the change is a job to do, are you going to do it yourself or let your accountant and lawyer do it and count on their bills charging you their fees. Put the numbers on a piece of paper or a spreadsheet and see what is the profit and cost balance, is it worse the headache and the dollars?
Liability exposure is the core difference between the companies structures; unlimited liability can cost you more than the tax saving savvy tricks. See that you have a limited liability before any decision about tax and entity type is taken.
IRS and changing your company structure
We have to wait and see how the Treasury Department and Internal Revenue Service (IRS) will interpret the new law and what will be the way they will apply the law in real life.
Change your entity type depends on the following
The new tax law made it an interesting idea to change the type of company you are having now. Before taking any decision, do not count only on your reading the law and the options, a tax consultant will know better than you, you better pay some consulting than fall in a pit along the way Should I be a C Corp? Choice of Entity after Tax Reform
PAYSTUBMAKR.COM team thanks you for reading this article.