When you first started your business, choosing an entity type was pretty much a no brainer, right? Your accountant probably asked a few questions and considered a few facts that would lead you in the right direction. If needed, your attorney weighed in.
If your business is like the majority, your choice came down to either an S corporation (S corp) or a Limited Liability Company (LLC). After you chose, you filed the paperwork and that was it. Filing as a C corp was most likely not even an option.
Since the passage of the Tax Cuts and Jobs Act at the end of 2017, entity choice is not so easy. It’s become a challenge for both new and established businesses. The new 21 percent corporate tax rate is enticing. Does it make sense to restructure your business?
Who will benefit most from the Tax Cuts and Jobs Act?
Virtually every business stands to benefit in some way. But for today’s discussion, let’s narrow it down to the two groups: 1) Pass-through entities, and 2) C corps.
What Are Pass-through Entities?
A pass-through refers to partnership types, LLCs and S corps. The reason the Tax Cuts and Jobs Act works well for pass-throughs because of the new 20 percent deduction on qualified business income. Before you get too excited keep in mind the deduction expires in 2025, unless another law is passed that will extend it.
What are C Corps?
A C corp is taxed separately from its owners. (An S corp generally is not taxed separately.) They have the widest range of deductions and expenses allowed by the IRS.
Unlike the 20 percent deduction for pass-throughs, this change to the corporate rate is permanent. The top rate will remain the same until congress changes it.
So … Does it Make Sense for YOU to Restructure?
It seems you’re at a crossroads. Unless you’re an international mega-corp that’s taxed as a C corp, the answers may not be immediately evident. Unless you have a crystal clear vision of the future, it may not make sense to change your structure.
But the fact is, you are probably part of the 90 percent of US businesses organized as pass-throughs. Your decisions are far from simple. Before you consider making any changes in your type of entity, you would be best served by getting the answers to a lot of questions first.
The best choice you can make right now is to get the clarity you need to make sound decisions about your business direction in these changing times. We can help. Give us a call.