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4 Tax Factors in Choosing Your Form of Business

4 Tax Factors in Choosing Your Form of Business

By    |   Monday, 02 July 2018 09:52 AM

Forming a business under the recently enacted Tax Cuts and Jobs Act requires serious considerations of four tax factors.

Among the sweeping changes impacting all taxpayers were substantial and complicated provisions revising the taxation of tax pass-through businesses, like partnerships, limited liability companies and subchapter S corporations, and regular corporations.

Whether a tax pass-through form of business or a regular corporation (known in tax circles as a C-corp.) will be best for you depends on a careful analysis by a tax professional.

What is the interplay of rates and potential qualified business deduction?

A pass-through business owner could potentially pay up to a 37% tax rate. If the 20% qualified business deduction is applicable, the rate comes down to a top rate 29.6%.

The regular corporate rate was reduced by the Tax Cuts and Jobs Act from 35% to 21%. But if the dividends are distributed out of the corporation to the shareholders, then the shareholders pay tax and the applicable rate could then exceed 29.6 %.

Adding a bit of uncertainty to the planning is the fact that the qualified business deduction is scheduled to be phased out after December 31, 2025. The rates for regular c-corps will continue.

Typical for the way Congress drafts tax legislation, the broad category of a qualified trade or business, which get the 20% deduction, excludes a significant number of business categories defined as specified service business.

What are these?

The tainted service businesses are those involved in health, law, consulting, athletics, financial services, brokerage services; and where a trade or business is dependent on the reputation or skill of an employee or owner; and where services services involve investment management, trading, securities dealing, partnership interests, or commodities.

Additional exceptions to the deduction allowable deal with owner-employees, guaranteed partnership payments, or payment for partners services.

The exception to this exception applies to taxpayers earning less that $157,000 (joint $315,000) until these taxpayers earning another $50,000 (joint $100,000) where a phase-out starts.

There are more qualifications and computations needed to determine the total amount of qualified business income which is allowable for the 20% deduction. Needless to say, it takes a lot of work or a very good computer program to figure all this out.

Whether you should chose a form of business which for tax purposes is treated as a tax pass-through or a regular C- corp will take a balancing of factors to figure out relative cost and benefit.

What’s the bottom line in this new tax regime?

The potential for reduced rates mean significant tax savings for small business and large corporations like multi-national. Large service oriented businesses get a break although in comparison a rather meager one.

The change in tax rates provides more capital to be retained and used by private businesses and individual owners or shareholders because less cash is siphoned off by government.

And that is a very good thing.

The decision tree by a taxpayer in choosing the right form of business for minimizing tax on future operations involves essentially an analysis of basically four tax factors.

Although tax professionals are awaiting additional regulations and other guidance on these substantial tax reforms, the fundamentals are known and present unprecedented tax planning opportunities.

If you haven’t started to work on making sure you are operating under the best form of business to minimize tax, then now is the time to get started.

Denis Kleinfeld is known as a strategic tax and wealth protection lawyer, widely published author and creative teacher.

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The potential for reduced rates mean significant tax savings for small business and large corporations like multi-national. Large service oriented businesses get a break although in comparison a rather meager one.
tax, factors, choosing, form, business
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2018-52-02
Monday, 02 July 2018 09:52 AM
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