Most of the time, entrepreneurs choose their business entity when they first start the business. Maybe a lawyer gave an opinion, or a website or Google search provided options or recommendations. Having the right business structure might not be a topic that’s revisited often.
But what was appropriate at the time of start-up may not still be optimal given your tax needs, and with regard to the recent tax reform.
Shiny promises in the tax reform
Understandably, some established business owners may be allured by the promise of a 21% flat corporate tax or a bonus deduction based on net income. But there are additional considerations aside from tax rates that business owners should consider about their entity formation under the new tax law.
Just a quick recap:
- So, corporations now enjoy a flat 21% tax rate. This is attractive, especially for taxpayers in a higher tax bracket like the 37%.
- But the corporation owner may have additional tax due on dividends which can range from 15%-20% and up (depending on additional charges like the net investment income tax or alternative minimum tax).
- The other type of business entities such as partnerships, sole proprietorships, LLCs and S corporations are what are known as “pass-through” companies.
- These pass-throughs have a special tax reform bonus deduction of up to 20% of qualified business income.
When does it make sense to restructure?
Considering the complexity of the new rules related to your taxable income, type of business, and how you earn income, it may make sense to restructure.
You must consider your current tax perks, but also your take-home income. There’s also your business activity. Weighing all factors matters in the distinction of your entity.