Our Charleston business lawyers have been busy unpacking the new 2018 tax law. One of the most important considerations under the new tax law is the choice of business entity and tax structure for new or existing businesses, especially limited liability companies. The new 20% tax deduction for “pass-through income” from sole proprietorships, partnerships, and S corporations may result in significant tax savings for our business clients (but the application of these deductions is quite complicated). While the double-taxation scheme applicable to C corporations generally made small business owners (prior to 2018) opt for a pass-through structure, the reduced corporate tax rate under the new law may level the playing field. The new tax law now provides for a flat 21% tax rate for corporations. Unlike changes to the individual tax scheme, which are temporary and somewhat piecemeal, the changes to the business tax scheme are permanent.
If you have service business or a professional business, such as an accounting firm, law firm or medical entity, and your taxable income exceeds the threshold amount plus the phase in range ($207,500 for individual taxpayers and $415,000 for married taxpayers filing jointly), then it is possible that you may lose the deduction completely. In that case, the old pass-through rules apply meaning you pay tax using your individual tax rate. For all other businesses, such as real estate investment firm, if your taxable income exceeds the threshold amount, the wage (and capital) limits begin to kick in. The wage (and capital) limit applies fully for a taxpayer (other than the aforementioned service business) when taxable income exceeds the threshold amount plus the phase in range.
The rules governing this new tax law deductions are extremely complex and the pass through deduction generally will not be available for high income owners of most service businesses. However, owners of operating businesses and certain real estate investments may see a significant benefit.
If you are starting a new business in 2018 or are looking to covert your current business’s tax structure, please contact one of our Charleston business lawyers for more information. We provide flat fee business organization services for most new businesses. If you are looking to form a real estate investment limited liability company, please contact our Charleston real estate attorney for more information.