The current tax reform has made business entity selection for new and existing businesses quite complicated for C corporations, and other pass-through businesses (think K1’s and Schedule C) There are tremendous factors based on your industry, size and structure of your organization.
C Corps which have been out of vogue in recent years to most businesses (and CPA entity choice) have gotten some new light, the new tax law reduces the maximum tax rate from 35% to now 21% flat. Remember that “distributions” in these entities are dividends, with a maximum tax of 23.8%, so hovering around 40% with the double tax.
Pass-Through Entities (S Corps and Partnerships) which now include Schedule C sole proprietors receive a new 20% deduction off qualified activity income, substantially reducing tax marginal levels near 31-32%.
Under prior law, most businesses benefited from the pass-through entity as it resulted in a lower tax rate. However, under the new code, special analysis must be conducted as major deductions have been eliminated or capped under the new individual code for 2018 going forward
The deduction for “qualified business income” appears to be straight forward at 20% of the income earned, however there are phase-outs, and how this is calculated based on your income and industry.
We often quote that simplicity can be expensive. It might be time to change your entity structure or break your business into new entities.