In wake of the new tax law, many business owners are asking themselves if changing the way their companies are structured could cut their tax bills. Recently, this topic was the feature of an article in The Wall Street Journal:
Ruth Simon (Feb. 22nd, 2018) For many entrepreneurs, the big question is whether to operate as a C corporation, which pays its own taxes to the Internal Revenue Service or as a pass-through company, which pays tax through individual rather than corporate returns. Pass-through businesses include S corporations, sole proprietorships, and limited liability companies.
The clock is ticking. Many business owners have until March 15 to make an election that would be retroactive to the beginning of 2018.
The rethinking of corporate structures is one byproduct of the new tax bill, which cuts the corporate tax rate to 21%, down from a top rate of 35%, though owners pay a second tax on profits distributed as dividends. – The Wall Street Journal. Retrieved from https://www.wsj.com
The top individual tax rate will also see a cut to 37%, down from 39.6%. And even though not all owners of pass-through business qualify, there are many that will be able to deduct 20% of their pass-through income, reducing the top effective rate to 29.6%.
Mr. Joe Maak CEO of Pride Resource Partners expressed his option on this topic. During an interview with The Wall Street Journal, he explained how his company will soon be operating as a C corporation instead of Limited Liability Company, “If we incorporate, our tax burden is only 21%,” Mr. Maak said. This decision comes after knowing that PRP LLC will not qualify for the 20% pass-through deduction for state and local taxes.