With the passing of the new tax bill, one area that has really created confusion and uncertainty affects individuals who own their business. Very often, your business is structured as a “pass-through” entity, meaning your business income is taxed at your individual tax rate.
The first question is if you should convert from a pass-through to a C corporation, not to mention what aspects of the new tax bill are being missed that could provide a cash tax savings.
This WSJ article covers a key aspect affecting pass-through entities that must be considered as part of this process.
Business owners across the country are puzzling through a new 20% tax deduction for pass-through businesses that was included in last year’s major overhaul of the U.S. tax code. Those firms—most U.S. businesses—don’t pay the 21% corporate income tax. Instead they put their business profits on their individual income-tax returns. These businesses include partnerships, limited-liability companies and S corporations. For those who qualify for the new deduction, it’s a significant benefit—a way to get a lower tax rate on business profits, taking the top rate from 37% to 29.6%. But it isn’t automatic.