With the Tax Cuts and Jobs Act a new tax deduction for pass-through business income was created (LLC, S Corp, Partnership and Sole Proprietorship income). The deduction allows for a 20% deduction of qualified business income. There are a few limitations, but in general this means that 20% of business net income can be a deduction on the owner’s personal tax return. *

Before the Tax Cut and Jobs Act a C Corporation had a range of tax rates between 15% and 35%. After the Tax Cuts and Jobs Act the corporate rate is now a flat 21%. For most large corporations this is a win with a lower tax bracket, but if you were operating as a C Corporation with net profits less than $50,000 this is an increase of 6%.

For this reason we are seeing:

  • An increase in the formation of LLCs (Liability protection; lower state fees overall; less paperwork)
  • An increase in new Corporations electing S Corp status
  • Existing Corporations making elections from C Corp to S Corp status with the IRS

Sole Proprietorships are not recommended in an asset protection strategy. With a Sole Proprietorship there is no protection for personal or business assets.  A Sole Proprietorship has no Charging Order protection or “corporate veil protection”.

Nevada currently is the only state that has a Charging Order provision for closely held corporations.

* PLEASE NOTE: There are a few limitations to the Qualified Business Income deduction such as W-2 wage limitation; Service business limitation and higher income level limitation. Please seek advice from YOUR tax professional for your specific situation/goals. 

Some information contributed by Elite Bookkeeping & Tax Services.