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Given the changes to the corporate tax rate and qualified business income deduction, you may be contemplating whether it would be beneficial to change your business structure to minimize tax liability. The recent changes under the newly passed Tax Cuts and Jobs Act have reduced the corporate tax rate to 21% effective 1/1/18 and will generally provide individuals with a qualified business income deduction of 20% from a partnership, S corporation, or sole proprietorship. This 20% deduction is subject to various limitations depending on the type of business, W-2 wages, unadjusted basis of qualified property, and your taxable income.
The rules regarding the above changes are quite complex where an analysis would need to be done based on your specific situation due to the various nuances. Some things you need to consider when thinking about converting to a C corporation because of the new corporate tax rate would be the accumulated earnings tax, if earnings are not distributed, and dividend income on distributions paid by the corporation if there are earnings and profits, which would be subject to a second level of tax. There is also a Personal Holding Company tax a corporation could be subject to depending on ownership and assets held by the corporation.
Other things to consider regarding the 20% qualified business income deduction would be whether the income will qualify based on the business conducted and any limitations based on wages paid. It will also be important to review the various state tax exposure by entity type.
We would be pleased to assist you in analyzing your organization’s structure to see if there would be opportunities in restructuring to potentially reduce your tax liabilities. We are available at your convenience to discuss further.