President Donald Trump signed his tax cut bill into law on Friday, December 22, 2017.
To say it introduces quite the shakeup to current legislation would be a major understatement.
At the same time, it might not last. Governor Cuomo of NY has vowed to challenge the bill and he’s not the only one.
Still, if you own your business, it’s not too early to begin thinking about how this new law will affect your normal tax planning practices.
How the Proposed Tax Cuts May Affect Tax Planning for 3 Types of Businesses
If you run a pass-through entity, these new tax cuts may end up changing the way you need to handle your tax planning.
For those of you unfamiliar with the term, a pass-through entity is any business where the owner is legally allowed to “pass through” their profits so they pay taxes on this as personal income.
The three main company types that fall under this umbrella include LLCs, partnerships, and S-corporations. Here’s how you’ll need to adjust your tax planning if you own one of these in light of the aforementioned changes.
1. The Corporate Cuts Don’t Affect Your Business
First and foremost, you may have heard that the plan cuts taxes for corporations. As a pass-through entity, though, you most likely don’t have revenues that would qualify for these cuts, so they don’t affect your tax planning in the least.
2. Pass-Through Businesses Will Get Taxed Less, But…
As you may already know, the legislation does include special new cuts for pass-through entities, so while your company doesn’t qualify for corporate taxes, it isn’t being left out.
In fact, many individuals may want to reclassify themselves as LLCs in order to take advantage of these cuts. If your business is run by a partnership, this is something to consider for tax planning purposes. The same goes for dentists, accountants, lawyers, and other professionals who own with their practices and make enough that they’d be taxed less under this new classification.
That said, at the moment, most pass-through entities pay 15% or less in taxes. So your taxes may actually not change at all. Unless you were paying more than that 15% at the moment, you don’t have much reason to change your tax planning practices.
3. Some Employees May Reclassify
A lot has been made of the 20% tax deduction for pass-through entities that is included in the bill. While some partners or sole-proprietors may decide it’s time to become an LLC instead, the same could apply to some of your employees, which would mean a major adjustment to your tax planning and bookkeeping.
This is probably not going to affect the vast majority of you, but it’s worth knowing about just in case. Also, given how much misinformation is out there about the bill, it’s worth knowing so you can explain the truth to any employee who asks you about the possibility.
Some employees may look at the 20% deduction and realize they’d be better off for tax purposes if they became classified as an LLC, but by doing so, they’d also have to forego employee benefits. That would mean paying for them by themselves. For most employees, this would only be possible if they received a raise. It might be worth it to the employer – one less benefits package to pay for – but that’s an awfully big “might.”
As you can see, there are a lot of variables involved with that massive decision, so don’t expect too many of your employees to propose the idea.
What You Should Do to Prepare
Again, at the moment, no one knows for sure exactly how this tax cut will affect the economy and individual businesses.
However, it is very unlikely that things will stay the same for you if you own a pass-through entity.
That’s why the best thing you can do now is to prepare for the potential changes we covered above. Marshall, Wazcheka and Patrick, CPA can help. We service pass-through entities in need of bookkeeping, tax planning, and accounting services, all of which may need to be adjusted for your business in the near future. Please Contact Us today to learn how we could do this for your unique business.