As you are probably well aware, we may soon see sweeping new tax laws around the country.
If you own an LLC, S corporation, or partnership, you’re probably trying to keep track of what the proposed changes would mean for your business and bottom line.
Although nothing is set in stone yet, the following will give you a good primer on how these cuts would affect your tax planning and bookkeeping.
How the Cuts May Change Tax Planning for LLCs, Partnerships, and S Corporations
If the proposed tax cuts go through, one of the groups that would face the biggest impact would actually be “pass-through entities.”
In laymen’s terms, a pass-through business is any company where the owner is able to “pass through” the profit it makes to their personal income and pay taxes on it that way.
So instead of facing a corporate tax or some other type of entity-level tax, if you run a pass-through business, you just pay taxes as anyone else would on their personal income.
LLCs, partnerships, and S corporations are all pass-through entities.
Currently, people who own pass-through entities may have to pay up to 39.6% on 30% of their company’s income. If the GOP bill passes, that rate would shrink down to 25%.
This would not be a small change for most businesses. In fact, if these numbers remain in the bill that gets passed, it will be the lowest rates pass-through companies have seen in more than 75 years.
Is Now the Best Possible Time to Own a Pass-Through Entity?
These numbers may lead you to believe that there’s never been a better time to run an LLC, S corporation, or partnership.
That’s not necessarily the case, though.
The proposed tax cuts for businesses could drop rates for corporations, too. They would go from 35% to 20%, which could make it less than what pass-through taxpayers will have to shoulder. Whereas many corporations in 1986 quickly moved to convert into partnerships after major tax reforms were passed, we could see the opposite transformations this time around as many pass-through entities scramble to limit their tax exposure.
What These Tax Breaks Could Mean for Your Employees
Finally, it’s important to consider what these reforms might mean for your staff. If your company is like most pass-through entities, a large portion of your bookkeeping has to do with your employees.
While it’s unlikely to happen en masse, some salaried employees may quickly realize that they’d take a larger sum of their income home if they reinvented themselves as an LLC. As an independent contractor or consultant, they could continue working for your business while enjoying the pass-through deductions.
Tax Planning for Whatever the Future May Bring
As it stands, no one knows for sure what the future holds. This certainly includes proposed tax cuts.
Fortunately, that doesn’t mean your only option is to wait around and see what happens.
Instead, plan ahead with help from Marshall, Wazcheka and Patrick, CPA.
Whatever Washington decides, you’ll rest easy knowing you have Marshall, Wazcheka and Patrick and their team of accounting experts in your corner, ready to advise you on your best options for ensuring your company’s future. Contact Us today to learn how we can help.