By now, whether you are an accountant, attorney, business owner, tax enthusiast, or simply an individual or business that files taxes, you have heard of the tax reform signed into law by President Trump on December 22, 2017 — better known as the “Tax Cuts and Jobs Act.” Depending on who you talk to, the Jobs Act is great or it is a disaster. Regardless of the perspective, it is a change in laws that impact us all and being aware of the changes that come with it is important. It is worth noting that this is the largest and most significant change to the United States Tax Code since 1986.
On an individual level, the Jobs Act modifies the tax brackets for individuals, while preserving the seven-bracket regime. The highest bracket is now 37%, down from 39.6%. While at first glimpse this is a positive change for individuals, the Jobs Act also made substantial changes to available deductions and exemptions. For example, the Jobs Act nearly doubles the standard deduction and child tax credit, while itemized deductions are reduced up to 80% for taxpayers with income meeting a certain inflation-adjusted threshold.
For businesses, taxes often play a large role in determining how to structure the business — will it be an LLC, an S-Corporation, a C-Corporation, or otherwise? Initially, as understanding of the tax bill increases, many may prefer forming as a corporation. This is directly correlated with the fact that the corporate income tax rate has been reduced down to a flat rate 21%. Additionally, while the law previously allowed corporations to claim a deduction for dividends received, the Jobs Act reduces the deduction to reflect the lower flat tax.
Smaller businesses, who often do not take the structure of a corporation, are typically pass-through entities. This includes sole proprietorships, partnerships, LLCs, and S-Corporations. To be a pass-through entity means the entity is not subject to income tax. Rather, the owners are directly taxed individually on their income. This means that the pass-through entities pay higher than the 21% rate for C-Corporations. To make up for this disparate treatment of entities, pass-through entities are afforded a new deduction of up to 20% of their net business income. This is a deduction in addition to other available business deductions.
Determining how to structure a business, how to hold income, or how to pay shareholder-employees requires understanding the tax implications. Without a sufficient understanding, individuals and businesses may not be appropriately minimizing their tax liabilities. It will be important to reach out and seek assistance to save yourself from increasing your tax liabilities or missing out on available methods of saving.