Pass-Through Entity Taxation And New Tax Law

Like baseball, young love, and hay-fever, we’ve entered the high season for taxes.

New this year, however, we begin to react to changes in the tax reform law of December 2017. The point of that law was to make the world safe for businesses and their owners, who received healthy tax cuts. If you were not already a business owner, I’m sorry to say the tax reform was really not about you. But, I quipped at the time the bill was passed, you should hurry up and form your LLC or C-Corporation in order to participate in the tax reform largesse. If you are neither a business owner, nor planning to take my advice to form your own business entity, may I make another suggestion? Just go outside and forget reading today’s post about business taxes. Enjoy the day. It’s beautiful out there. I love Spring! Buh-bye.

Ok, great, now that it’s just us business owners, let’s get into the nitty-gritty details.

I’m sure you already know that traditional corporate owners – people with C-Corps – won big in December by getting tax rates on profits dropped from 35 percent to 21 percent. High Five! That was awesome.

But the main thing to dig into here is not about traditional C-Corps, but rather the more flexible businesses like limited liability companies (LLC), limited liability partnerships (LLP) or sole proprietorships.

A huge range of businesses, including especially small businesses, choose this type of business structure for the greater flexibility, low costs, and ease of administration.

As you no doubt already know, profit from these so-called “pass-through entities” – LLCs, LPs or sole-proprietorships – has for taxation purposes generally been passed through to the owners, just as if they were salaried employees. This means that a high-earning LLC owner potentially pays high tax rates, because personal income tax rates are much higher than corporate rates. Starting in 2018, that highest personal rate is 37 percent – which is now so, so much higher than the corporate tax rate of 21 percent.