2018 Federal Tax Law Changes

The 2018 tax law changes show that one of the only ways left to save on federal taxes is to own businesses. A business can write off, within certain limits, things like interest, travel expenses, the purchase of business related items and rent.  The new law heavily favors almost all types of business formations. Here are some of our tips on how to benefit from the new tax law.

C-Corporations

The tax on C-corporations was cut from a high of 39% to a flat 21%.  A C-Corp is the only type of company you can leave money in and not pay personal taxes on it, while that money remains in the company.  So this type of company is a good way to build up money to purchase other companies, purchase high ticket items, or increase the capital of the company.  And if you incorporate in Wyoming, there would be no state taxes on that money that you leave in the C-Corp. Keep in mind that if you take profits out of a C-Corp in the form of dividends that you will also pay personal taxes on that money.

S-Corporations

An S-Corp passes the profits through to the owners of the corporation.  So if you leave money in the S-Corp, you will still have to pay taxes on that money on your personal return, even if you have not taken the profits out of the company, at the end of the tax year.  So if you are trying to build up capital in the company, over the long term, this is not the type of company you should elect.  But if you  are going to take the profits out of the company, and do not need to build up capital, then this is the type of company you should elect.

The new tax law allows, some owners of S-Corps, a 20% deduction of qualified business income, thereby lowering your personal tax rate, on that income, by about 5%.  There are a number of limits on this deduction and you will need to talk to your CPA to see if you can take the deduction. But for some business owners this is a good new tax break.

LLC’s

An LLC can elect to be taxed as a C-Corp, S-Corp, Partnership, or Sole Proprietorship.  So any of the tax breaks talked about above, can be used with an LLC.  Partnership’s and LLC’s taxed as Sole Propritor’s can possibly use the 20% deduction of qualified business income as well.

It is important to note that if you’re involved in multiple businesses, you determine the qualified business income of each one separately, and you first figure the deduction, subject to any limitations, on each business.

Conclusion

It appears that having more than one entity maybe the best way to take advantage of the new tax law.