S corporations with pass-through income tax filings were a special focus of the tax bill which passed last year. But what are the changes and who is affected? Understanding the changes and how they affect filings will be key for CPAs, finance and account pros, accounting and tax firms, tax attorneys, and small business owners alike.
Tax and bankruptcy attorney Haleh Naimi focuses on pass-through entities in her audio conference for AudioEducator, “Federal Tax Update on Pass-Through Entities.” The 120-minute webinar focuses on choice of entity issues, debts, changes in expensing, and basics such as at-risk and passive activities for LLCs and partnerships. The session is geared toward CPAs, enrolled agents, finance and accounting professionals, law firms dealing with tax issues, and small business owners.
Forget Filing on a Postcard–Tax Pros Now Needed More Than Ever
Businesses in general got some sweet deals in the Republican-orchestrated tax plan, though benefits to the mostly small American businesses who file as S corps are complex. While some had hoped that the new plan would allow everyone to file taxes on the back of a postcard, that’s not what happened. The new tax plan is as complicated as ever – don’t think of going it alone, pros say.
Certified public accountant Mark Kohler told FOX Business that the details of the new tax plan make filing more complicated than before. “Tax advisers are going to be even more critical for the small business owner,” he said.
The new tax plan puts a flat 21-percent rate on corporations – but that would not have worked for pass-throughs since companies would then have been taxed at a lower rate than individuals.
“Congress’ solution? Business income that passes through to an individual from a pass-through entity and income attributable to a sole proprietorship will be taxed at individual tax rates less a deduction of up to 20 percent to bring the rate lower,” explained Forbes in an article titled “What Tax Reform Means For Small Businesses & Pass-Through Entities
Lower Tax Liabilities—and the Chance to Be an Independent Contractor
The 20-percent deduction will lower tax liability for those in a higher individual tax bracket, noted Investopedia in their article, “How the GOP Tax Bill Affects You.” Professional-service business owners such as lawyers and doctors filing as single and earning more than $157,500 (or $315,000 if filing jointly) get a phase-out and deduction cap.
“Independent contractors and small business owners will benefit from the pass-through deduction, as will large businesses that are structured as pass-through entities, such as certain hedge funds, investment firms, manufacturers and real estate companies,” Investopedia said, adding that some salaried employees might save on taxes if they set themselves up as independent contractors—though they will then become responsible for the employer’s share of Medicare and Social Security taxes as well as their own benefits, such as health insurance.
Is 2018 the Year to Make Capital Investments?
Under the new bill, S corps and corporate business owners can immediately and entirely write off capital business expenses rather than do so gradually over several years, meaning it will be cheaper for businesses to make capital investments.
“The break is structured to give significantly greater help to capital-intensive businesses on the theory that their income is less like earned individual income,” noted an analysis from New York Magazine. “But it may have a perverse effect: ‘This seems ideally suited for commercial property businesses, where there aren’t a lot of workers, but there is a lot of valuable property around,’” Steven Rosenthal, a senior fellow at the non-partisan Tax Policy Center, told the magazine.
A group of mostly academic economists, in an analysis of the tax plan, “The Games They Will Play: An Update on the Conference Committee Tax Bill,” said that they would “expand the ability of highly paid owners in certain industries—and particularly those heavy in property but light in employees, like real estate—to qualify for the pass-through deduction.”
