With the new tax law now passed through Congress and signed by the President, our Chicago business lawyers have been spending time unpacking the new 2018 tax law related to Illinois corporations and pass through entities, such as Illinois limited liability companies. We have found that the choice of business entity and the elected tax structure for new or existing businesses is the most important consideration under the new tax law. The 20% tax deduction on pass through income for business entities electing to be taxed as sole proprietorships, partnerships and S corporations will likely result in significant tax savings for our business clients. Regarding corporations, or corporations electing a C-Corporation tax structure (double taxation scheme), the reduced corporate tax rate under the new tax law may level the playing field when choosing a business entity to operate a business. The new tax law now provides for a 21% tax rate for corporations electing a C-Corp tax structure. Unlike changes to the individual tax scheme, which are temporary and somewhat piecemeal, the changes to the business tax scheme are permanent.
With respect to service businesses or professional service corporations, such a realtors, lawyers, physicians and accountants, if a member, partner or shareholder’s taxable income exceeds the threshold amount plus the phase in range ($207,500 for individuals and $415,000 for married filing jointly), then may lose the deduction completely. In that case, the old pass-through rules apply and those member’s, partner’s or shareholder’s will pay tax using their individual tax rate. For all other businesses, such as real estate investment firm, if your taxable income exceeds the threshold amount, the wage (and capital) limits begin to kick in. The wage (and capital) limit applies fully for a taxpayer (other than the aforementioned service business) when taxable income exceeds the threshold amount plus the phase in range.
The regulations governing the 2018 tax law deductions are quite complex and the pass through deduction generally will not be available for high income owners of most service businesses. However, owners of operating businesses and certain real estate investments may see a significant benefit.
In summary, there are many factors to take into account to determine how best to structure a new or existing business for tax purposes. For example, owners of S Corporations may be able to avoid substantial Social Security and Medicare/Self Employment taxes. Actions that lower an owners amount of Self Employment tax may decrease the pass through deduction. Also, with the significant change of the corporate rate to a flat rate of 21%, those business entities electing to be taxed as a sole proprietorship, partnership or S Corporation may not be as attractive as in past years.
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Please contact us to discuss your business legal matter. If you contact one of our business lawyers via email, we will respond within 24 hours (or one business day). If you would like to schedule a meeting in person to discuss your business’ needs, we will schedule the most convenient time available for you. Initial meetings are generally provided free of charge and there is no obligation to hire our law firm.
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