A lot has been written about how the new tax laws will affect corporations and individuals. However, there is one group that will be particularly affected by these reforms: small businesses. Although these changes will be beneficial for many small business owners, they will come with many new considerations. The changes likely to have the most impact are a lower corporation tax rate for C corporations and new pass through deductions CPAs will often need to take the lead in planning and adjusting plans to accommodate changing times.
Changes to Corporation Tax Rate and More
The Tax Cuts and Jobs Act lowers the corporation tax rate for C corporations significantly, from 35% to 21%. This can be a significant contribution to your clients’ bottom line. This may influence some small businesses to change structure to a C corporation. It is important to remember that C corporations are still doubly taxed, both on revenue and on payments to shareholders.
Many small business owners will be tempted to move from a pass through entity to a C corporation because of the lower corporate tax rate. However, this is generally only advisable if the client plans to keep most of their revenue in the business rather than withdrawing significant income. This should be examined and explained by a tax professional based on the client’s individual needs and situation.
New Pass Through Deductions
The changes in pass through deductions will keep many small business owners from forming a C corporation. Pass through entities such as S corporations, sole proprietorships, and partnerships will have more deductions on qualified business income, or QBI. These deductions get smaller at $157,500 for single people and $315,000 for couples.
These changes may affect the way small business owners organize on paper, but they will be a boon for many. It is more important than ever for clients to involve their accountants in their business planning. This is an opportunity for accountants to become more involved in finance outside of tax preparation and to show how they can add value to businesses of all sizes.
