As the Tax Reform bill inches closer to the President’s desk, the latest version of the bill still leaves more questions than answers, particularly in the area surrounding pass-through business deductions.
On December 15, 2017 many Americans were surprised to learn the agreed upon method of applying a lower tax rate to business income includes a flat-tax method on C Corporation income, while a deduction method is used for all LLCs, Partnerships, S corporations, and Sole Proprietorships.
Although the Senate had passed a similar version of a deduction method in implementing tax reduction for pass-through businesses, the new version of the bill includes several new departures from the Senate’s proposal leaving many practitioners confused about the new formulas and how to calculate the applicable deduction.
For C corporations, the Republicans in House and Senate agreed upon a flat tax rate of 21% for corporations, this was slightly higher than the expected rate of 20%, and much higher than the plan released by Trump of 15%. Also a surprise, a change of heart related to personal service corporations. Originally thought to be taxed at the highest current corporate rates, Senators and Representatives instead opted for a flat tax of 25%, which is still a significant savings over current tax rates for PSCs.
Pass-through entities, however, are not so easy to calculate. Ordinarily taxed at the individual level after separately stated items are “passed-through” via Forms K-1, current pass-through income can be taxed as high as 39.6%, the current highest tax rate.
The provision in the latest version of the bill provides for a deduction in the amount of 20% of certain pass-through company income. However, the provision calls for a phase in of a wage and capital limitation for taxpayers with taxable income over a threshold of $157,500 for individuals and $315,000 for joint filers.
About Dominique Molina
Dominique Molina is the President and Founder of the American Institute of Certified Tax Planners.With over 15 years of experience as a CPA, Molina has worked with many top business owners and investors using proactive tax planning to help them keep more of what they earn.