How New Tax Cuts Impact an LLC
Q: How do the new federal tax rules impact the taxation of my LLC business?
The recently enacted Tax Cuts and Jobs Act of 2017 (TCJA) took effect January 1st, 2018 and will have a significant impact on the federal income tax treatment of business pass-through entities, which for the TCJA are defined as sole proprietorships, partnerships, S corps and similarly taxed LLCs that are engaged in trade or business activities.
The TCJA’s 20% deduction for income from pass-through businesses (‘the 20% deduction’) is the principal tax benefit the law provides small business owners who operate profitable trade or business activities through sole proprietorships, partnerships, S corps or similarly taxed LLCs and whose personal taxable income from all sources after deductions is less than $315,000 if married filing jointly, or $157,500 if single. The benefit of the TCJA’s 20% deduction, however, will be less significant for owners of S corps or similarly taxed LLCs that need to draw all the profits from their businesses in order to support themselves due to the IRS reasonable W-2 compensation requirement for corporate officers.
Also, the TCJA will have a significant impact on the federal income tax treatment of C corps and similarly taxed LLCs. The TJCA modified the federal tax rate structure for C corps and similarly taxed LLCs from a graduated rate structure with a top rate of 35% to a flat rate of 21%.
If your LLC is a single member LLC taxed as a sole proprietorship and you are considering corporate (C or S type) tax status for the LLC, we strongly recommend that you consult your local accountant or CPA to thoroughly evaluate how the TJCA will impact your LLC and you personally before you make any changes in your LLC’s tax status. You can review the business and individual income tax provisions of the TCJA through the websites below to develop a better idea how they impact your LLC and you personally:
https://www.kitces.com/blog/final-gop-tax-plan-summary-tcja-2017-individual-tax-brackets-pass-through-strategies/ (see in particular the New “Qualified Business Income” 20% Deduction For Pass-Through Entities section)