In light of the new tax law, which President Trump signed into law on December 22, 2017, many business owners are contemplating restructuring to take advantage of the incoming corporate income tax reduction.
Inc Magazine notes “hundreds of pass-through businesses are planning to re-organize in 2018, in order to access the lower corporate tax rate of 21 percent.”1 The new maximum corporate tax rate of 21 percent is a departure from the 35 percent rate currently imposed on C Corporations. Inc Magazine estimates that most U.S. small businesses currently do not qualify for the reduced corporate tax rate as they are structured as limited liability companies or S corporations.1
In addition to the tax break for C Corporations, the new tax bill will also reduce the tax burden on pass-through businesses, such as LLCs and Partnerships. To help equalize the tax rate reduction among businesses, the tax bill temporarily allows pass-through businesses to deduct up to 20 percent of their pass through business income. Anti-abuse measures were included to ensure owners of eligible business operations claim the 20 percent deduction and ban high-income earners from reclassifying their income as pass-through income to utilize the deduction. Income eligible for the full 20 percent deduction is also capped at $315,000 for married couples and $157,000 for individuals.2 While there is some tax relief in the law for those pass-through firms, many could access the permanent cut by converting to full-blown C corporations.2
