The Tax Cuts and Jobs Act of 2017, signed into law by President Trump on December 22nd, 2017 (the “Tax Cuts and Jobs Act”), added Code Section 199A to the Internal Revenue, which provides for up to a 20% deduction applicable to pass- through income, including income from S-Corps, partnerships, and sole proprietorships. Given this new deduction, it is within an owner of a passthrough’s interest to maximize what the IRS refers to as Qualified Business Income (“QBI”) which is defined as income net of any deductions or losses from a qualified business or trade, including any wages paid by the pass-through entity. The IRS requires that shareholders of S-Corps who perform services for the S-Corp must have a portion of their distributive share from the S-Corp and other payments be classified and treated as wages so that the amounts are reasonable compensation for services rendered. Consequently, all S-Corp shareholders who perform services for the S-Corp must receive reasonable wages which will necessarily reduce the amount of QBI available for the 20% deduction provided by §199A.
In order to remedy this potentially disadvantageous side-effect of being organized or treated as an S-Corp, it might be advisable, depending on taxable income, for entities to consider changing their taxable form to partnerships or sole proprietorships, as these types of entities are not required to compensate service providing shareholders with reasonable wages. Such a switch will affect many other tax elements, such as self-employment tax and Medicare tax liability. Furthermore, various states tax law regimes have laws specific to pass-through entities that may or may not be applicable depending on the structure of the entity. Because such a structural change will affect how income to individual shareholders is taxed at a statewide level, as well as at a federal level, it is highly recommended that tax advisors and counsel be consulted to determine the most tax efficient manner for taking full advantage of the §199A 20% income deduction. To take advantage of accelerated depreciation and expensing of certain business related assets, read the full update. Read MoreIn December 2017, President Trump signed The Tax Cuts and Jobs Act into law enacting a national Opportunity Zone program designed to provide significant real estate and other investors significant federal tax incentives to invest in 8,700 historically distressed, state-designated neighborhoods throughout the United States. Specifically, the federal tax incentives provided through the Opportunity Zone program may permit an investor not only to defer present taxation on any of its currently realized and recognized capital gains, but also to reduce the actual amount of capital gains ultimately realized in the future. In addition, for certain investments held for more than 10 years, any and all gains on such investment amounts will be 100% tax-free for federal income tax purposes, to the extent initially comprised of deferred capital gains. Read our client update today. Disclaimer: You should not act or rely on any information at this website without seeking the advice of an attorney. The determination of whether you need legal services and your choice of a lawyer are very important matters that should not be based on websites or advertisements. Read More
