The queries among business owners whether they enlist among the fortunate who get the new 20% tax break in their business related incomes are raging. This is mostly due to the law passed regarding the new 20% tax break passed by the Trump administration. However the small business also want to become the part of the fortunate group because even a new 20% tax break would mean a lot for them.
This law of new 20% tax break is passed by the Tax Cuts and Jobs Act and it is for those business that are limited liabilities. These intuitions are not expected to pay income tax. Instead, the vendors of these entities are directly taxed on incomes that come from their share in profits or losses.
Keeping this new 20% tax break law in mind, the small scale businesses are seriously trying to reform their existing small structure in to corporative structure. In this way the owners will have limited liability because in times of debt or bankruptcy, their assets will not be placed on risk. This means that the deduction law is so attractive that it has lured the small sole proprietors and partnerships to get in to corporations.
There is no doubt that the new law is very appealing but just to avail the 20% tax break, is it wise to totally change the business structure. The business analysts are of an opinion that in today’s time every one want to become a limited liability company. LLC can protect you from burden of taxes but with a forewarning. So before jumping in to conclusions let us first look at certain factors that might lead you to make a composed and wise decision.
Who is the eligible?
In order to become a worthy candidate for full 20% reduction in income tax, your income that is supposed to be taxed must be less than $157,500 if you are a bachelor or single. If you are married then it should be below $315,000 if the request for 20% break is filed jointly. According to Jeffery Levine who is an accredited public accountant at new York city, if the requesters have taxable income below the prescribed level can opt for those tax deduction appeals no matter which type of business they belong to.
However with such limitations imposed, those people who come from high income brackets such as doctors or lawyers cannot avail this 20% deduction opportunity.
It so happens that in a partnership when one partner gets the opportunity of 20% tax break because his taxable earning is less than the other, then we should be ready for the imminent partnership breakdown. According to Levine, it is impossible that two people who work on a same project but one gets favored from the 20% tax break and the other is deprived.
Assets are secured:
The biggest advantage of becoming a limited liability Company is that the owners’ assets are secured and they cannot be detained by the creditors in times of difficulties and bankruptcy. However, converting your existing business structure in to LLC will be a costly measure as you need to spend thousands of bucks in it. Plus, you need to undergo a lot of legal paper work and formalities with the state regarding the nature of your business dealings. After this, you need to notify the IRS how they can tax your new business.
If you become the owner of an S-corp, then you can use only your income to pay Self-employed tax. The S corp business will give you the opportunity to evade dual taxation as it will not be made mandatory upon you to pay corporate income tax from the profits earned by the business. This is the advantage that gives you an upper hand over the entrepreneurs who need to pay employment taxes which are inclusive of payouts regarding social security which is 15% and profits.
So, at the end of the day, it is advisable for the small scale businesses to turn in to S-Corps. By becoming one, you will have the responsibility of keeping records of the returns the business gets out of trading and how much they will be taxed. So the owners should now consider that how much they will save on taxes after becoming and S-corp instead of lamenting upon how much money they need to spend in changing the existing business structure.
