upcoming tax law adjustments could significantly impact clients’ business structure decisions.
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quick tax tip
with art werner
cpe today
we are anticipating changes to tax laws that could significantly impact clients, either positively or negatively, depending on the structure of their businesses.
one major consideration is the type of business entity the client operates. the options include sole proprietorships, partnerships, and corporations. within corporations, there are further distinctions: c corporations or those that have made an s election.
for limited liability entities, clients may choose to have the entity taxed as a partnership, sole proprietorship, or corporation by making the appropriate elections, such as the “check-the-box” election or an s election.
many of these choices were influenced by the tax cuts and jobs act (tcja). for instance, the reduction in the corporate tax rate from 35% to 21% created a strong incentive for businesses to consider the c corporation structure. additionally, section 199a introduced a 20% deduction for qualified flow-through income, which provided significant tax savings for non-corporate businesses.
however, section 199a is set to sunset, potentially increasing the tax burden for flow-through businesses. meanwhile, the corporate tax rate reduction to 21% is permanent and would require an act of congress to reverse. this stability in the corporate tax rate might prompt a re-evaluation of whether a c corporation structure is more advantageous for some clients, particularly if section 199a benefits are no longer available.
as tax professionals, we must start advising clients on whether their current business structure aligns with their long-term tax planning goals. in some cases, transitioning from a flow-through entity to a c corporation may be worth considering for tax efficiency.