What Tax Reform Means For Small Businesses & Pass-Through Entities

 

One of the most significant changes under tax reform is the tax treatment of businesses. Unlike changes to the individual tax scheme, which are temporary and somewhat piecemeal, the changes to the business tax scheme are permanent and fairly comprehensive. It would be impossible to address all of the changes so I'm focusing on what I've been asked about most: how the new rules will affect pass-through entities and small businesses.

 

First, a quick reminder. Currently, you can structure your business in a few ways, including:

  • A sole proprietorship is the most simple form of business entity. Taxpayers do not file a separate tax return and instead, business income and expenses are reported on a federal form 1040, Schedule C.

  • A partnership is an association of two or more persons to carry on a business and can take different forms (like limited or general partnerships). A partnership files a separate return, a federal form 1065, and passes income and losses to the individual partners who are responsible for reporting that information on their individual tax returns.

  • A Limited Liability Company (LLC) is a hybrid entity that offers the option to be taxed as a partnership or a corporation.

  • A Single Member Limited Liability Company is an LLC with a single member, typically treated as a "disregarded entity" for federal tax purposes. That means there's no separate tax form and income and expenses are reported on a Schedule C, just as with a sole proprietorship.

  • A C corporation is what most people think of when it comes to business. A C corporation files a federal form 1120 and pays any tax due. Shareholders also pay tax at their individual income tax rates for dividends or other distributions from the company (this is where the term "double tax" comes from).

  • A Professional or Personal Service Corporation is a corporation for certain occupations - typically service professions like lawyers, doctors, and architects.

  • An S Corporation is a corporation with tax treatment similar to a partnership. An S corporation files a federal form 1120-S which passes most items of income or loss to shareholders who are responsible for reporting that information on their individual tax returns.

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