Tax Rates and Business Structures

The corporate tax rate is now a flat 21%. There is also favorable treatment for pass-through entities, including S corporations and limited liability companies (LLCs). Now may be a good time to discuss your corporate structure with your tax and legal professionals.

REDUCED FEDERAL INCOME TAX RATE

Corporate business owners are still double taxed—paying corporate taxes and personal taxes. While the lower corporate tax rate should help ease a bit of this tax burden, business owners can avoid this double taxation by organizing their businesses as pass-through-entities, such as S corporations or limited liability companies (LLCs). There is no corporate income tax on business income for these entities. Instead, profits flow through to the individual tax returns of owners, paying income tax once at the individual tax rate.

Sole proprietorships and partnerships also avoid double taxation and receive flow through treatment. But these latter two forms do not provide limited liability. Sole proprietors and partners may be personally liable for claims against their businesses.

PASS-THROUGH INCOME

Owners of some pass-through businesses can now take a deduction of up to 20% of qualified business income—plus 20% of qualified real estate investment trust (REIT) dividends and qualified publicly-traded partnership (PTP) income. This tax break phases out for single taxpayers at $170,050 of taxable income, and for married taxpayers at $340,100—not including qualified business income deduction. Above these thresholds, the deduction is based on whether you are a specified service trade business (SSTB) or not. There is a caveat: The pass-through provision will expire in 2026 unless Congress votes to make it permanent.

NET OPERATING LOSSES

Net operating losses for corporations can be carried forward indefinitely. The previous ability to carry back losses and apply them to years when a company had taxable income was eliminated in 2017 under the Tax Cuts and Jobs Act (TCJA).