While it is far too soon to draw conclusions on Washington’s proposed tax reforms, the impact on LLC and S Corporations looks to be significant. The new tax proposal includes a 25% pass through corporate tax which could affect the majority of American business owners. Pass through profits are presently taxed at the highest personal income tax rate which is presently 39.6 percent, which is actually above the highest present corporate tax rate of 35 percent. This has been a bone of contention between business owners and Congress for quite some time.
The proposed tax reform package is primarily touted as a corporate tax cut. Politically, it will be nearly impossible to reduce the corporate tax rate without addressing pass through income. The primary challenge facing Congress is the separation of business income from wage income, especially for high wage earners (often S Corporation owners). Granted, high income individuals may see a substantial cut under the proposal, though it still has a long way to go. This is the primary concern of many onlookers. A large percentage of pass through business owners do not earn enough to be taxed a personal rate above 25%, therefore the biggest winners under the proposed tax plan are high wage earners who are able to classify their earnings as business income.
Which income will qualify for the proposed rate reduction and which income will be taxed at wage rates? This critical question will be one to watch as the tax drama unfolds. While the new tax proposal includes a 25% pass through corporate tax the impact on most mid-sized to large corporations has yet to play out. San Diego is home to many national and international business entities and decisions regarding the corporate tax rate may have a substantial impact on international tax planning, corporate structures and foreign corporate ownership.
Allen Barron’s integrated tax, legal, accounting and business advisory services help to guide our clients through these complex times. Many companies have to employ 3 to 4 separate professionals in order to receive the advice Allen Barron can provide from a single source. We invite you to contact us with questions or call 866-631-3470 for a free consultation.