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Taxation of Pass Through Income Versus Salaried Earnings

There is a lot of confusion surrounding the taxation of pass through income versus salaried earnings as US taxpayers assess their positions after tax reform.  This is far from “finished” and a wild roller-coaster ride is about to ensue for many US taxpayers.  How will you know what to do?  One simple concept from the outset is taxation (in this discussion) is based upon “income.”  In many tax strategies around the world, “Income is Income.”  The new tax reform actually changes the nature of income causing many to re-evaluate the taxation of pass through income versus salaried earnings and how they can position their own job, business or livelihood to minimize tax and keep more of what they earn.

This is the essence of tax planning.  Allen Barron is uniquely positioned to guide high wage earners, business owners and those who presently own or have an interest in pass through entities such as S Corporations, LLCs or partnerships.  Our integrated tax, legal, estate planning, accounting and business advisory services provide the right answers for those who wish to find the right solution to a problem, challenge or opportunity in these ever-changing times.  That is how to look at tax reform: it is a problem, a challenge and an opportunity for many.

Is it appropriate and legal to make changes to your own employment relationship or business entity to reduce your tax liability?  The answer is absolutely “yes.” US tax courts and even the IRS have found there is nothing illegal or unethical with using existing laws to guide business and tax decisions and to structure your income, business ownership and affairs in a way which reduces your taxes as much as possible.

Who will be able to claim the 20% deduction for pass through income?  The new tax law (supposedly) specifically excludes many professionals from claiming the 20% deduction, as well as those who provide services regarding investment or investment management, trading, partnership interests, and dealing in commodities or securities.  The reality of the matter is these answers are still being unpacked and it may be some time before the answers are remotely clear.  We haven’t even begun to examine the impact of the “SALT” limitations on California taxpayers (the limitation of deductions for State And Local Tax including income tax, property tax and sales tax).

Each strategy will be unique and tailored to the specific and unique circumstances surrounding your personal situation.  Do not fall for those who make broad sweeping statements regarding large groups of businesses.  We’re not there yet.  If you own your own business or have income above the maximum FICA limit you should be immediately investigating your existing situation and your options.  If you own your own business or an interest in a pass through business entity such as S Corporation, multiple properties earn a substantial income you should be concerned about the taxation of pass through income versus salaried earnings.  We invite you to contact the tax attorneys and experts at Allen Barron or call 866-631-3470 for a free consultation.  The ride is just beginning, and this is going to be a complex and wild ride!