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Three ways the tax law impacts pass-through entities

There’s no question that the Tax Cuts and Jobs Act of 2017 will have a wide-reaching impact on businesses and families of every type. You might understand a few aspects of the new law, but determining exactly what is in the law and how it will impact your bottom line may be difficult to determine until tax time next year.

How the tax law will affect your business depends on the structure of your organization, where you do business and what products you sell. Entities that will experience big changes are businesses that classify themselves as pass-through organizations including S corporations and LLCs.

Here are three ways pass-through entities are impacted by the new tax law.

1. Increased deductions

Under the new tax law, S corporations and LLCs can deduct 20 percent of their income, effectively cutting tax rates by one-fifth, according to Harvard Business Review. While this could encourage more businesses to become pass-through entities, certain requirements need to be met to earn this classification.

The idea behind the apparently drastic change is to balance the tax law’s impact on multinational corporations, small businesses and highly-skilled professionals who work independently. Following the tax law change, businesses should carefully examine their income and operations when considering their classification.

2. A new way to consider assets

As businesses consider their assets under the new tax law, it is important to consider the new way in which the code considers assets. Previously, essential businesses assets were taxed on deprecation, meaning the asset was expensed and deducted over a number of years. Now, the tax code is simpler, according to HBR, because businesses can take the full deduction immediately to encourage investment.

3. Worldwide income

Companies like Apple have already announced that they are bringing some operations back to the U.S. Under the new tax law, companies have an incentive to operate in the U.S. and export products because of subsidies and one-time tax payments. Although, according to HBR, the effect of these rules will likely vary from corporation to corporation.

The net effect

People who earn their income via pass-through entities and 1099 work have a lot to consider for the future. Although the tax law is written in black and white, its effects will vary from business to business.

When considering how the new tax law will affect your business, keep the experienced attorneys at Goldburd McCone in mind. Through the years, they have guided businesses of all sizes through complex changes in the law. Contact their firm today to understand how your business can take advantage of the new tax law in 2018 and beyond. 

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