The Effect of the Tax Cut and Jobs Act on Pass-Through Entities

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b2ap3_thumbnail_Untitled-design-31.jpgWith the passage of the Tax Cut and Jobs Act and the Healthcare mandate in limbo, it is a difficult time to make big decisions concerning business, finance, and health in the United States. Whether you are already engaged in commerce or planning your entry into business operations (in California or anywhere in the U.S.), you need to know where you stand financially. That goes for both the present and the future. Taxation is obviously a key part of a business’s financial outlook. As such, it is imperative that you utilize the type of business entity that best suits your individual and business needs and goals with regard to income earned over time. General partnerships, traditional corporations, and the increasing popular and oft-mentioned “limited liability” entities are different in important ways. In discerning the entity that is best for you and your business, rely on an experienced Fremont business law attorney.

A Limited Liability Business Entity is a Pass-Through Business Entity

You may have heard of or are already familiar with “limited liability” entities, such as the Limited Liability Company (LLC) and Limited Liability Partnership (LLP). In such entities, income is not taxed at both the business level and the individual level.  Rather, income earned by the business “passes through” the entity to the individual without being subject to taxation. The individual’s income is subject to taxation.  However, the reporting of income and calculation of taxation on pass-through income factors in business expenses and losses. Depending on the complete picture of profits and losses specific to a given limited liability entity, pass-through income may not be taxed as highly as if the income were employment-based, for example, and not passed through from entity to individual. 

While the Tax Cut and Jobs act does away with some components of the standard personal tax exemption, Code Section 199A, with its impact on what constitutes qualified business income, may offer substantial deductions on individual taxable income. Specifically, individual LLC owners may experience a 20% deduction in taxes owed on income passed through from the LLC. 

Sound Business Planning Following the Tax Cut and Jobs Act

In the course of business planning on the heels of the Tax Cut and Jobs Act, it is important to understand with perfect clarity whether or not your business or planned business will benefit from changes in the tax code. In arriving at that understanding, count on an experienced Fremont business law attorney.

Sources:

https://www.forbes.com/sites/peterjreilly/2017/12/16/qualified-business-income-is-key-provision-to-tax-cuts-and-jobs-act/

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