Qualified Business Income Deduction – A Game Changer
A significant topic of discussion was the Qualified Business Income Deduction (QBI), introduced in the 2017 tax legislation. This deduction allows S-corp and other pass-through entities to deduct up to 20% of their qualified business income, subject to certain limitations, providing a substantial tax benefit.
Choosing the right structure for your business is crucial for both legal protection and tax benefits. Recently, I tapped into the expertise of CPAs Christina Llewellyn and Nathan Goldman, both professors at NC State University, to delve deeper into this subject.
S-Corporation
Christina Llewellyn explained that an S-corporation is popular among small business owners because it combines legal protection with favorable tax treatment. S-corps avoid the double taxation of C-corporations by passing profits (and losses) directly to owners’ personal income without corporate tax. However, they have strict criteria for shareholders and specific challenges.
C-Corporation
Nathan Goldman highlighted C-corporations, ideal for businesses that plan to reinvest earnings. C-corps are taxed at the corporate level, and dividends paid to shareholders are taxed again at the individual level. This structure is beneficial for raising capital, allowing for unlimited shareholders and international investment.
Switching between C-corp and S-corp statuses is straightforward: you can make an S election from a C-corp or vice versa by filling out a form. However, switching back and forth has restrictions, such as a five-year waiting period after dropping the election. All shareholders must agree to convert from a C-corp to an S-corp, while only a majority is needed to revert to a C-corp.
Partnership
Partnerships offer flexibility in profit distribution and tax deductions. This structure suits businesses that do not need to raise capital through stock sales. Unlike S-corps, partnerships allow non-proportional profit and loss distribution among partners. However, all partnership income is subject to self-employment taxes.
LLC
An LLC provides limited liability protection, meaning members’ personal assets are protected from business debts and claims. LLCs enjoy pass-through taxation, where profits and losses are reported on members’ personal tax returns, avoiding corporate double taxation.
Qualified Business Income Deduction – A Game Changer
A significant topic of discussion was the Qualified Business Income Deduction (QBI), introduced in the 2017 tax legislation. This deduction allows S-corp and other pass-through entities to deduct up to 20% of their qualified business income, subject to certain limitations, providing a substantial tax benefit.
What’s Best for Your Business?
Choosing between an S-corp and a C-corp depends on your business goals. A C-corp is suitable for reinvestment due to its lower corporate tax rate and ease of attracting investment. An S-corp benefits those who want to distribute earnings and utilize pass-through taxation.
Each business structure has unique benefits and limitations. Consider your business’s needs, long-term goals, and the legal and tax implications of each structure. Consulting with a tax professional or accountant is recommended to make the best choice for your situation.
Each business structure has its own set of benefits and limitations. It’s crucial to consider your business’s specific needs, long-term goals, and the legal and tax implications of each structure. Consulting with a tax professional or accountant is recommended to make the best choice for your situation. If you’re considering starting a business or re-evaluating your current business structure, connect with a professional to guide you through your options to ensure you choose the best structure for your business needs and goals.