Tax Reform and Limited Liability Companies

President Trump signed the Tax Cuts and Jobs Act into law on December 22, 2017. Tax reform offered sweeping changes for the individual taxpayer and business entity, like a limited liability company (LLC).

Limited Liability Companies (LLC) Are Popular, Now More Than Ever

For years now, the limited liability company has been one of the most popular business entities to form. As pass-through entities, limited liability companies offer more favorable tax treatment than a C corporation with the liability property of a partnership.

The 2017 tax reform may cause a rise in limited liability company ownership in coming years. Many LLC owners will be able to take a 20% tax deduction on pass-through income, making the limited liability company even more attractive.

Treatment of Pass-Through Entities

Business entities are taxed differently. For example, a C corporation pays a corporate income tax, then the owners also pay personal income tax. However, sole proprietors, S corporations, partnerships, and limited liability companies are called “pass-through” entities. The entity itself does not pay federal income tax. Instead, individual owners report the company’s income as personal income tax, escaping the double taxation faced by C corporation owners.

The 2017 tax reform changes the way pass-through entities are taxed. Limited liability companies that qualify may receive a tax deduction of up to 20%. Most limited liability companies qualify. Those that don’t qualify are considered Specified Service Businesses. Limited liability companies owned by performing artists, accountants, healthcare providers, and lawyers fit this category. For such businesses, the 20% deduction applies for tax year 2023 up to an income limit of $182,100, filing singly, or $364,200 for married filing jointly, in qualified business income, then begins to phase out. At the $210,700 level for single filers or $421,000 for married joint filers, the 20% deduction disappears entirely.

Are Limited Liability Companies (LLC) the Answer?

Applying the 2017 Tax Reform to your current and future business opportunities may seem like a good idea. However, consider all options, including the possibility that tax law may change again in the coming years.  Every situation is unique and must be considered with care.  There are some limited situations where C Corporation tax treatment might actually make the most sense.

Law Offices of John Mangan, P.A.     Palm City – Stuart, FL

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