Tax Law Signed; New Year Likely to Bring Lots of New S-Corporations

President Trump signed the tax reform legislation into law. While there are many changes for 2018, one of the biggest is the new Section 199a deduction. This allows a 20% writeoff of net income for sole proprietors, owners of S-Corporations, and members of partnerships/LLCs, limited by wages paid (unless income is less than $157,000 (single)). I suspect tax professionals will see lots of S-Corporations in the future.

First, wages paid to owners counts in calculating the Section 199a deduction. Imagine you’re a consultant with income of $300,000 structured as a sole proprietorship. You’re ineligible for the Section 199a deduction (your income is too high). Now, convert to an S-Corp (or an LLC taxed as an S-Corp), pay yourself a reasonable salary (say $80,000), and:
– You get the Section 199a deduction ($44,000); and
– You avoid self-employment tax on a large part of the net income of your business.

Maybe I’m missing something, but for successful businesses there are now two factors leading toward an S-Corporation as the solution. And given the way the deduction is written, reasonable salary likely won’t be an issue—owners have an incentive to pay themselves!

As a reminder, there is no one right form of business entity. Though S-Corporations appear to be an excellent choice based on Section 199a, the choice of type of business entity should always be discussed with your tax professional and attorney prior to selecting it.


5 Responses to “Tax Law Signed; New Year Likely to Bring Lots of New S-Corporations”

  1. Paul says:

    You may be forgetting that he will still count 220K ((ish, less some payroll deductions) from his K1 in his AGI, which will trigger the income exclusions.

    What this guy should do is get married 😉

    • carol says:

      Am I missing something?

      He still has the same amount of overall income subject to the same limitation on his individual return?

      – 80,000 wages
      =220,000 s income

      220,000 from s return
      80,000 from w-2
      300,000 income subject to limitation

      no 199a deduction…..

      i think the limit is calc’d on the individual return

      • Russ says:

        Once you’re above the taxable income limit, the ability to take a 199a deduction is based on either wages or wages plus property in service. Since there are now wages of $80,000, a $40,000 Section 199a deduction would be allowable (assuming the individual isn’t in a prohibited profession).

  2. clay says:

    I am confused because I thought personal service businesses were going to get cut out of this. You make it sound like there is no restriction on types of businesses, they all get this tax cut.

    Am I missing something?

  3. Seriously?! says:

    Many people would still balk at incorporating into a S-Corp AND follow through with actually paying themselves ‘wages’ via a W-2. They do NOT want the Hassle of payroll issues.
    It’s a real pain with those types of S-Corp clients!

    Better to form a SMLLC!

    But due to the 2018 tax law changes, it may be more popular to incorporate as an S-Corp.

    Advice: Don’t let the tax tail wag the dog!
    Translation: Don’t make decisions based solely on tax decisions.

    Too many lawyers and tax professionals let their EGO and Greed get in the way of telling clients what to do instead of listening to what client’s needs and doing what things for the actual benefit of clients.

    Lastly, despite what anyone thinks of Social Security…
    If you don’t fund it, you don’t receive anything when you’re eligible for it years later.
    There’s NOTHING WRONG with paying SE tax!
    There’s Nothing WRONG with forming a SMLLC!
    Discuss with clients and their ‘actual needs’ of which bus entity they ‘should’ choose.