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[Video] Tax Reform and Your Business: Pass-through Entities and Accelerated Depreciation

Compliance
Video
01/11/2018

The tax bill provides deductions for qualified business income for pass-through entities. As a result, employers may benefit from reevaluating their business structure. Laurie Savage explains what this means, and identifies other potential benefits businesses may want to take advantage of this year.

More tax reform videos: General overview | Tax tables and Form W-4 changes | Employer tax credit for paid family and medical leave | Affordable Care Act changes | States' response

Full transcript:

Hi. I'm Laurie Savage, senior compliance analyst at Paychex. I'm here today to talk about the federal tax overhaul, particularly how small businesses and their structure, how they may be able to benefit under certain provisions of the tax overhaul. There was a significant reduction in the corporate tax rate to 21 percent. Now, this would have never benefited a lot of those small businesses that structure themselves as pass-throughs. What a pass-through entity is, is generally a sole proprietorship, an S corporation, a partnership, or a limited liability corporation – an LLC.

Pass-through entities don't benefit from the corporate structure because, again, that gets passed directly through individual tax rates onto the owners. So, they added a deduction of up to 20 percent of qualified business income for pass-through entities.

Now with this, this is incredibly complex. There were several carve-outs. So there are thresholds that have additional tests. So once you make over $315,000 if you're married, filing jointly, you then have additional tests on how much the business paid W-2 wages. There's also some alternative test with the actual assets, and a percentage of the assets and W-2 income. So there's a lot going into this.

In addition, there were several professional services that were carved out. So if they're over that threshold, there are also phase-out limits. And a lot of them can't qualify for the deduction.

With all this, there is a lot of holes right now that will have to wait on IRS guidance to see how it plays out. But the bottom line is, is there's this additional deduction which helps reduce the rate for pass-throughs if they qualify for it.

Otherwise, I mean – in general, what's going to happen is, businesses are going to look at what's the best way to structure their business so that they can benefit from the tax law. Is that incorporation? Is that through a pass-through entity? And it will really depend on your individual circumstances.

In general, employers have this whole new set of rules of engagement for accounting principles. So, it's complicated. It's not a you do this or you do that. You really have to look at your business structure, what the rules are. These touched multiple places in the code.

So the old rules are sort of out the window now, and everyone's trying to figure out what best benefits their business. And accelerated depreciation, those rules are incredibly complex. They touch multiple sections of the code. And even in the statute, there are some things that are generally drafting errors that the IRS is going to have to reconcile for how they apply for different businesses.

So it really is complicated and you should wait on some of the guidance from the IRS, and seek some advice from your tax advisor how you can best benefit from that system.

This website contains articles posted for informational and educational value. Paychex is not responsible for information contained within any of these materials. Any opinions expressed within materials are not necessarily the opinion of, or supported by, Paychex. The information in these materials should not be considered legal or accounting advice, and it should not substitute for legal, accounting, and other professional advice where the facts and circumstances warrant.
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