Choice of Entity and the New Tax Cuts and Jobs Act

When President Trump signed the new Tax Cuts and Jobs Act in mid-December 2017, the changes created quite a stir for tax advisors as they hurried to gain an understanding of this new legislation in time to make any necessary tax-related recommendations to their clients before year end. While advisors recommended certain obvious changes, one area that appears open to some analysis by practitioners is what choice of entity each of their clients should make to maximize the benefits available under the new laws. While the choice of entity is a legal area, many accountants offer their clients guidance, as the tax consequences are a significant component of this decision. Many business owners are left pondering the following questions: “Should I switch to a C-Corporation for the lower corporate tax rate?” and “Should I terminate my S-election and continue as a single-member LLC?” These types of questions should be answered on a case-by-case basis, as some considerations need to be explored carefully. Some items to consider are the effective tax savings or costs to the potential choice/change of entity, issues related to reasonable compensation for S-corporations, whether the choice of entity would qualify for the new 20% business deduction for pass-through entities, and the effect of any changes at a state and/or local level. This tax act is not the simplification promised by the Trump administration; careful attention and planning are needed to advise clients appropriately.

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