analysis for business owners, including attorneys. The choice of entity for business owners may vary depending upon the type of business and the amount of the business’s income. An examination of how the new law affects different types of businesses shows the new act complicates the choice-of-entity analysis and treats similarly situated businesses differently. Two aspects of the new law create complexity and inequity: the 21 percent corporate tax rate and the 20 percent deduction for qualified business income (QBI). The corporate tax rate applies to a corporation’s taxable income, but corporate dividends are also subject to tax, at a rate ranging from 0 to 20 percent. By contrast, the taxable income of an individual is subject to a rate schedule with rates ranging from 10 to 37 percent. The top rate applies only to taxable income over $600,000, so few individuals are subject to the top tax rate. The new act also creates a deduction for QBI, which applies to income from a qualified trade or business (QTB). The QBI deduction is 20 percent of QBI, subject to limits based upon the W-2 wages and assets of the QTB. Many LLCs, partnerships, S corporations, and sole proprietorships will qualify for at least some portion of the QBI deduction. Specified service trades or businesses (SSTBs) generally do not qualify for the QBI deduction. SSTBs include professional services businesses, such TAX TREATMENT OF $500,000 OF INCOME Based Upon Entity and Business Type Arrangement Total Tax Corporation $152,670 (100% distribution) SSTB $126,379 (no QBI deduction) Corporation $108,233 (25% distribution) QTB $91,379 (20% QBI deduction) 40 • Brooklyn law notes | Spring 2018 | brooklaw.edu as those in the fields of law, accounting, healthcare, athletics, consulting, financial services, and performing arts. The full QBI deduction applies to the income of an SSTB only if the income is less than $315,000 for married couples. The deduction phases out entirely if a married couple’s taxable income exceeds $415,000. The new law fosters inequity by taxing similar income differently. Consider the different amounts of tax owed on a married couple’s $500,000 of taxable income ($800,000 of gross income and $300,000 of W-2 wages) under the following scenarios. To simplify the analysis, the discussion does not consider employment taxes or other tax rules, such as personal deductions and alternative minimum tax, which could otherwise apply. • Couple withdraws 100 percent of earnings from a corporation. A corporation will pay tax of 21 percent on the $500,000. That corporate-level tax will be $105,000, leaving the corporation $395,000 to distribute, which will be subject to the tax on dividends. The total tax paid on the $500,000 will be $152,670, and the effective tax rate will be 30.53 percent ($152,670 ÷ $500,000). • Couple has QBI in pass-through entity. If the $500,000 is QBI of an LLC, partnership, or S corporation and the income qualifies for the 20 percent QBI deduction, the couple may
- Subject
- THE
- Type
- course
- Source
- www.brooklaw.edu